What development model for Russia?

The current situation has been characterized by sweeping changes in the geopolitical context but also in the current debate about what model of development Russia needs today.

Cold war 2.0?

In just six months relations between USA, the European Union and Russia soured to a considerable degree. Certainly, they were not very good before. But some compromises have been found and fences were mended. However, with the dramatic evolution of the situation in Ukraine, things have been mostly out of control. The Malaysian Airlines MH17 crash did not improve things, even if some people inside the intelligence community have tried to warn the US governments not to jump to conclusion from shaky grounds. To some extent we could speak of Cold War 2.0. But actually, this would be too a mistaken point of view. Despite the game of sanctions and counter-sanctions, still Russia is a major partner for the EU and the USA, not only where energy matters but also in the fight against Islamic fanaticism. This could explain the French position on the “Mistral” ship contract[1]. Actually, France could not have launched the Sangaris operation in North Mali without the support of heavy weight Russian transport planes. The Sangaris and Serval operation logistic is still heavily dependent of these assets and of the informal cooperation with Russia.

Sanctions taken or announced by the US government and the EU are targeting the energy sector as well as banking and the armament industry. But, there are few signs that US or by the way Westerns companies are breaking off with Russia. By the way, Russian oil and gas companies are too big and too globalized to be really hurt by these sanctions. They could use third party companies to buy the technology targeted by sanctions, or rely to country not implementing these sanctions. The recent acquisition by Rosneft of 30% of shares in Norway’s
North Atlantic Drilling (NADL) through an
asset swap[2], appears to show that the business community is to remain undeterred by political sanctions. Declarations made by the North Atlantic Drilling CEO are a stone in sanction-mongers garden: “We’re very pleased with the execution of this important transaction and welcome Rosneft as an equity partner and to our board of directors,” said Alf Ragnar Lovdal, in a statement. The Chief Financial Officer of Seadrill, which owns 70 percent of North Atlantic, said exactly the same thing, downgrading the sanction process relevance: “We’re not very worried” said Rune Magus Lundetrae to Bloomberg by phone. “Rosneft is a very good and constructive partner for us.” By the way, we have to remind ourselves of the Ronald Reagan embargo against the then USSR in 1983, a much more severe and extensive measure than present day sanction, which went to be turned in many ways.

Russia’s development model.

However, we also have to think about the future of Russia’s development model in such a context[3]. So far Russia has been one of the most globalized countries. Such a situation raised concerns among par of Russian leadership. A well-known economist, Sergey Glazev has frequently warned the government against risk such situation induced. Other economists, among them people working at the Institute on Economic Forecasting in Moscow have argued about the necessity to diversify the economy and to boost industrial production. This debate actually predated sanctions. But it is clear that sanctions have to some extent shifted the gravity centre of this debate. By the same token a clear shift can be seen for many year toward a more important share of East Asian and emerging countries in Russia’s foreign trade. Quite interestingly it is frequently the same who are speaking in favour of a much more self-centred economic model and for increasing ties with China and the Far East.

Future Russian economic model will certainly not be autarkic. Speeches about a U-turn toward the former “Soviet model” are non-sense. Already Russia is displaying strong economic and trade links with East-Asian countries and this trend will still continue to grow. But, in the same time Russia is not to rely too much on the so-called “fruits of globalization”. To some extent we could even see in years to come emerging a trend toward the de-globalization of the Russian economy. Recent sanctions taken both by the US government and the EU have taught Moscow the hard way that these fruits could suddenly grow sour. This was giving some weight to the “Statist” approach, still present in the Russian economy. It is clear now that Russia will dramatically diversify its suppliers. The “developed West” is no more the single source of advanced technologies in the world. Russia will also engage itself in the business of import substitution industrialization, and will promote domestic agricultural production. The so-called “embargo” taken against European and US food products is not just a response to sanctions but also a kind of protectionist measure taken for the sake of developing a true Russian food-product industry. In this context, it is quite interesting to see that exchange rates fluctuations for the last year have played in the hand of such a strategy.

Figure 1

Exchange rate of the RR against USD

 Rub-vs-USD

Rub-vs-Eur

Source: Central Bank of the Russian Federation, http://www.cbr.ru/eng/currency_base/dynamics.aspx

The implicit devaluation by 10% of the Rouble is certainly the best thing that could happen for Russian industry. It is also quite interesting to see (figure 1) that de depreciation began well before events in Ukraine have reached the flashpoint by end of February. The Russian Central Bank (CBR) has to any effect let this depreciation to happen and will continue to be so. By August 18th it was announced by CBR authorities that a Ruble free float between a corridor of 35,40 RR to 44,40 RR was to be implemented. Quite clearly, the government has chosen a strategy of support to the industry and Russian production by letting the Ruble to depreciate.

Toward financial independence?

Russia is also seeking to create a measure of financial autonomy and to progressively free itself from the US Dollar domination. Russia began to move this way by 2010 but financial sanctions, mostly implemented by the US government, have speeded up the process. Recent agreements between the Russian federation Central Bank and China Central Bank are to lead to a much greater use of national currencies in the much growing trade between these both countries. Already the Chinese Yuan is traded on the Moscow stock exchange, and the Russian Ruble is used as a payment and transaction tool between non-Russian resident operators. Non-resident market participants, both for investments and current transactions, could also use the Ruble and the Yuan. The ominous warning of an exit from the Dollar area could be seen as written on the wall. By the same token it is quite clear that sanctions could backfire quick. The German industry that is massively exporting to Russia, is already feeling the pinch. German exports to Russia went down by 15% in the last months.

 

Globally, Moscow is to build alliances with some non-Western countries and to try to diminish U.S. power in the world. China stands out as a premier partner, as shown by huge energy contracts signed last June and including the development of infrastructures. Russia will supply China with more energy, even if it is less lucrative than contracts with Europe, and with more advanced military technology. It would seek cash and investment in return to develop and modernize its own manufacturing industry. Other countries, like India, Brazil, Argentina, Egypt, Iran, Israel, Turkey, and the UAE, among are also being eyed by Moscow with enhanced interest. As a result, Russia is joining forces with the non-West. It will not seek however to undercut the United States in areas where U.S. actions do not harm Russian interests or even are fully compatible with it. Afghanistan and Iraq stand out here. Some coordination could be found between both countries as it is to be found between France and Russia in Western Africa. Still, Moscow—while having no sympathy whatsoever for Islamist extremists—will point its finger at US policies as the main reason of regional instability from Libya to Iraq.

Then sanctions could have decisively accelerated a trend that could be seen from years. Russia is to turn toward Asia, not just for political reason but also because it thinks that economic growth will be much more buoyant here that in Europe, still plagued by the Eurozone crisis.

 

 


[1] Sapir J., “Future of Mistral Contract », August 18th, 2014, Russia in Global Affairs, electronic edition, http://eng.globalaffairs.ru/book/Future-of-the-Mistral-Contract-16876

[2] “Rosneft to take 30 percent in Norwegian driller”, RT Business, August 22nd 2014, http://rt.com/business/182188-rosneft-nadl-deal-stake

[3] Trenim D., Russia’s New National Strategy, http://carnegieeurope.eu/strategiceurope/?fa=56442


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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