Development / Economics

Where does Russia’s economy go from here?

A Russian business analyst considers his economy; oil and sanctions aren’t the crises they were last year, so why is Russia’s economy still ailing?

If in the summer 2014 there were optimists who claimed that Russia would stand up to all the hurdles it faced globally, today there is none. It’s no secret that the country is slipping into deep recession. The general opinion, especially in the Western world, is that the sanctions and the falling oil prices are the key reasons behind the turmoil, and that Russia could be already removed from the list of the countries that you consider promising from the economic point of view. It’s an interesting view but I don’t think it’s proper one. Instead, here’s an alternative prognosis for the Russian economy.

The ongoing currency crisis, with a fluctuating Russian rouble, is only part of the picture.

The ongoing currency crisis, with a fluctuating Russian rouble, is only part of the picture.

The crisis is structural, so the sanction and the oil prices are not to blame for it.

There is not denying the fact that the sanctions imposed by the EU, the USA, and the tumbling oil prices (from around 100$ to 40$ per barrel) are amongst the contributors to the dull state of the Russian economy at the moment, but these are not major. These two just exacerbated the situation, because the crisis has a structural nature and according to the investment cycle Russia was set to slow down. Our list of problems grows every day, such as negative economic growth, soaring unemployment, capital outflow, etc., so the questions are “how long is this going to last?” and “what can be done to smoothen the ride?”.

The crisis will become less severe in 2 years but it will not cease to exist.

There are basically two possible scenarios of how this all will develop: Russia either deals with it and returns to growth or falls into long, maybe even 20-year long, stagnation. I honestly prefer to believe in the former and here’s why. Firstly, the same way as the falling oil prices hurt the economy they will benefit it as they rise. If we look at the historical data we’ll see that after every sharp decline in oil prices they gradually went up. For example, during the 2008 global crisis oil reached 29$ per barrel. Secondly, I hope that this geopolitical mess with Ukraine will exhaust itself and the sanctions will be partially lifted. The result would be better credit ratings and returning investment into Russia, though not sure about the latter. Nevertheless, as I said before the crisis is structural so the country won’t start growing again as easily.

Russia’s government will have to cope with more serious problems – reforming the country won’t be easy.

With sanctions lifted, and oil prices up, we’re still heading into trough. The structural cause could be only dealt with through increasing the productivity in the existing economic sectors and creating or developing new ones. This could be done by attracting more investment, which will be hard given the current capital outflows, improving governance practices, revamping infrastructure and enhancing the business climate. To a visitor, Russian infrastructure can be taken as symptomatic of our business climate and government practices – suspiciously Westernized, efficient and modern in places, but often rusty, patchy and unreliable elsewhere. I doubt if our government has a decent/ambitious/promising/proper plan for such systemic improvement, so it has to speed up already now in bringing change to the country’s economy. Everyone knows that Russia needs to diversify – and when was the last time you bought a Russian-made consumer product that wasn’t food or drink? The oil market is looking bearish, which is fittingly the symbol for the country that relies on it so much.

The proposed high-technology business park at Skolkovo in Moscow region is an example of attempts to diversify Russia's economy that have not yet got off the ground, years after their announcement.

The proposed high-technology business park at Skolkovo in Moscow region is an example of attempts to diversify Russia’s economy that have not yet got off the ground, years after their announcement.

Opportunities

I noticed that often people in other countries have a wrong image of what Russia is. Even though we’re not in the best shape, I think the Russia of today has a big potential with its overall well-educated people, ample natural resources and relatively cheap labor (with the falling Rouble the dollar equivalent of an average salary is smaller than that in China). But we still have plenty of things that have to be taken care of with the most important one being our attitude to the economy, trade with Europe, and the world. We must wake up to the fact that oil prices can’t be relied upon to lift us out of economic difficulties.

The writer is a young Russian professional living and working in Moscow.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s