In the aftermath of the 2015 St. Petersburg International Economic Forum, which brought nearly 10,000 foreigners to St. Petersburg last week, RD analyzes possible implications of the event for Russia’s economy.
All negotiations at the 2015 St. Petersburg International Economic Forum look like just rhetoric regardless of the Forum’s ambitious goal and motto to move from words to deeds. Photo: TASS
Even though some Russian officials and experts were bullish about the results of the 2015 St. Petersburg International Forum (SPIEF) and even started talking about the end of Russia’s isolation from the West, their optimism didn’t prevent the EU from imposing trade and investment sanctions on Crimea on the second day of the Forum and extending economic sanctions on Russia on June 22.
This naturally leads to the following question: Was this year’s St. Petersburg forum a sign of the easing of Russia’s isolation from the West, or just more relentless promotion of the Kremlin’s economic agenda?
This year the number of the foreign participants of the Forum was much higher that last year: There were about 10,000 foreigners from 120 countries who took part in the events. Among the participants of the Forum were many Western entrepreneurs and politicians, including former UK Prime Minister Tony Blair. As a result, Russian Deputy Prime Minister Sergei Prikhodko didn’t hesitate to debunk the statement about Russia’s isolation from the world at the opening ceremony of the Forum.
Perception vs. reality
Nevertheless, the high attendance at the Forum doesn’t necessarily mean that Russia is still not isolated from the West’s leading countries. Even though the Forum “is seen by outsiders as being generally open to opposing viewpoints and frank discussion,” given its regular nature, one “can’t say that this Forum signals the end of Russia’s isolation, even with Tony Blair being present," said Christopher Hartwell, the president of the Center for Social and Economic Research in Warsaw (CASE).
“What country does Tony Blair lead now? Was he paid to be there? If David Cameron had been there, perhaps it would be a better signal that Russia’s isolation is ending, but Russia remains out of the G7, out of important international discussion, and still in Ukraine. Isolation will continue so long as present policies continue,” he told Russia Direct.
Likewise, Oleg Buklemishev, associate professor of Economics at Lomonosov Moscow State University (MGU), is also doubtful about the message the Forum sent.
“The results of any conference need to be assessed not by the number of foreign participants and signed agreements,” he said, adding that among foreign participants at the Forum were primarily political retirees, who didn’t play a significant role in the current political agenda in their counties. Besides, Buklemishev thinks that the impact from signed deals at forums is usually exaggerated, since “the real content [of the agreements] differs from the declared.”
“What is more important for any other forum is clarity and substance of the message, sent to the country and to the world,” Buklemishev said, pointing out that some Forum participants failed to understand how the Kremlin really deals with economic problems such as the investment crisis, declining incomes of the population and severe budget cuts. “Nobody talked frankly about mistakes of others nor admitted their own mistakes,” he added.
Hartwell believes that the Forum is often used as a platform for government officials, including President Vladimir Putin, to signal the official line, “and it’s usually no new news.”
“So in that sense, the Forum is a tool to promote Kremlin propaganda, but it’s not really a tool, since you’ll hear from other people there contradicting the government,” he clarified. “A forum is just a collection of words and speeches, it will take concrete action to reverse Russia’s isolation. Putin may portray it as a win, but that’s a big stretch. Perhaps more important is that it’s a signal that he has less good news to trumpet daily.”
Indeed, the Kremlin seems to have less positive news to brag of, especially, amidst the prolonged sanctions. Ironically, sanctions themselves and their negative implications on Russian, European and American businesses were among the most discussed issues at the Forum’s numerous panel discussions (there were even talks about the urgent need for economics to influence the political agenda).
But all negotiations look like just rhetoric regardless of the Forum’s ambitious goal and motto to move from words to deeds, because the EU extended the sanctions until January 31, 2016 shortly after the SPIEF Forum, which indicates that Russia’s isolation from the West is very far from over.
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Buklemishev argues that the Forum confirmed Russia’s isolation, but not physically.
“It is impossible, because our country is strongly involved in international division of labor and communication,” he said. “Mutually beneficial cross-border business, despite sanctions, is still alive. Our isolation today is different: It is an attempt to create a separate informational space, which lives in accordance with its own peculiar laws and is weakly related to reality.”
Buklemishev is pessimistic. He is concerned with the possibility that Russia’s physical isolation will be increasing in the future, if there will be a build-up of this “isolated information space.” And this, according to him, could have confused many investors who came to the SPIEF Forum this year.
"Russia is a terrible hybrid of an economy – it’s a petro-state that is tied closely to commodity prices, meaning that it has uneven development but is not resilient to shocks." Photo: TASS
Sanctions will stay in place until Russia changes its Ukraine policy
So, the gap between rhetoric and deeds remain big, as indicated by Russia’s economic record. Some experts interviewed by Russia Direct believe that Russia’s economy is still weak and not ready to survive big shocks, with the easing of the recession in the first quarter just an illusion.
“The crisis has abated somewhat, especially in currency markets, but the underlying structural defects are still there,” said Hartwell. “Russia is a terrible hybrid of an economy – it’s a petro-state that is tied closely to commodity prices, meaning that it has uneven development but is not resilient to shocks.”
Hartwell argues that the best measure of an economic crisis is not necessarily a straight downward line in production or foreign exchange markets, but in the increasing volatility and unpredictability.
When asked what is to be done to minimize the exacerbation of the crisis, Hartwell said that “the short-term remedies” won’t help. He believes that Kremlin needs “a bold and radical shift in Russia’s economy from a quasi-state-dominated one, with massive stratification between government mega-corporations and tiny kiosks, to one where there is a middle class and medium-sized firms.”
However, Hartwell doubts that Putin will be able to make such an economic shift, no matter how much foreign and Russian entrepreneurs and economists talked about it at the St. Petersburg International Economic Forum this year. The expert believes that problem lies in Putin’s “narrow economic viewpoint that politics and the nation trumps all,” which is embedded in the Russian economy.
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Hartwell argues that sanction will remain in place, as long as Russia sticks to its previous foreign policy toward Ukraine. And the only way to avoid the exacerbation of the crisis is to change its position toward Ukraine, according to him.
“The elephant in the room, Russia needs to stop invading Ukraine. Full stop. No discussion. Russia is much weaker than it was in 1986, and it cannot afford a new arms race with the West,” Hartwell said.
So, prolonging the sanctions and imposing investment and trade sanctions on Crimea is a logical consequence of the Kremlin’s intransigence toward Ukraine and Russia’s controversial economic record after the collapse of the Soviet Union, he argues, adding that “sanctions haven’t had a direct impact, but they continue to contribute to the perception that Russia is a mono-state, built on oil and ready to fall apart at any time.”
“That’s no Western conspiracy, no shadowy cabal of the CIA and Mossad trying to harm Russia’s image, it’s just the truth – Russia had a bad decade with the 1990s, culminating in a crisis, and the global financial crisis a decade later hit them hard. Markets forgive, but they rarely forget,” he said adding that Russia’s political response to sanctions is making things worse.
“Doing business in Russia I would say is now nearly impossible for a foreigner. Who wants to deal with the hassles of harassment, of being labeled a foreign agent, of having to play along to get along?” Hartwell asks. “This is not seen as a fault but is by design – Russia for Russians, Russian firms selling cheaply at home and soaking foreigners abroad. If you don’t see this as a problem, how can you fix it?
Q&A from SPIEF 2015: "Is the Kremlin 'wasting' this economic crisis?"
In contrast, Stanislav Tkachenko, an associate professor at St. Petersburg State University, believes that Russia should keep following its previous economic policy and actively keep expanding to Asia-Pacific markets, because, according to him, the crisis in Russia resulted from the U.S. and EU policy of the sanctions and “the dependence of Russia from their trade and financial markets should be diminished twofold.”
Tkachenko argues that, “U.S. and EU sanctions severely affected Russia’s economy, stopped its modernization and deprived business of loans while severely squeezing money market.” At the same time, he expresses doubt that sanctions, even prolonged ones, will further hamper Russia’s economy, because government and business have already adjusted to them and “the chance of toughening sanctions are almost close to zero.”
“Business in Russia and in the EU and in the U.S. has learned how to live with sanctions and even bypass them,” he said. “That why we could forget about their negative implications.”
At the same time, other Russian experts are more cautious about the effect from sanctions.
“The effect from sanctions is psychological,” said Yakov Mirkin, head of the Department of International Capital Markets at the Russian Academy of Sciences’ Institute of World Economy and International Relations. “They create the atmosphere of confrontation and increasing risks. So far, sanctions have contributed to creating economic problems no more than by 15-20 percent. In two-three years, if the situation will be the same, the effect [from sanctions] will double.”