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Abstract Trends in Russian Economy: Conclusions for Ukraine and the West


Articles

The economy of Russia is in crisis today, characterized, inter alia, by significant reduction in the share of the Russian economy in the world GDP, abrupt reduction in price indices for the exports of goods, significant decrease of the role of Russia in the global consumption of goods, record volume of capital outflows, etc.

Causes of the crisis are quite diverse. Among them, there are specific features of the functioning of the Russian economy (structural deformation, raw materials and energy oriented nature, and low industrial and technological potential), erroneous economic policies chosen by the country leaders (import substitution, or rather an attempt to “spur” it and economic development of the country in general by means of devaluation as it was in 1998), the trends of the world economy development (dramatic drop in energy prices), effects of sanctions (deprivation of opportunities to enter the world loan markets, limitations in the purchase of modern Western technologies, etc.).

Obviously, the main role among the above belongs to the domestic Russian factors, for the crisis phenomena, transition from growth to stagnation emerged in late 2013, when oil prices were still high. They were caused by the raw orientation of the Russian economy, excessively bureaucratic economic management, corruption in the social life of Russia. This means that transition to rapid economic growth in the short or medium term is hardly probable without solving these and similar problems.

On the other hand, radical economic reforms threaten the existing personalist authoritarian regime. Accordingly, the country leaders will scarcely use them. Along with political passivity and patience of the people of Russia to significant decline in living standards it will slightly extend the current inefficient functioning of the economic system. Therefore, even a gradual adaptation of the latter to the new conditions is likely to provide only a transition from recession to a long phase of stagnation with economic growth close to zero.

At the same time, radical economic reforms threaten personalist authoritarian regime existing in Russia. Accordingly, the country’s leaders are unlikely to use them. Considering political passivity and patience of the population to significant decline in living standards, it will slightly extend the current inefficient functioning of the economic system. Therefore, even a gradual adaptation of the latter to the new conditions is probably able to provide only a transition from recession to a long phase of stagnation of economic growth close to zero.

However, there are no reasons to expect a rapid collapse of the Russian economy now. It has sufficient inertial potential to operate even under a long-term and not very efficient isolation. Moreover, the leaders of the Russian Federation are, most likely, traditionally prepared for continual economic exhaustion of the country to achieve their political goals. They are able also to concentrate limited economic resources to implement specific foreign policy ambitions.

Thus, Russia has and in the medium term perspective will keep significant opportunities to foster different kinds of conflicts in Ukraine and other countries of the world and to wage a hybrid war against the West.

Quite large opportunities of Russia to continue the economic war against Ukraine are due, in particular, to the preservation of its significant impact on Ukrainian economy, especially in the areas of trade and finance, as well as the presence of a number of long and traditional cooperative manufacturing relations. The aim of this war is simple, though paradoxical in terms of normal logic: not to make Russia richer, but to make Ukraine poorer at any cost. Such a situation sets a burning task for Ukraine to develop preventive measures to neutralize potential negative influence of Russia on the Ukrainian economy.

The main economic response of the West to attempts of Russia to change the principles of the present world order was the introduction of sanctions. Such a step was unexpected for Russia, which after inadequately soft response of the West to the aggression against Georgia believed that the situation would develop that time under the same scenario. The forecast did not come true, although it was hard to find consensus on the sanctions among 28 EU countries in a rather difficult economic period.

 The aim of the imposed sanctions for the Western countries is not destroying the Russian economy, but only forcing the political decision to stop the aggression. Therefore, sanctions were accruing gradually, in three phases. The first and the second were related to politicians only, while only the third one has been dealing with the Russian economy as such.

Sanctions of the third phase, limiting the access of Russia to the Western capital and technologies, do not act as fast as many in Ukraine expect. This is determined, first, by relatively weak integration of the Russian economy into international production processes, creating added value chain, and specific impact of economic sanctions, the effect of which is always delayed in time, meaning that they are medium or long-term.

Regarding the reverse negative impact of sanctions on the European economy, it has touched, first of all, a number of southern EU agricultural producing countries. As for the other countries, the extent of such effect is often deliberately exaggerated. It is based on the fact that, as a rule, representatives of businesses cooperating with Russia take part in surveys aiming to assess the impact and usefulness of lifting sanctions. However, for example, representatives of big business belong primarily to the latter in Germany, which accounts for only 1% of its economy. For 99% of the German economy, i.e. SME, these sanctions are generally invisible, especially considering that Russian foreign trade makes only about 2% in Germany. Russia is still only potentially, but not really a major market for Europe.

In general, we can say that economic sanctions against Russia did not significantly affect the economic development of the EU, because the EU total exports in that period rose and did not fell.

The picture of the impact of countersanctions imposed by Russia on the economies of the EU is largely similar. In essence, the latter, in fact, are nothing else, but the commonest protectionist measures to support their own agricultural business.

However, the analysis of the ability of Western sanctions imposed to limit the possibilities of Russia to direct economic factors into political area and ensure the return of Russia into the international legal framework demonstrates their incompleteness and insufficiency.

First, despite the sanctions, the share of EU foreign trade almost did not decrease, because Russian foreign trade with other countries also reduced, but without any restrictive measures on the part of the latter. Second, the Western sanctions have not affected the main financial source of aggression – export of energy resources and the income from them. A number of EU and NATO member states were and still are “active contributors” to Russian oil revenues, traditionally converted by Russia not only into military capabilities in general and the implementation of aggression against Ukraine, in particular, but also the means of influencing the Western countries, which have rather diverse instruments (information, corruption, terrorism, etc.).

Finally, such limited and low-efficient sanctions against Moscow only slow down aggression against Ukraine, but they cannot stop it. Moreover, they have not become a reliable way of protecting Western civilization from the hybrid war actively and consistently led by Russia against it. The limited capacity of using energy resources as a tool for achieving foreign policy goals, increasing its political weight and promoting its interests in the solution of global problems is caused primarily by the fall in energy prices, but not by implemented sanctions.

Such context of sanctions analysis gives every reason to make a conclusion about short-sightedness of rather numerous public European politicians who in “value–price” dilemma choose the latter, thus forming troubles with hardly predictable consequences for the future Europe.

Discussion within the conference showed the widespread contradictory thesis to the effect that excessive pressure on Russia can only increase its aggressiveness.

Despite the seemingly obvious character, the specified argument is speculative and scholastic. It applies without taking into account the practice of Russian actions and mentality of its leaders. In practice, it is impunity for the aggression against Georgia that pushed Russia to unleash the war against Ukraine, and cancellation of sanctions would not obviously weaken, but rather ignite Russian aggression. The mentality of the Russian leaders, in contrast to that of the European politicians, is characterized by absolute unscrupulousness, cynicism, and inhumanity, and stake on the strength. They understand only power arguments, and any attempt of counterparts to ensure a reasonable compromise, reaching agreement on the win-win game formula is qualified as a sign of weakness, which requires increasing pressure. In this context, any weakening, and especially lifting sanctions imposed against Russia can only encourage it to new aggressive actions in Europe and to strengthen the hybrid war against it.

The discussion has shown that it is rather difficult to predict the future role of Russia as an economic partner of the West today due to a number of reasons. However, we can say: most likely, the post-sanctions Russia will be much less interesting for the Western business than the pre-sanctions Russia, at least until the oil prices rocket up again.

 

In general, the discussion at the conference allows the following conclusions:

 

  1. The Russian economy today is in crisis, which, however, will change soon for a long period of stagnation.
  2. This development of the Russian economy may significantly limit its ability to intensively build up its military capacity and military aggression against Ukraine.
  3. However, Russia would not lose the ability for lengthy recharge of  hybrid conflicts, search for new means of pressure on European countries and Ukraine.
  4. Economic sanctions implemented by the countries of the West are not sufficient to stop the attempts of Russia to impose upon them a radically new world order and to stop aggression against Ukraine.
  5. Despite the fact that the situation obviously makes the task of developing preventive measures to neutralize potential negative impact of the Russian Federation extremely important, to date neither the West nor Ukraine have any economic strategy for combating hybrid war that Russia wages against them.
  6. Western strategy would provide a gradual strengthening of the sanctions pressure, the introduction of new and more efficient restrictions that would not allow the Russian economy to adapt to them. In this context a combination of low oil prices with stringent sanctions of the Iranian type (EU restrictions on the purchase of Russian oil, disconnection from SWIFT, etc.) is important, as well as the rejection by the EU of politically motivated projects such as “Nord Stream-2” or “Turkish stream” pipelines, which are not only projects of gas exports to the EU, but rather the scheme of exporting Russian gas corruption to EU. Development and publication of a package of such measures, together with a warning that it is ready, would be a significant deterrent for Russia.
  7. Strategy of Ukraine should provide for:

-           initiative, and not just passive actions in response to new economic constraints of the Russian Federation;

-           asymmetric approach to imposing sanctions;

-           gradual and steady curtailment of economic relations with the Russian Federation, development of programs of import substitution of Russian goods that enter the Ukrainian market, organization of the governmental support for the reorientation to other markets for Ukrainian businesses that have traditional cooperative ties with Russian business etc.

 

29.12.2016 08:35:00