Russian Economy: From Resistance to Long-Term Sustainability

On Tuesday, October 3, the 20th Annual Meeting of the Valdai Discussion Club continued. On this day, three working sessions took place, as well as meetings of participants with Deputy Prime Minister of the Russian Federation Alexander Novak and Assistant to the President of Russia Maxim Oreshkin. 

The fourth session of the meeting was devoted to economic interaction in the context of restrictions imposed by Western countries against Russia.

The dominance of the US dollar in the global financial system is coming to an end, stated Jeffrey Sachs, Director of the Center for Sustainable Development at Columbia University, who participated in the session via video link. This is partly due to the declining role of the United States in the global economy: if by the end of World War II it accounted for 30% of global GDP, today it accounts for only 15%, and this decline will continue. In addition, the events of the last year and a half - in particular, the illegal freezing of Russian assets - have demonstrated with renewed vigour that the United States is using the financial system to achieve its geopolitical goals. Washington takes advantage of its privileged position in the global financial system, which is pushing countries around the world to de-dollarise. Digital means of payment are being developed that will allow central banks to work without intermediaries such as commercial banks. At the same time, Sachs expressed hope that the WTO and the IMF will one day become truly global institutions, and not serve the interests of one country or group of countries.

Benedict Weerasena, Research Director of the Bait Al Amanah analytical centre (Malaysia), also drew attention to the inevitability of de-dollarisation. In Southeast Asia, steps in this direction have been taken for a long time. Since 2010, the Chiang Mai Initiative Multilateralisation Agreement has been in force, regulating the swap agreements of its participants. De-globalisation and the transition to regional integration creates a geopolitical and geo-economic alternative for many countries of the world, Weerasena noted.

Leonid Grigoryev, Academic Supervisor of the Department of World Economy at HSE University, pointed out that sustainable development goals and other ambitious goals were formulated at high growth rates, but they will have to be implemented at low growth rates. Properly in conditions of low growth, elections will be held in a number of countries in the next two years, which inevitably means nervousness among Western political elites.

Umid Abidkhadjaev, Director of the Institute for Macroeconomic and Regional Studies under the Cabinet of Ministers of the Republic of Uzbekistan, noted that globalisation is a well-veiled regionalisation: most countries trade with their neighbours. He pointed to the impressive growth rates achieved by Uzbekistan as a result of increased economic openness and reduced regulatory burdens. 

Arvind Gupta, chairman and co-founder of the Digital India Foundation, focused on the risks posed by monopolisation of key elements of the digital economy. Western technology corporations dominate in areas such as operating systems, search technologies, e-commerce, cloud services, and advertising revenues. Information systems are turning into weapons in geopolitical struggle. 

After the fourth session, the participants of the Annual meeting met with Alexander Novak, Deputy Prime Minister of the Russian Federation. During the meeting, the situation on the hydrocarbon market was discussed, as Western countries have adopted restrictive measures targeting Russian exports. 

Today, the share of hydrocarbons in the energy balance is about 85%. It will decline, but not at the same pace as we were promised several years ago, the Deputy Prime Minister noted. Until 2030, oil consumption is expected to increase, and renewable energy sources will primarily replace coal. Electricity consumption will increase due to the spread of new technologies - from data centres to electric vehicles. 

Over the past year, Russian gas supplies to the EU have decreased two-thirds, while LNG supplies to Western Europe have doubled. The main supplier is the United States, on which the EU today depends for 40% of gas supplies. Thus, the imaginary energy dependence on Russia has been replaced by a real dependence on the United States. Energy consumers have paid and will continue to pay for these tectonic shifts. 

This year, 80% of Russian hydrocarbon supplies have gone to the Asia-Pacific region. We can say that the countries of the world are competing to circumvent the illegal sanctions imposed on Russia. 

The fifth session was devoted to the challenges facing the Russian economy in the context of an unprecedented economic war unleashed against it. According to one of the participants, the events of the last year and a half could serve as a catalyst for a new development model for Russia. The new conditions are our new normal, creating a demand for transformation of institutions. The central question is to what extent the Russian economy to be able to develop under conditions of severe sanctions, demonstrating not just resistance, but long-term sustainability. 

The main reason for the stability of the Russian economy is the competent policies implemented over the past two decades, another participant noted. Back in 2001, land reform was carried out, which made it possible to create a powerful agro-industrial complex. Russia got through the pandemic more successfully than many other countries, and did not succumb to panic when the price of oil went negative. It was possible to redirect export flows from West to East, but there is an understanding that in Asia one should not expect price or investment bonuses: the countries are guided by their own interests. The reason why Asian countries willingly cooperate with Russia is not only the benefits from this cooperation, but also their fatigue from Western mandates.

The question was raised about the state and prospects for the development of the Russian military-industrial complex amid the current conditions. According to one of the participants, over the past year the enterprises have increased their production volume 2-3-fold. However, there are also problems, the most important of which are the shortages of personnel, technology and production capacity.

The economic war against Russia became the central topic of the meeting with Maxim Oreshkin, Assistant to the President of the Russian Federation. According to Oreshkin, Europe was the first to suffer from the sanctions imposed against Russia. A significant number of the EU countries demonstrated negative GDP dynamics. Industrial production is declining, inflation is rising, and rising prices are not compensated by rising incomes. 

The consequence of the economic war was a drop in confidence in American securities: countries such as China, India, and Saudi Arabia sharply reduced investments in them. In parallel with this, the share of global payments made outside the SWIFT system is growing. Russia and friendly countries have their own alternative systems. However, according to Oreshkin, the general trend in the field of settlements is a move away from central counterparties and their replacement with automatic systems. 

The last session of the second day of the Annual meeting was devoted to the prospects for the development of energy markets against the backdrop of military-political tensions. According to one of the participants, the key factor that has allowed Russia to maintain its usual level of income from hydrocarbon exports despitie Western sanctions has been market relations. Before the introduction of the oil embargo and the price ceiling, the volume of supplies from Russia was 3 million barrels per day, now it is 3.4 million, and last spring it reached 4 million. At the same time, 40% of Russian oil is transported with the help of countries that have imposed sanctions and embargoes. Russia is too prominent a player in the hydrocarbon market to be simply ousted from it, he stated. 

In the future, global energy markets will be divided into two circuits: the Western one, in which the United States will provide energy resources to Europe, and the eastern one, in which Russia is entrenched itself. At the same time, in the Western circuit there is already a tendency to reduce energy consumption, which is associated both with the climate agenda and with a decrease in growth rates. Price surges in the hydrocarbon market lead to a decrease in motivation to invest in new oil and gas projects. 

The participants also touched upon the topic of de-dollarisation, which ran through all the discussions on the second day of the Annual Meeting. Today, trade in Russian hydrocarbons is carried out in national currencies: 40% in rubles, and 30% in currencies of friendly countries. By comparison, at the beginning of 2022, 85% of trade was carried out in dollars and euros. The transition to national currencies is associated with certain difficulties (such as “hanging rupees”), but this process is irreversible. However, the single BRICS currency was called a “non-viable project”, in contrast to the aforementioned alternative payment systems.