Global risks for the Russian economy
ValdaiClub.com interview with Julian COOPER, professor , Centre for Russian and East European Studies (CREES), University of Birmingham; Co-Director, Centre for East European Language Based Area Studies (CEELBAS) (SSEES-UCL, Oxford, CREES); Asssociate Fellow, Chatham House.
In your opinion, what are the main risks for the Russian economy in 2012?
The principal risks in 2012 are external, namely the potential impact on Russia of unfavourable developments in the global economy, above all the possible deepening of the crisis in the euro area, but also a less likely sharp slowdown in the growth of the Chinese economy. The situation in the euro zone is now threatening, with a real risk that one or more countries could soon default, leading to a crisis in European economies that will inevitably have negative repercussions for Russia, a major trading partner with the EU. But there is also another risk for Russia, in my view, namely that the country’s top leadership is unprepared for negative developments, showing a surprising complacency, with revival of the smug ‘safe haven’ rhetoric which was a feature of the run up to the crisis of autumn 2008. If a crisis does develop, there is a real risk that much needed institutional reforms, including further privatisation and measures to improve the climate for investment, domestic and foreign, will be postponed yet again.
How likely is a large-scale financial and economic crisis in Russia in 2012?
As above, a large-scale financial and economic crisis could be provoked by external developments, which are difficult to predict, but not by purely internal factors. The situation in the Russian economy is far from ideal, but relatively stable. Compared with most European economies, Russia’s performance in recent times has been good: GDP growth of some 4 per cent, inflation at little more than 6 per cent, foreign currency reserves of $500 billion and a total external debt (state and private) of barely one-third of GDP are indicators that can only be envied. Given the continuation of sound macroeconomic management, provided there is no new external shock, another round of crisis should be avoided.
With the country’s experience of the crisis in 2008, is Russia prepared for a new wave of crisis, and is it possible to prepare for the crisis at all?
In my view Russia is not as well prepared for a potential crisis as it should be. First of all there is complacency, a belief that the country came through the 2008-09 crisis well and that on the basis of this experience any new downturn in the global economy presents a manageable threat. However, it is overlooked that social costs of the 2008-09 crisis were minimised by resort to substantial budget spending directed to keeping in operation many backward, loss-making, plants. This policy limited the restructuring required to raise productivity and prepare the economy for post-crisis growth. It is well known that economic crises promote reform and restructuring, but in Russia’s case the ‘benefits’ of crisis were limited by government action for which a price is now being paid. Today’s Russian economy is still far too dependent on the price of hydrocarbons, in particular oil. The 2012 budget is based on an oil price (Urals) of $100 per barrel. The finance minister, Anton Siluanov, has acknowledged that a balanced budget will be achieved only if the actual price is $117 per barrel. At the time of writing oil prices are being maintained at c. $110 per barrel by the tensions relating to Iran, but a deepening of the euro area crisis could quickly drive the price down to $80 or less, with serious consequences for the Russian economy. There have been no lack of warnings to the Russian government of the need for strict budget consolidation – the World Bank, IMF and former finance minister, Aleksei Kudrin, to the fore – but these warnings have not led to appropriate action to restrain and restructure spending. With presidential elections imminent, it is unlikely that any action will be taken; indeed, new future spending commitments may be promised. As recent discussion of the draft revised 2020 strategy has shown, Russia’s future economic policy is now uncertain, with a growing sense of drift, not a sound preparation for possible economic turmoil.
Will the measures taken by European governments help to overcome the debt crisis in Europe or Europe is waiting for a new wave of recession in 2012? How might this affect the Russian economy?
As the latest IMF World Economic Outlook argues, the prospects for European economies in 2012 are not favourable, with a forecast fall in total euro area GDP of 0.5%. At the same time, it is recognised that downside risks have recently risen sharply. The IMF has lowered its forecast for Russia’s growth in 2012 by 0.8% to 3.3%, which could well prove over-optimistic, given that a euro area crisis could lead to lower world oil prices and reduced trade volumes, potentially serious for Russia given the fact that 53% (Jan-Nov 2011) of Russian exports go to EU member countries. As for economic prospects in European economies in 2012, this depends on developments in the euro zone and actions by governments and the European Central Bank. I am not an expert on these issues, merely an economist resident in an EU country fortunate, in present circumstances, in possessing its own currency. One can only hope... But there may be lessons that Russia should note with care. With action underway to create a future Eurasian Economic Union, there is renewed discussion of the possible creation of a Eurasian single currency. The problems of the euro zone arose to a large extent because it was established on weak foundations and then expanded too rapidly to embrace relatively weak economies of lower levels of development than the core members. Will Eurasian enthusiasm blunt wisdom when the time comes?
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.