The impact of Covid-19 has laid bare the structural weaknesses of the Russian economy, dependent as it is upon nefarious practices and long-term assumptions about perennial growth in the world market for oil and gas, writes Albrecht Rothacher. And in the face of rising Chinese competition, future prospects are bleak
The Russian economy suffers from the coincidence of multiple policy and structural failures. The coronavirus currently afflicting more than 1.7 million Russians has only added fuel to the fire. During the current year the IMF estimates that the Russian economy will contract by 6.6% at least. This seems an optimistic estimate.
In March 2020 the country began an ill-fated oil price war with the Saudis and the rest of OPEC, of which Russia is not a member. Overproduction and shrinking global demand cut oil prices from $60 a barrel to less than $20 within weeks.
The Russian logic was to try and drive US oil shale producers in Texas, Colorado and North Dakota out of business. Yet the Russians ignored the fact that US fracking operations in the meantime have become so competitive that they remain profitable, with prices of $25 per barrel already.
At the same time, export revenues from gas and oil are critical to the Russian budget. While gas exports are mostly used to cross-subsidise the energy costs of wasteful industrial production and consumers, Russia’s federal budget needs an oil export price of at least $42.50. This is not just to break even but to finance the Kremlin’s prestige projects, pay public salaries and pensions, and cover the costs of the rearmament of dependent client regimes (from Belarus to Transnistria and South Ossetia) and Putin’s dirty little wars (from the Ukraine to Syria).
Russia’s federal budget needs an oil export price of at least $42.50, not just to break even but to finance the Kremlin’s prestige projects, pay public salaries and pensions, and cover the costs of the rearmament of dependent client regimes
This year the budget deficit will reach -5%, which is high by traditionally conservative Russian fiscal standards. At the same time the erstwhile rich West Siberian oil fields face exhaustion while the new Arctic fields are much more expensive to develop and maintain.
The crux of the Russian business model remains its dependence on state-run raw material production and the energy sector, a model which, during the past two decades, the Kremlin has been unable and unwilling to diversify.
The crux of the Russian business model remains its dependence on state-run raw material production and the energy sector
Most of the Kremlin’s power holders, typically former KGB officers from St Petersburg now in their sixties, have grown up with an oil and gas mindset, and they take for granted rising demand from Europe and China. That such demand might actually contract in a post-corona world, and in a market characterised by more and more renewables, is not in their calculations.
Global warming is rather seen in a positive light: it expands Russia’s seasonal growing period and has led to bumper wheat harvests which always eschewed former Communist planners. Given winter temperatures of -40°C in the northern city of Vorkuta, slightly warmer temperatures are hardly an unwelcome thing, especially as they are making the Northern passage navigable.
Yet Russia’s way of governance systematically discourages private entrepreneurship (foreign investment in particular and manufacturing and services in general).
Politically well connected state oligarchs (most oligarchs from the Yeltsin era have been either dispossessed, driven into exile, to Londongrad or Israel, or killed) enjoy protected cartelised markets and access to the finance of state controlled banks. Private or foreign businessmen are seen by the Kremlin as crooks, and subjected to regular shake-outs by the corrupt tax police, the militia and other predatory authorities.
The result is short-termism and a perfectly understandable massive capital flight via Cyprus, Delaware, Panama and various Caribbean tax havens. The capital invested in soccer clubs, yachts, Swiss mountain cottages as well as mansions in Chelsea and St Tropez could have been put to better productive use in Russia itself. Yet the absence of effective legal property protection clearly discourages long term planning and investments by private business. As a consequence, Russia’s huge pool of well-trained technicians and scientists remains woefully underutilised.
Post 2008, under normal conditions, the Russian economy grew at rates of barely 1.5% per year. Today it is in full recession. Yet Russians are used to adversity, to tightening their belts and to living off the products of their little gardens when times get tough.
Will things ever change for the better? Putin has extended his rule until 2036 when he will be 83. Unless overthrown he is unlikely to change the nepotistic policies practiced during the first two decades of his rule.
Ten times bigger in terms of population and economic might, and growing stronger than a stagnating Russia with her shrinking population, China holds all the cards
Russia risks becoming a Chinese colony before long. Ten times bigger in terms of population and economic might, and growing stronger than a stagnating Russia with her shrinking population, China holds all the cards.
Russia will become a captive market for China's more sophisticated, cheap consumer products in exchange for the steady supply of Siberian raw materials – from timber, diamonds and metal to oil and gas. Such will be the legacy of the Russian patriot Vladimir Putin.