Russia: future in the past

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Россия: будущее в прошлом

The events of the past three years (2014-2016), directly or indirectly associated with Russia, led to the emergence of numerous statements and publications about the state of the economy. Particularly noteworthy are two polar myth. First: “Russia is a rich and strong country”, the second: “Russia — a colossus with feet of clay”. According to the laws of philosophy, the truth is probably somewhere in the middle. But it’s worth finding out.

The global crisis is over, Russian — ongoing.Global measures of political isolation and international economic sanctions concerning Russia created the impression that they caused the decline of the Russian economy. But a deep analysis shows that this is only one of the myths that exaggerate the satellites of Russian politics, and mostly outside Russia (see “EU—Russia: myths about sanctions“, ZN.UA No. 23 dated 24 June 2016). However, continued research in this direction shows that economic sanctions only vividly highlighted the “genetic” problems of the Russian economy plunged into a prolonged crisis.

In 2015 in Russia fell all the main macroeconomic indicators and some of them — more than in 2009-m. Russia’s GDP decreased by 3.9%. This is the largest decline after 2009 (-7,8%). Inflation reached 12.9% and the devaluation of the ruble is 60%. Real incomes of Russians fell by 4.3% and real wages by 9.3%. This is more than in 2009 Between the EU and the world economy has recovered from the crisis, in 2015 the GDP growth was 1.9% and 3% respectively. Such a sad situation in Russia is mainly due to the historical specificity of the Russian economy and the feature of its modern adaptation to globalization.

 

Россия: будущее в прошлом

 

In Russia, there is a deep structural imbalancesbetween the rich resource potential and poverty socio-economic status of the population. In Russia it is concentrated about 40% of the world reserves of natural resources. The level of resourcing of the population of Russia is one of the highest among countries of the world. This myth once operated the Russian, then Soviet, now again Russian apologists. But that’s only half the truth.

The second half is that the use of this large resource potential very poor. Russia ranks 66th in the world in terms of GDP per capita. Moreover, in Russia the worst use of the resource potential. In particular, the level of GDP per unit of inventory of carbon energy (the most productive part of natural resources) to hundreds and even thousands of times lower than in developed countries.

 

Россия: будущее в прошлом

 

 

So, for Russia it’s a bad time when the resources and innovativeness of the economy determines a country’s level of development. It can be clearly seen from the comparison of the level of resource provision and the efficiency of its use in Russia and Germany. This is also confirmed by the results of similar comparisons of the performance of Russia and other developed countries: USA, Japan, Korea, EU countries, etc. It is a highly critical conclusion for the Russian economy.

 

Россия: будущее в прошлом

 

Overall, Russia has developed the structural strain energy and raw material economy. Thus, the share of commodity export reaches 80% of total exports of Russia. The oil and gas export reaches 60% of Russia’s exports and 30% of its GDP. Half of Russia’s budget, and in some years — up to two-thirds, was formed due to oil and gas revenues. And in the years cyclical rise and fall in oil prices to two thirds of the gain or loss of budget revenues it is due to the price changes. It happened in 2000-2013, when oil prices were rising, and in 2014-2016, when prices were falling.

Energy and raw material efficiency of the economy falls.Paradoxical for Russia is that lately, even when high-yielding oil and gas sector has the positive impact on the economy, as it was in 2000-2008 this is mainly due To the cyclical nature of the collapse in oil prices in the world market. Over the past 45 years the world has had two cycles of rising oil prices — 1971-1980 and 2000-2013 and one cycle of decline, 1981-1999 In 2014, began the second cycle of decline in oil prices. Based on previous experience, this cycle can last at least ten years.

 

Россия: будущее в прошлом

 

However, the problem is not only in the price of oil and gas emerging in the global market. No less serious internal problem — their cost of production. According to Russian experts, in Russia it is 3-4 times higher than in the Arab world, which are rapidly increasing production and export of oil and gas. As a result, the oil and gas sector no longer has such a positive effect on the economy of Russia, as in other countries — the largest producers and exporters of oil, which account for 60% of world oil exports. In this group of countries is Russia, followed by Venezuela, shows the worst dynamics of GDP. Perhaps it is humiliating for Russia than Venezuela, Nigeria or Angola, but it is a statistical fact.

 

Россия: будущее в прошлом

 

The devaluation of the energy-raw-materials doping for the Russian economy is a natural trend. Because forecasts about the prospects of Russia in the global oil and gas market is also very disappointing. This is due to the market entry of new players (Iran, Iraq, Libya, Nigeria, USA, etc.) with strong capabilities of high-quality and cheap energy. In addition, the March large-scale energy conservation and energoresursy the transition from carbon to carbon-free (renewable) sources of energy. The same applies to the price of oil. With the start of the cascading oil price cycle and strengthening energoresursi, price forecasts up to 2020 is very modest — $ 45-60./Barr. Russia to balance budget needs, the price is $ 80./barrel. after all, the cost of Russian oil is much higher than in the Arab world.

So, the oil and gas sector, the former main budgetanalysis first in USSR and then in Russia, that their role is lose. With the beginning of the crisis in 2008 everything went down. But most acutely this trend in 2015 With this special relationship with the international sanctions that had not. It becomes obvious that the efficiency of the oil and gas sector can no longer compensate for the serious problems of energy and raw material economy of Russia.

Largely, these trends are typical for the Russian steel industry and other resource sectors of the economy. Thus, the export of metal and metal products from Russia in 2015 has almost halved against 2008 and almost 20% down compared to 2009.

Energy-a resource-based economy is degraded. Studies show that even if there was a significant drop in the price of oil and gas, oil and gas vector would not be able to stop the degradation of the production-technological potential of the Russian economy. So, in terms of GDP, the Russian economy reached the level of 1990, but the volume of investments is only half the level of 1990. So, over the past two decades, the economy was just wear and tear. However, the deteriorating quality of economic potential. Fell sharply the share of the manufacturing industry, especially engineering. Instead, increased the share of export-oriented raw materials industries. Thus, the production of energy significantly exceeded the level of 1990, but the production of machinery and equipment, again, only up to half of 1990 levels. The degradation of the Russian economy shows the comparison of the actual indicators of reproduction of the economic potential of science-based Russian Academy of Sciences (RAS) is extremely critical indicators.

 

Россия: будущее в прошлом

 

Even worse is the situation with competitiveness of the Russian economy. Here the actual values of the indicators is significantly below the science-based maximum critical values. This is particularly true of energy consumption and innovation economy.

 

Россия: будущее в прошлом

 

The Russian economy is split into two sectors:theinner, which is shrinking and degrading, and export, which is increasingly slipping into a commodity. The share of commodities in exports greatly exceeds the maximum critical value. Economics, specializing in the export of raw materials, acquires colonial features and loses the ability to self-reproduction and development. It is evident from comparison of actual values with scientifically based maximum critical values of indicators of foreign economic activity of Russia.

 

Россия: будущее в прошлом

 

Particularly threatening for Russia, the liberalization of trade with China. In just 18 years (1996-2013) volume of export from Russia to China increased 10 times, but the volume of import from China to Russia increased by 50 times. If before 2005 the trade balance of Russia with China was positive, 2010-2015 — negative and quite significant. Moreover, Russia’s trade with China is very unpredictable. So, for 2014-2016 the volumes of Russia’s trade with China fell by as much as with the EU, while from China there are no special sanctions were not.

 

Россия: будущее в прошлом

 

About the threat of monopolization of commodity trade between Russia and China show the structural deformation prevailing in their foreign trade activities. Thus, the share of manufacturing industry products in exports to Russia, though was quite low in 2000-2013 (before the sanctions), but fell twice, and in China it was quite high and continued to grow. However, in Russia the share of manufacturing industry products in exports seven times less than in China, which is also becoming our main partner Russia.

 

Россия: будущее в прошлом

 

Recently made a sensational statement that Moscow is planning to bring China to the Eurasian Union. It may turn out to Russia’s monopolization of China of its foreign trade. The problem is not only in volume but also in the structural implications. After all, the main policy of China is to import raw materials and export of finished products. Therefore, we can predict that Russia will become a major exporter of raw materials in China and the main importer of its finished products. That is, it will become a raw materials appendage (the colony) China and the territory of distribution of its finished products. About the risks of monopolization by China foreign trade Ministry shows that the last trade with partners in the Eurasian (Customs) Union, has already collapsed. In 2015 compared to 2011 (commencement of operations of the Union), the trade turnover between Belarus and Russia decreased by 39.3%, and from Kazakhstan — by 24.8% in the first quarter of 2016 — even by 9.4 and 29.7%, respectively. And again, as in the case of China, without any sanctions from the partner countries in the Union.

Alarming trend of rising external dependence of the Russian economy began its offshoring. The majority of the assets of large Russian corporations (80%) was offshore. Russia every year loses about $ 100 billion. as a result of offshore operations and shadow economy. The accumulated volume of illegal capital outflow reached 0.5 trillion dollars and with foreign direct investment of Russian residents — about $ 1 trillion. The offshoring of the economy, the oligarchs account for the need to facilitate access to global financial markets and protection of private ownership of capital. We can agree with them, though it is also a problem in Russia. But the consequence of offshore operations is the total outflow of capital and assets that far exceed the volume of attracted financial resources. External debt of Russia in 2015 has increased by 90 billion dollars. and exceeded 700 billion Negative balance of investment income was $ 67 billion. In some sectors payments on servicing and repayment of foreign investments already exceed their supply. However, about 70% of foreign investment comes from offshore companies the Russian business. Russian capital, which, without payment of tax goes offshore, then returned to the country to launder and pushing new income.

 

Россия: будущее в прошлом

 

Export of raw materials economic policy of Russia has led to the emergence of specific financial and monetary policies.As a result of this policy there is critical dependence of the Russian financial system from the situation on the world financial market. This is also confirmed by the results of the comparison of actual indicators of financial dependence with scientifically extremely critical.

 

Россия: будущее в прошлом

 

Negative effects of this financial dependence has already manifested, and they are quite impressive. For 2014-1015. compared to 2013 the volume of foreign direct investments decreased by 14.5 times. The situation with the European investment is still catastrophic. If in 2013 the EU was raised 58.3 billion dollars, in 2015 withdrawn 8.5 billion dollars. Cyprus accounts for almost 90% of the seized investment (-7,2 billion dollars.) which (70%) are floribundum Russian capital. This, in essence, the sanctions of Russian investors against Russia. As for the leading EU countries that determine its foreign policy (Germany, France, Italy), there is no exemption or even a reduction . The same applies to the USA and China.

 

Россия: будущее в прошлом

 

However, in 2014-2015 dramatically increased official foreign direct investment from Russia to other countries. This is the official outflow of Russian investments from Russia. Over the years, for the first time after 2009 crisis the investment outflow significantly exceeds inflow. But the most dramatic — a sharp increase in the informal (hidden) outflow (flight) of the Russian capital. In 2014, “ran” 153 billion., 93 billion more than in 2013.

In a strong economy — strong currency and weak?.. In economic theory and practice it is well known that the indicator of the wealth and strength of the economy is the stability of the national currency. But in Russia, as once in the Soviet Union, this is not observed. Moreover, in Russia the dynamics of the ruble devaluation differed little from the devaluation of the hryvnia in Ukraine, but for Russia then any sanctions was not, but Ukraine has never been an exporter of oil and gas and has not received oil and gas revenues.

 

Россия: будущее в прошлом

 

Russia is unique among many countries of the world, including the rich energy resources in which the rate of the monetary unit depends not on the strength of the economy and prices of oil. Russian scientists-economists have long proved a close correlation between the course of oil prices and the ruble exchange rate. Therefore, the world Bank rightly argues that it is wrong to explain the devaluation of the ruble only the influence of sanctions. The main reason for the devaluation of the Russian currency is primarily energy-raw-materials the structure of the economy and exports. This reason was evident in 2009, when no sanctions, but even halve the devaluation of the ruble caused a significant drop in the volume of foreign trade to GDP.

Serious economic and financial problems of Russia, in the end, negatively affected the budget situation in the country. Recently, the government of Russia for the first time since 1991, declared the sequestration of the budget. Meanwhile, the Russian government had two years of use the contingency Fund. According to Russian experts, it will be enough only until the end of 2017 the national wealth Fund (NWF) also has decreased by a third. According to the same estimates, it may last only three years.

The dynamics of degradation of the Russian economy has a negative impact on social development. In the country for a long time as reproduction of human capital and quality of life of the population is poor. According to Russian sociologists, about 15% of Russians are at the social bottom. According to famous sociologist K. Jung, if more than 40% of citizens are dissatisfied with the socio-political structure of society, there is a critical danger to the political system. According to the Institute of socio-political research Russian Academy of Sciences, in 1990-ies the figure has already exceeded 40%. And you know, what was happening in Russia. In 2008, this figure dropped to 20%, however increased again to 30%.

 

Россия: будущее в прошлом

 

A feature of the current political situation is that the strain energy commodities , the Russian economy is increasingly becoming a victim of the Imperial policy of the Kremlin. At the last meeting of the economic Council Presidium Alexei Kudrin called Russia a technologically backward… and raised questions about the need to change harmful to the economy geopolitics. And first Deputy Prime Minister Igor Shuvalov at the world economic forum in St. Petersburg said that in Russia the situation is complicated, as before the collapse of the Soviet Union. Well, the above characteristics of the economy of modern Russia was indeed inherent in the economy of the former Soviet Union.

From the above conclusion on the status and future of the Russian economy: it can not be called rich and strong, but she’s not a colossus with feet of clay. World historical experience shows that very often poverty, porcellanato and Patriarchal economy is both the factors of endurance and resistance of the economy against the destruction and ability to survive. It proved Russia itself in times of war, devastation, disaster, ruthless militarized, expansionist policies and operation of the economy ideology of world revolution. Therefore, we cannot say that the Russian economy has no future at all: it is, but the best times are behind us.

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Россия: будущее в прошлом

author Paul gaydutsky academician of NAAS, Director of the Institute for strategic assessments under the Presidential Fund of Leonid Kuchma “Ukraine”

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