Russia at the crossroads

This paper has been kindly translated from La Russie à la croisée des chemins by Anne-Marie de Grazia

The meeting of the finance ministers and governors of central banks of the G-20, which took place in Moscow on February 15th and 16th, has been particularly disappointing. On the urgent question of a “currency war” being rekindled by Japan, as well on the subject of austerity policies, no important decisions were taken.  This failed meeting takes place just as growth in Russia has fallen to a level that is historically low (+2.6%) outside of a financial crisis. These two events do not appear to be connected. Yet, the very disappointing job done by the G-20 does not augur well for the economy of Russia.

The weak growth for the year 2012 did not come from nowhere and was not a surprise for some analysts. Whereas the first half of the year had been good, and Russia found itself on a 3.7% growth hike – a result which would have been the envy of many governments in Europe as well as in America – the economy slowed down brutally in the second semester. The slowdown affects all sectors, in particular investment and railroad freight traffic, the latter being a good indicator of the real state of the Russian economy.

Figure 1


In fact, the results of January 2013 are confirming that Russia is to expect a weak growth for 2013. Retail sales have fallen 3.5% in annual growth, when they had remained above 4.5% in 2012. It is true that there occurred in January a rebound in investments, but proof has yet to be brought that it was not a flash in the pan. The brutal drop in growth is therefore broadly worrisome for the authorities, as it comes to interrupt the trajectory of recuperation taken by the economy after the crisis of 2009 and early 2010.

Figure 2


It is in fact striking that the January the unemployment rate has gone back up to 6%. True, this number remains low in comparison with many European countries where it is far over 10% and even 20% in Spain and Greece. But, in this case also, it interrupts a decreasing trend, which has been holding on for two years now. There is nothing dramatic to it so far, but evidently the situation is becoming worrisome and a number of alarm lights have started blinking.

Figure 3


This is not surprising, and was, as we previously wrote, predictable. Whereas Europe is digging itself into generalized stagnation and, in the case of certain countries, into recession, and that growth in the United States has brutally fallen in the fourth quarter (with null growth), Russia has seen the markets on which it is selling a great part of its exports, be they hydrocarbons or metals or wood, drying up. This unfavorable evolution in terms of volume flows has been partly compensated by the good resistance of crude oil prices. But the prices of natural gas have sensibly decreased. The situation has been only marginally better in the emerging countries. China is indeed still in a growth phase, but one that is less fast than it has been in the past. It is out of the question that it could be capable of pulling the world economy. India knows some difficulties and industrial production has gone back during the fourth quarter. Latin America alone is still expanding, but it weighs too little in the world economy to be able to substitute for the main markets. Like any export driven economy – and it is interesting to notice that Japan itself, the third ranking economy in the world, knows the same problems – Russia is tributary of its export markets. From this standpoint, there is little difference in whether you export commodities (as in the case of Russia) or manufactured products (as in the case of Japan). The lag taken by Russia in developing a robust industry is not relevant here.

Figure 4


But the reaction of Japan to this subsidence of world markets will change the deal for Russia. In Japan, now governed by the LDP, which emerged a winner in the general elections, the centre-right party engaged in an aggressive policy of currency depreciation, launching a new stage in the “currencies war.” This has been obvious in most of the new Prime Minister, Mr. Shinizo Abe’s statements, and will be proven by the appointment of the new Bank of Japan governor, expected for the end of February. Given the characteristics of the Japanese economy, this may be an adequate response. The weakening of the Yen brings down the production cost of manufactured products produced in Japan, but it also brings an increase in the value of the assets of the country’s pension funds, which are held mostly in Dollar-denominated assets. The reactions to these policies, which have made the Yen drop 14% in value in two months, have been significant: the Euro/Dollar parity has steeply appreciated while the monetary authorities in America have done everything in their power in order to limit the extent of the depreciation of the Yen. Exchange rates have started fluctuating, not only in the case of the major currencies but also for the secondary ones, like the Australian and Canadian Dollars, the currency of Singapore and the Korean Won.

It is against this agitated background that the meeting of February 15 and 16th took place. Russia expressed its position strongly, but it was not followed, except by China and India. The G-20 broke up on a declaration appealing for exchange rates not to be used as a trade policy, but refusing to mention a “ currency war” (unofficially, this wording is even taboo) and leaving in fact countries free to lead their own policies. One noticed that the Yen started going down again as soon as the meeting ended.

Against such a background, what margin of maneuver is left to Russia? Russia is clearly engaged in supporting the Eurozone. This position is understandable, for the European Union is the principal client of Russia and the overvaluation of the Euro is of course to the advantage of the economy of Russia. Moreover, a significant part of foreign investments in Russia are in Euros. The same is true of credits, and 69% of the credits destined to Russian banks come from the Eurozone (article of the Moscow Times ). But this may well be a short- sighted policy. The attempt to maintain the Euro through thick and thin translates into austerity policies and even deflation in a certain number of countries of the Eurozone. And this is the very reason why the Eurozone is in recession. The prospects are here definitely gloomy. The recession is not for 2013 only but will span at least on to 2014 as well. The choice for Russia is therefore between having a Eurozone with a currency exchange rate favorable to the Ruble, but whose market is contracting, or not having the Eurozone (or more precisely a split of the Eurozone) and having in consequence to handle a currency exchange problem, but seeing consumption taking off in a number of European markets. It is not sure that the statu-quo of today is profitable for Russia, quite in the contrary. Especially as hopes for a rapid development of Chinese and Indian markets seem now to be fading. One may well ask oneself therefore if another strategy would not be possible. A particularly important point here is a comparison between productivity gains in Russia, the USA and Germany. One notices that these gains have been particularly important in Russia in regard to the USA, the leading light of the Dollar zone, and in regard to Germany, the leading light in the Eurozone.

Figure 5


Should the Eurozone fall apart, it would entail a steep increase in the value of the currency of Germany (who would revert to the Deutsche Mark) but also a strong drop in the value of the Spanish, French and Italian currencies. Given the current drop in the Japanese currency, Russia would find itself in a situation where it could purchase capital goods inexpensively, in Italy, France and Japan, in order to modernize its industry.

This would more than compensate for the increase of the “new” Deutsche Mark. Of course, manufactured products from these same countries would drop in price when these would be translated into Rubles. Still, the productivity gap with Italy and with France remains very wide. In order to protect a renascent Russia economy, customs tariffs would probably have to be temporarily increased within reasonable limits (somewhere between 10% and 20%). This strategy would be coherent with the goals of a modernization of Russian industry such as it has been expressed many times by the government.

Confronted with the disappointing results of the G-20, Russia is at a crossroads. It can decide to maintain the statu quo, but find itself in fact in a very delicate position as far as the modernization of its industry is concerned, or in the contrary, adopt another strategy, which would take full advantage of this “currency war,” which the Western countries are quite incapable of preventing.

Version française

Jacques Sapir, “La Russie à la croisée des chemins”, billet publié sur le carnet Russeurope le 23/02/2013.


Jacques Sapir, “Russia at the crossroads”, article published on the blog Russeurope 25/02/2013, URL:

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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