Russia’s economy already crumbling, sanctions will finish it off

2014/04/18 • Analysis & Opinion

Russia's economy

When President Vladimir Putin solemnly addressed the Parliament in May, he didn’t speak only about Crimea, but also praised the Russian economy, which allegedly is so strong that even sanctions from the West cannot do it serious harm. The important event required a lot of important words, but an objective observer could not miss the fact that the Russian economy could be anything but not strong, stable and self-sufficient. Economic sanctions from the west certainly cannot destroy it, but they could have a grave impact on the relative prosperity of the Russian middle class, and perhaps even reduce the absolute prosperity of the richest Russians, who in recent years have bought apartments in London, Monaco, and Spain, and whose children have been studying at private schools in England or Switzerland.

Ondřej Schneider writes in his article ‘Colossus with feet of clay’, published in the Czech news magazine Respekt. The author teaches at the Institute of Economic Studies of Charles University in Prague and works as an economist at the Institute of International Finance in Washington.

The low level of investments (nearly 20% of GDP per year when the normal level is nearly 30% of GDP), worsening demographic situation (the number of residents in Russia has decreased by five million in comparison with 1990), and outdated structure of the economy gradually so reduced the competitiveness of Russian producers that import to Russia increased fivefold from 2000 to 2008, while export only increased 40%.  Today Russia exports chiefly oil and natural gas, and the production of knowledge-intensive products has been decreasing (Russia produces no more than 20 civil aircraft per year) or is dependent on foreign partners (cars, consumer goods).

When the rise of oil prices stopped in 2008, so did the average growth of the Russian economy, which stuck at a level less of than 1%. The federal budget decreased because of rapidly growing imports since 2009; although the 2006 oil price of 30 USD per barrel was sufficient to smooth the budget, this year oil should be selling for 115 USD per barrel.

It is therefore no exaggeration to say that Russia missed the best period in its modern history, and in 2014 it is in a very delicate economic situation. The Russian authorities’ attempt to create a modern technological park in Skolkovo resulted in the waste of a more than a billion dollars. That number is actually not so frightening when compared with the absurd 50 billion dollars for the Olympic Games in Sochi. The high level of corruption, the unpredictable behavior of bureaucrats, and the lack of independent courts have placed Russia 124th among the 147 countries whose economic positions are tracked by the World Economic Forum.

The old informal agreement between the authorities and society is no longer working – the economy has slowed, as have the incomes of the majority of the Russians, and the ruble is weakening. Capital flight has reached record levels: capital withdrawn from Russia in the past year was 63 billion USD more than the amount of foreign investment (objectively the worst result in history), attempts to revive growth have failed, and the bureaucracy is becoming increasingly hostile toward the private sector.

2013 was a bad year, but this year the confidence of Russian and foreign investors is unequivocally lost. Investments have been declining constantly as those who can change their money into dollars or, better yet, transfer their capital to foreign banks. According to the Russian government’s valuation, 70 billion USD has been withdrawn in the first three months – more than all of last year! Since the beginning of this year, the ruble has lost 10% of its value against the dollar, though the Central Bank has spent 40 billion USD on foreign currency interventions to bolster the national currency.

These numbers illustrate how vulnerable the Russian economy is: Russia lost more than 100 billion USD over three months even without serious sanctions, and this does not take into account that the index of the Moscow Stock Exchange fell more than 10% in March. The Russian financial sector is under great pressure: the Russian banks lack capital; they used to get loans primarily from abroad. The Russian banks, together with large corporations, owe foreign creditors more than 650 billion USD.

Russia has become a part of the global financial system over the last 20 years and has gotten used to its advantages and comfort. Those who were more fortunate, who were closer to the gas valves and the oil capital, have gotten accustomed to travel, and enjoy capitalism in Europe and the US. It would be hard for Russians to return to a primitive Soviet-type economy, and the associated financial losses would be tremendous. The state propaganda machine has been doing its best to create the image of an enemy who, of course, will be blamed for the extreme difficulties the Russian economy is going to face. But the question is how long the national enthusiasm of the Russians will last once they see the price they’ll have to pay.

I would like to add to the foregoing that the Council of the European Union threatened Russia with sanctions with “far reaching consequences” for bilateral relations if Moscow takes further steps toward destabilizing Ukraine.

This is stated in the conclusions the EU Council drew as a result of the Ukrainian crisis discussion at the meeting of the EU Council at the level of foreign ministers held on Monday [April 14] in Luxembourg. “The Council recalls that any further steps by the Russian Federation to destabilize the situation in Ukraine would lead to additional and far reaching consequences for relations in a broad range of economic areas between the European Union and its Member States, on the one hand, and the Russian Federation, on the other hand,” it says.

Also recall that John Kerry, during his phone conversation with Minister of Foreign Affairs of the Russian Federation [Sergei] Lavrov, stated that the US intends to introduce new sanctions against Russia.

In particular, Kerry “expressed his concerns in connection with the protests in southeastern Ukraine,” asserting that they are a result of “instigation” and possibly direct intervention from Russia.

He also noted that “the servicemen in Eastern Ukraine are armed with Russian weapons and wear the same uniform as the Russian servicemen who invaded Crimea.” In connection with this, Kerry has made it clear that Russia can expect “additional consequences if it does nothing to de-escalate the situation in Eastern Ukraine.”

Canadian Prime Minister Stephen Harper also promised yesterday that his country, in coordination with its allies, will impose new sanctions on Russia for inciting turmoil in Eastern Ukraine.

Harper said that peace and stability are under greater threat that at any time since the end of the Cold War.

The seizures of government buildings by pro-Kremlin fighters in Eastern Ukraine, in his opinion, are patently the work of Russian provocateurs directed by the regime of Russian President Vladimir Putin.

Canada will take additional measures to isolate Russia in political and economic terms, Harper stated. Canadian Minister of Foreign Affairs John Bird, for his part, branded the pro-Russian fighters as bandits who had come to Ukraine from the Russian borders.

In his opinion, there are some disturbing parallels between what is going on in Eastern Ukraine now and what happened before Crimea’s annexation. “I don’t know who the Russian Federation thinks it’s kidding when it tries to pretend it has nothing to do with them,” the Minister stressed.

Source: UAINFO

Translated by Shara Anatoliy, edited by Robin Rohrback

 

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  • https://www.facebook.com/jan.wiechowski.9 Jan Wiechowski

    You also have to remember that this oil and gas are not always of Russian origin, but they come from the Russian sphere of influence