Leonid Grigoryev, Chief Adviser to the Head of the Russian Government’s Analytical Center, talks with the Valdai Discussion Club www.valdaiclub.com about challenges and threats to the Russian economy in light of the new national economic security strategy.
The National Economic Security Strategy until 2030 was adopted in May 2017. It has identified challenges and threats to Russia’s economic security and ways to combat them. “The implementation of this strategy should ensure the economic sovereignty of Russia and the resistance of the national economy to external and internal challenges and threats, strengthen sociopolitical stability, keep up sustainable socioeconomic development and enhance the standard of living and the quality of life in the country,” the Strategy says.
Leonid Grigoryev said the Strategy divided these challenges into four groups. The first group includes natural/climatic change that can cause draughts and, consequently, food and water shortages, increased competition and, ultimately, conflicts.
The second group covers objective global economic processes that are beyond our control. “These include fluctuations on the global commodity and financial markets, economic shifts, new kinds of regulation and new economic associations. They can be damaging for Russia even though they have developed independently and have no formal relation to us,” the expert said.
“Some of our problems are rooted in major shifts, which we don’t always manage to keep up with,” Grigoryev said. “One such challenge is a change in the global energy demand. However, I believe that any change in the global energy system should be seen as a permanent natural factor rather than a threat targeted at Russia. It is a fact that research and technology progress are changing the current energy system, and we must accept and adjust to this fact,” he said.
The third group of challenges includes measures that are deliberately aimed against the Russian economy, such as discriminatory provisions and sanctions. “The issue of economic sanctions is both complex and simple,” the professor said. “It is a complex issue because it concerns restrictions on foreign funds and modern technology and precision strikes at specific projects. Sanctions are annoying and bad for business. Germany and Austria have recently spoken up against the latest US sanctions because they would disrupt their business. This is vitally important, because the US administration sometimes takes decisions which affect countries that didn’t want to become involved in this. But if they continue to do business with Russia, contrary to US demands, they will sustain losses as well.”
Russia has to react to this complex legal and economic system of negative impulses.
On the other hand, sanctions are a simple issue because they have forced us to create our own systems and revitalized Russian companies in some technical areas, the companies that stinted funds for R&D but rather relied on imported technology.
The main threats to the Russian economy are about the lack of technology and finance, the expert said. For example, the sanctions have revealed the Russian oil and gas sector’s dependence on foreign oil and gas service companies. “Russia now has few low interest borrowing opportunities,” Grigoryev said. “Neither state nor private companies can borrow large amounts in the West. Life is tolerable, because we still have a trade surplus, but our access to financial markets is not like it was before the crisis.”
On the other hand, the Western sanctions have boosted our technologies. “The sanctions have highlighted our technology and human capital opportunities, which have always been there but were not used,” Grigoryev said.
And last, the fourth group of challenges concerns the Russian economy’s internal dynamics. “This concerns areas where we haven’t done well enough, which creates challenges and threats,” the expert said. “One of these is the openness of the Russian financial infrastructure to global risk. I am referring not only to technical solutions, such as foreign payment systems, but also to inadequate capital buffers.” So, the fourth group is very challenging because of external influence on the areas where we don’t have ready solutions, such as the lack of quality jobs. This engenders competition for skilled personnel (brain drain), something that is noted in the National Economic Security Strategy.
It is important that the Strategy points to the fact that the export-oriented commodities-based economy is exhausting its capabilities, which is a key threat, Professor Grigoryev said. The Strategy also mentions drawbacks in the Russian economy like the absence of Russian non-resource companies among the world’s economic leaders, as well as insufficient investment and weak investment activity.
The Strategy focuses on the depletion of Russia’s resource base, “primarily the depletion of the deposits in which the government invested heavily during the Soviet period,” Grigoryev said. “This is a real problem, because we cannot invest a comparable amount of funds in the development of new deposits, and so we must act very accurately and efficiently. We still have rich resources, but prospecting and development are becoming increasingly expensive, and these deposits are smaller.”
The rapid growth of prospecting and development costs is even a bigger problem than the depletion of natural resources. “Changes in the pattern of global demand are a problem as well. We invest in production, for example in gas and electricity, because we expect demand to grow, but it turns out that our reserves are bigger than the demand for them. We invest in the coal industry, but anti-coal sentiment is increasing in the world,” the expert said.
The analysis of the threats in the National Economic Security Strategy is evidence of a strategic view on reforming the Russian economy, Grigoryev said.
“From the global perspective, everything will depend on the speed and quality of growth and the use of our advantages. Human capital is becoming more important than natural resources. I believe, therefore, that we will have to modernize the economy within the next 10 years. The decline in 2015 and 2016 was provoked by plummeting oil prices. We experienced an external financial shock. Of course, we are weathering it much better than we did during the crisis of the 1990s, but we must admit that what mostly helped us back then were high oil prices. Now, we again need to modernize both production technology and our economic institutions,” Leonid Grigoryev said in conclusion.