Russian successes

Note kindly translated by Anne-Marie de Grazia

We notice with interest today that a growing number of commentators evoke « Putin’s victory. » In any case, one cannot deny that Russia has been accumulating successes. This seems to be the result, however indirect, of the commemorations of May 9th but also of stock having been taken of the total inefficiency of the economic sanctions, and the presently decreasing efficiency of the financial sanctions decreed against Russia.

A diplomatic victory?

From the standpoint of diplomacy, the recent visit of the American Secretary of State, John Kerry to Sochi on May 12th has signalled that Obama had taken duly note of the failure of his policy of isolating Russia. Not only has this policy failed to either put the brake on, or to destabilize Russian politics, but it has even reinforced the ties between this country and China and India. As concerns Europe, the presence of European heads of state at the May 9th ceremonies has been important. The presence in Moscow, at the occasion of these ceremonies commemorating the 70th anniversary of the victory over Nazism, of the Presidents of Bosnia, Macedonia but also of Serbia (who had troops marching on Red Square), of Greece, and of the Czech and the Slovak Republics, shows that in the Balkans, but not only there, the friends of Russia are many.

We must remind ourselves, moreover, that in July the countries of the European Union will have to vote again about the « sanctions » against Russia. An opposition of Greece and Cyprus, which could be supported by Hungary and Slovakia, would result in fact in the end of these sanctions, which must be voted unanimously by the members of the EU. And we must point out, in addition, that the Russian and Chinese government afforded themselves the luxury of undertaking common naval manoeuvres in the Black Sea and in the Aegean during the first days of May 2015. So as to hit the nail on the head, obviously, and to remind the world that it is not only the USA and NATO who can “show their muscle” in that region.

John Kerry’s visit focused both on Ukraine, where the American Secretary of State has recognized the validity of the Kiev agreement, committing himself to make the Ukrainian party respect it, and on Iran, where Obama desperately needs Russia in order to arrive at an agreement. Significantly, the matter of Crimea was not brought up[1]. It is not devoid of irony that this encounter should have taken place in Sochi, in the city where the Winter Olympics of 2014 took place, which had signalled the beginning of the cold spell between some Western countries and Russia, but most importantly, the start of the Ukrainian crisis. It is just as significant that the American President finds himself in the position of putting a request to Vladimir Putin. This throws an interesting light, to say the least, on the so-called « isolation » in which Russia is claimed to be caught.

We must also point out that the disastrous situation of the Ukrainian economy is presently constituting a real problem both for the United States and for the European Union. Political support for President Poroshenko will translate into economic support, most of it at a total loss. The various chancelleries have been doing their accounts and, from all evidence, the check turns out to be exceedingly steep for many countries.

 

An economic victory.

This diplomatic victory, Vladimir Putin owes it to the resistance of the Russian economy to the « sanctions » and to sundry destabilizing manoeuvres. The decision, announced on May 14th , to officially resume foreign currency purchases on the currencies exchange market, confirms that Russia has retaken the upper hand on financial and monetary questions. Forthwith, the question is no longer on putting a brake to the depreciation of the Rouble, but in the contrary to slow down its appreciation and to stabilize the exchange rate around 50 roubles to the US dollar. Coming after the episode of speculation of December 2014, the rouble started to appreciate rapidly as early as February 2015 and has reached a few days ago a rate of 50 roubles to 1 USD, which appears to be the level at which the CBR is intent on maintaining it. To this effect, it has announced that it will buy foreign currencies (dollars, mostly) on the currencies market, which is one way of sending a warning of its intention of defending a 50/1 parity. This decision is understandable if one considers the evolution of the real exchange rate of the Rouble (that is, the nominal rate subtracted of the inflation). This rate was probably overvalued by 10% to 15% in December 2013. Which is why, even before the beginning of the dramatic turn of the Ukrainian crisis, the CBR had let the exchange rate slip. The latter had then stabilized between its old level (corrected by the inflation) and the level which one can consider to be optimal from an economic standpoint (also corrected by inflation). By choosing a reference rate at 50 roubles to 1 dollar, the CBR is leaving itself a comfortable margin in case of a continuation of inflation.

Chart 1

Evolution of the exchange rate of the Rouble

A - Gr1TdC - copie

Source : Central Bank of Russia and CEMI-EHESS

This policy, therefore, is to assure that Russian products will become more competitive not only on the domestic market, but on export markets as well. Industrial production in Russia depends on exports (for the aeronautics and armaments sectors) but growth comes mainly from the domestic market. On the domestic market, the principal indicator of the competitiveness of « Russian » producers remains the exchange rate. The very high sensitivity of the Russian economy and production to the level of the exchange rates becomes therefore understandable. This sensitivity is expressed both in effects of volumes of production (particularly, but not only, in exports) but also of the margin rates of Russians companies or of those “based in Russia” (mainly on the domestic market). We know that the contraction in growth during the first quarter of 2015 has been less than had been anticipated by the Russian government itself. Russia should therefore find back to growth no later than in the third quarter of 2015.

Moreover, the fact that the Central Bank of Russia is buying back foreign currencies is tantamount to injecting roubles into the economy. This official announcement must be interpreted as a signal for monetary policy. The latter, if it will still display restrictive aspects by the way of the exchange rate policies, should in reality become more lax from the point of view of the quantitative supply of the market. This also means that, in the absence (which one hopes to be temporary) of important structural reforms of the Russian banking system, the authorities of the Central Bank are counting on the profits made by businesses (and, essentially, the small and medium sized companies) to restart investments. Which is another reason which probably lead to the adoption of a depreciated exchange rate, in relation to what industry needs would technically request.

 

Energy politics.

But the victory of Russia is also verified in another domain, the one of European energy policies and of gas-pipelines. Various indicators show that presently « big manoeuvres » are underway in the energy domain in Europe. Such “big manoeuvres” naturally implicate Russia.

Two important projects have bit the dust at the end of 2014. The first of these being the one supported by Russia of the « South Stream » gas (and oil) pipeline which was supposed to make it possible to by-pass Ukraine and to supply Southern Europe and the Balkans. It’s an understatement to say that the EU was opposed to this project, the credibility of which was the more important because the fetish project of the EU, the gas-line « NABUCCO, » had never manage to take off for good. The European Union multiplied pressures on Romania and Bulgaria. In response, Russia decided to cancel « South Stream ». One might therefore consider this to be a Russian failure. But the reality is quite different. In its original format, « South Stream » was an extremely costly project, which could have been profitable only if one had enormous quantities of gas transiting. However, in consideration of the projects of developing gas pipe-lines in the direction of China, and of the agreements between Gazprom, the Russian gas company, and the Chinese government, it had become clear that Russia would not have enough gas to supply both the Europeans and the Chinese. At least, not in the quantities that were foreseen for « South Stream ». In fact, and this is corroborated by the swiftness of the Russian decision, the obstacles put in the way of « South Stream » provided a miraculous pretext for Vladimir Putin for cancelling a project which was becoming an embarrassment.

It was the European Union, which found itself left in the lurch. While it had multiplied obstacles and raised numerous procedures against « South Stream », it suddenly discovered that its disappearance left an enormous void in the supply of energy of Southern Europe. The more so that it also had to take the blow of another project meeting its end – granted it was a somewhat fumy one – into which a lot of hope had been invested: the massive development of shale gas (and oil). We know that the exploitation of shale gas and oil has been presented as an alternative to the supply of gas (and oil) coming from Russia. But various factors have brought this dream to capsize. To begin with, it seems that the deposits are much smaller, and much deeper, than had been thought at first. This would imply high extraction costs, undoubtedly higher than in the United States. Additionally, the drop in the oil (and gas) prices makes the exploitation of shale fuels unprofitable, even in the United States. It seems that on average, a price of 80 dollars for the barrel of oil is needed in order for exploitation to be profitable in the United State, and probably between 95 and 105 dollars in Europe. However, the price of oil, even if it has recovered somewhat (around 60 dollars a barrel for the WTI and around 67-68 dollar for the BRENT), should not exceed 70-75 dollars by the end of this year.

Exit therefore the dream of energetic independence (either for Europe or the United States), and back to square one. We are finding ourselves in a situation in which, surprise, surprise! the Russians have pulled another project out of the hat. This project would consist in deriving from another, already existing gas pipe-line towards Turkey (the « Blue Stream »), and with a coupling to the TransAnatolian gas pipe-line, a gas pipeline which would cross the Bosphorus and could, according to needs, either go back up towards Macedonia and Serbia in order to supply Hungary, Slovakia, Austria and Italy, or go through a projected gas pipe-line between Greece and Italy (through the canal of Otranto) and supply Italy directly. This project is far less costly than the defunct « South Stream », of course with reduced volumes, but it could be brought into service within two years.

Geopolitics « Russian way».

Which is where one discovers that the relations between Russia and Turkey are finally better than had been thought all along. Russia is ready to increase its gas supply to Turkey and even to build nuclear plants on its territory. As to Erdogan, he is not displeased to thumb his nose at the European Union, which has been snubbing him and to show his good dispositions towards the new Greek government.

Greece finds itself, as we well know, in conflict with the European institutions and in particular, with the European Central Bank and with the Eurogroup. Lacking an agreement, which has gone off to a bad start[2], Greece will be forced to default on its sovereign debt and likely leave the Eurozone. However, this new gas pipe-line would turn out to be advantageous indeed, by way of the royalties it would bring to the Greek government, as well as by putting at its disposal low cost energy, an important factor if one takes the perspective of an exit from the Euro and the necessity to rebuild the Greek industrial potential. Moreover, this gas pipe-line project allows the Greek and Russian governments to discuss a possible adhesion of Greece to the « BRICS ». Joining the BRICS would have effects geopolitical as well as economic. It would allow, among other thing, Greece to borrow from the monetary stabilization fund, which the BRICS have set afoot in 2014. It turns out that, when one might have thought Russia to have suffered a setback with the demise of « South Stream », it is jumping back and rattling the European Union, both economically and politically.

 

Russia’s importance in Europe.

The two gas-line projects presented by Russia will most probably be pulled through. But, when this could have been an occasion to unite the countries of Europe, it will turn out to be in the contrary a symbol of division. This results from the attitude both of the European Union and of the United States.

Brussels may complain that Russian policies aim at prying out Russia friendly countries in Europe. But this is perfectly normal. The game of division was put in place by the European Union even if – at present – it realizes with bitterness that when it comes to face Russia it has considerably less power and less influence than what was thought. Actually, far from being « isolated », Russia has never been more central for the future of Europe. In this context, the policies of French President, Mr. François Hollande seem to have been particularly ill considered and even blundering.

 

 

[1] Herszenhorn D.M., A Diplomatic Victory, and Affirmation, for Putin, The New York Times, 15 May 2015, http://www.nytimes.com/2015/05/16/world/europe/a-diplomatic-victory-and-affirmation-for-putin.html?_r=2

[2] http://www.bloomberg.com/news/articles/2015-05-15/tsipras-says-he-won-t-cross-red-lines-in-talks-with-creditors

 

 


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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