Europe, Russia, Contagion and New Economic Growth

The crisis in Western Europe at its core consists of low economic growth, poor economic and political governance, and high sovereign debts of European countries, but the effects of international speculative attacks on the EU could easily spillover to Russia. If Russia were to dramatically reduce its oil exports to Western Europe, the effects will be severe on the economy of the West as a whole.

Western Europe’s problems with domestic-debt management, economic policy credibility and scant economic growth might turn out to be more than just a distant problem reported in Russian newspapers.

Consider these economic data. First, gross domestic debt of the eurozone countries was 88.2% of the GDP in the first quarter of 2012, according to Eurostat. Greece’s debt/GDP ratio was much higher at 132.4% in the same period, while Italy’s was 123.3%. Germany and France are two special cases of countries where the public debt is officially under 100% according to national statistics, but whose accounts appear a bit ambiguous, and it's possible the two countries are hiding hundreds and hundreds of billions in debt, which would increase their debts to (or close to) the level of Italy's debt ratio. The lowest debt/GDP ratios in the EU/euro area were in Estonia (6.6%), Bulgaria (16.7%) and Luxembourg (20.9%), according to Eurostat. Russia’s existing situation is not so terrible, with its central government debt at 9.4% of the country’s GDP and external debt at around 1.8%. Second, Europe suffers from a lack of economic-policy credibility and of economic policy-making that bear striking resemblances to those of Russia. Europe’s lack of compelling leadership will likely be debated after the summer holidays, while attacks by a couple of rating agencies and international speculators continue. Third, the euro club’s growth might drop this year by 0.3% with little improvement, perhaps 0.7%, although the global economy could grow by as much as 3.5% in 2012 and 3.9% in 2013, says the IMF. Russia, meanwhile, is expected to grow much less than its 5% in 2012 and 4.3% in 2011, both of which are less than its 2007 rate and are mediocre indicators for a BRICS country.

These are the primary economic worries of Western Europe now and on the surface may not seem to be Russia’s problems. For example, Italy may seem susceptible to a classic contagion from Spain because of Italy’s huge domestic debt, but that is more a technical possibility than a true likelihood. Russia, though, may actually be vulnerable to a different kind of contagion via the ruble and exports. Russia could suffer substantial hardship of diminished trade with Western Europe if the deep recession widens there, an indirect result of the debt contagion. Europe’s flirtation with recession could lead to significant decreases in Russia’s energy exports, and rampant recession in Europe could mean oil’s collapse from the current price of around $85 per barrel, and apparent near-disaster for Russia’s budget. There would be more unemployment for Russian workers, devaluation of the ruble, further enhancement of the dollar and yen, undermining the efforts undertaken by Russia

If Russia were to dramatically reduce oil exports to Western Europe, or if oil and gas prices decreases significantly, the economic effects would be severe in Russia. Russia's political and diplomatic strategies might be upset as well: Oil and gas trade links with the West are critical; consider, for instance, the North and South-streams.

The crisis in Western Europe at its core consists of low economic growth, poor economic and political governance, and high sovereign debts of European countries, but the effects of international speculative attacks on the EU could easily spillover to Russia. If Russia were to dramatically reduce its oil exports to Western Europe, the effects will be severe on the economy of the West as a whole.

Rating-agencies working recently behind the scenes to erode Europe's prospects no doubt contribute to the ineffectiveness of European policy-making. But if Greece weakens its ties to the euro zone and Brussels does not take action in September, the EU will be substantially weakened as a political entity, at least within Europe. And though Greece constitutes a mere 2% of the EU's population, the probability of an untenable credibility gap seems uncomfortably high in this hot dry summer if EU leaders are unable to lead.

Although Russia’s gross domestic debt and GDP growth figures are not so alarming relative to European countries, those levels are insufficient to bring about an immediate solution for Russia. Nor will they suffice to lend legitimacy to Russia's place in the World Trade Organization. That membership, however, may improve whole sectors of the Russian economy.

Russia's ineptitude in the realistic implementation of its long-term policy is not hard to see: foreign reserves of $40 billion for 2012-2013 would be too little in a negative scenario, which is all the more troubling now with the threat of a deepening euro zone crisis. Back in 2009 Russia needed $200 billion to support the economy. Current Russian mismanagement is to the tune of no less than $160 billion, and actually considerably more, not to mention that as far and R&D are considered China is now investing ten times as much as Russia.

However, Russia is one of the countries that do have enormous growth potential in information technologies and innovation. But apparently there is not even a scintilla of an implementable plan for building a modern and socially sustainable economy, nor for climbing up the ranking of innovative countries. Putin's return to the Kremlin was presumed to be a deterrent to Russia's long-term economic development last year by Standard & Poor's and by other independent Russian journals and magazines. We should ask ourselves, though, what the basis of this deterrence is when, for example, several Russian newspapers have harshly criticised internet censorship and other laws that seem to roll back some of the more recent, if limited, political reforms.

Still, there is no way around Russia's gaping and critical need for a thorough spirit of modernization and well rounded competitiveness. Maybe there should be a seminar in Beijing soon in order to learn how China has become, along with the U.S., the most innovative nation in the world. Maybe Russia needs a smart, female entrepreneur in a top government position to bring the country to the next level in competitiveness and innovation.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.