On Jan. 26, shortly after the 2015 World Economic Forum in Davos, international rating agency Standard & Poor’s downgraded Russia’s credit rating to junk status. In this light, Russian economist Yakov Mirkin ponders the future of the Russian economy.
Standard & Poor’s downgraded Russia’s rating to BB-plus late on Monday, a non-investment grade, for the first time since 2004, citing a slide in the ruble and weakening revenue from oil exports. The agency said Russia's financial system is weakening, limiting room for maneuver for Russia's Central Bank. Photo: AP
At the World Economic Forum in Davos, tongues tend to wag. Under a hailstorm of questions, it is impossible not to reveal one’s true opinion of one’s country and what treatment local doctors are planning to use. Russia was represented at Davos 2015 by deputy prime ministers, former and current heads of major banks and corporations, a few modest billionaires, and a sprinkling of journalists. More than 70 trustees of the Russian elite — all close to the captain’s tower and perhaps well-received there.
Of course, everyone was curious to know if they had caviar for breakfast (vodka is a permanent fixture), or whether this common Russian luxury was off the menu? No, it wasn’t. There was more than enough to go around, and hospitality too, since Russia is still the world’s largest supplier of raw materials. But of greater importance than mere attributes was what those entitled to speak from the podium at Davos were unable to conceal.
They still intend to live in a market economy and are not ready to turn inwards or erect an ivory tower opposed to the entire world. They do not want to build a financial wall between Russia and the world or turn the ruble into a non-convertible currency, introduce a administrative exchange rate, or deprive capital of the freedom to move across borders.
The Russian elite is fully conscious of the challenges facing it. It recognizes the damage caused by the drop in global oil prices. It understands that Western sanctions have had a real impact. It is aware that the external pressure could become even more intense — the price of oil and gas could go lower, the penalties could become tougher, export volumes of raw materials could decline further (already the case with gas), and the weak economic situation in the European Union (Russia’s anchor client, accounting for 50 percent of its foreign trade), as well as slowing growth in Asia, could reduce demand for raw materials even more. Lastly, the Russian elite sees a clear link between its domestic economic problems and events in Ukraine. Further economic deterioration is forecast for 2015, with rising unemployment and double-digit inflation.
But no one expects social storms or a shaking of the foundations of power. This is because Russia is still in possession of a considerable amount of financial resources accumulated in the period 2000-2013 (coupled with a very low national debt, battered but large currency reserves, and, for the time being, a huge trade surplus). Besides, there is the well-known natural law that the stronger the external pressure on the country, the more the people support those who are in charge of it. Nothing unites the population more than a sense of danger from abroad. And there’s no avoiding it, a threat does exist.
All the answers given in response to these challenges are still confined to the field of market economics, but the rising political confrontation with the West is producing new risks and uncertainties as to whether Russia can stay in bounds.
What are the answers? Refinancing programs and recapitalization of the largest banks and corporations on the part of the government and the Central Bank. In other words, that self-same “quantitative easing” widely used in the United States, the UK, Japan, and now the eurozone.
Budget consolidation and cost-cutting programs budget are also necessary. They can be supplemented with strong tax stimulus for business. It is proposed to introduce relief for small and medium-sized businesses in the regions, despite the fact that such places tend to have budget shortfalls and depend heavily on transfers from Moscow.
The list of measures to help keep the Russian economy afloat also includes a program of targeted assistance to the poorest and retraining for those to be laid off, as well as attempts to set up zones of ultrafast growth in the regions, especially the Russian Far East, in imitation of China and other Asian economies.
What else? Anti-crisis monitoring and crisis response teams, from Moscow to the smallest districts, will also help.
It all sounds neat, and most economists would be willing to sign up to conventional measures, too. The only question is the scale of such measures. Will they remain on paper at a time when practical politics is lagging behind the destructive forces of crisis?
Will they be sufficiently effective and radical to increase domestic supply and demand and to shake up an economy used to feeding off raw materials? Will they be reduced to simply pumping taxpayers’ money into the largest banks and corporations, while small and medium-sized business and the public are left to fend for themselves?
Will it lead to further concentration of ownership and nationalization of the Russian economy? Even now it resembles an impassable herd of elephants, being 50-70 percent controlled by the state. And finally, how is Russia going to overcome the West’s technological boycott, given that in the last quarter of a century the country has lost many vital technologies and scientific schools, while some key sectors are 70-80 percent dependent on imported equipment and technologies?
Answers to these questions need to be found — and in pressing conditions at that, no thanks to the Central Bank’s ham-fisted actions in 2014, in which it “burned” 20 percent of the country’s foreign exchange reserves, causing a near threefold increase in interest rates (the discount rate now stands at 17 percent), halving the ruble exchange rate and driving inflation into double digits — and all against a backdrop of wanton capital flight abroad.
It is the financial sector that now represents the Russian economy’s Achilles’ heel, and one of the main reasons for its slowdown. Of course, most of the woes are the result of objective circumstances, but, nevertheless, are in many ways linked to the crude and at times irrational policy of the Central Bank. If this policy becomes more technocratic, keeping Russia’s head above water and encouraging growth in production (the so-called “central bank of development”), then the task of finding responses to external stresses will become much easier.
Ahead lies a minefield of uncertainties, risks and good intentions on the part of the Russian elite as it seeks to preserve the high degree of integration in the global economy that Russia has achieved in the last 25 years.
But good intentions, as everyone knows, also pave the road to hell. Everyone knows that such intentions can collapse under the pressure of non-economic circumstances. Whether or not that will come to pass represents one of the great unknowns of the next few years. In any case, Russia’s neighbors, primarily the European Union, have everything to fear from its instability. It is absurd for Europe to harbor a toxic asset on its borders, undermining its chances of resuming sustainable growth and restructuring its economy, instead of cultivating what could be a reliable resource base for the continent.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.