Tuesday, October 14, 2014

Window on Eurasia: Russia Can’t Grow under Sanctions if It Remains Dependent on Raw Material Exports, Moscow Economist Says

Paul Goble


            Staunton, October 14 – The Russian economic model of the last decade, one based on high world prices for oil, was already in trouble before Western sanctions, but those sanctions, a Moscow economist says, have made such a model unsustainable and condemn Russia to stagnation or worse unless Moscow changes its economic approach.


            In a paper presented to a conference of the Association of Independent Centers of Economic Analysis, Natalya Akindinova, the director of the Moscow Center for Development of the Higher School of Economics, says that the existing Russian model is “not capable of ensuring the growth of GDP” (opec.ru/1753965.html).


            And up to now, she says, the Russian government has not focused enough on “a new driver” for growth – increased productivity in high tech sectors – a reflection of problems with the Russian “institutional milieu and the deficit of resources available for investment.”  Those problems have been exacerbated by the sanctions.


            Akindinova says that the economic model Moscow had been using since 2000 had entered “a crisis” even before the Ukrainian events and the imposition of Western sanctions but that the sanctions had made the situation worse and ensured that the Russian economy could not grow unless it changed its fundamental organizing principles.


            She said that the situation had been worsened still further by “the contradictions” among Russian political players. “On the one hand, the council of ministers is trying to support macro-economic stability and improve conditions for business operations. [But] on the other, the level of government interference in the economy is growing” and military spending is overwhelming other parts of the budget.


            Western sanctions, Moscow’s counter-sanctions, and what are called “’informal sanctions’” involving Russia’s exclusion from various international organizations and operations have slowed GDP growth, reduced trade, increased capital flight, cut investments, and led to a growth of inflation, the economist said.


            Emblematic of this has been the devaluation of the ruble and the trade restrictions Moscow itself has introduced.  The Russian population has responded by cutting back its spending on durable goods and shifting its savings from rubles to hard currencies and thereby posing “a threat to the stability of the banking system.”


            The Russian government’s response has included discussion of price controls and greater regulation of the banking system “which is suffering from a deficit of resources.”  And the private sector’s response has included efforts by larger companies to swallow up smaller ones in the hopes of protecting themselves and their profits.


            Akindinova said the experts at her institute had come up with three scenarios for the future if Russia remains committed to relying on earnings from the export of raw materials. The first and most optimistic one presumes a softening of sanctions “not later than the middle of 2015” and the ultimate lifting of those sanctions.


            The second and more probable one presupposes the continuation of sanctions for a significant period. And the third presupposes that and the fall in the price of oil to 85 dollars a barrel. In all three, but in the third in particular, inflation would be higher and growth negative for the next few years.


            But all three of these scenarios presuppose that the government will continue on inertia and not make the kind of fundamental changes in economic policy which “could lift the Russian economy back on to the trajectory of growth.”  Unless that happens, Russia will fall further and further behind the outside world, with all the problems that will entail.



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