September 4, 2013

Russian Economy: Facts Are Stubborn Things

Trying to stop the processes of European integration of the countries of the former Soviet Union, Russia has resorted to active outreach activities, stubbornly stating that today “Russia is economically more attractive” and that “its economic situation is much better than that of the European Union”.

The intensity of these measures increases with the approach of this year's November summit of “Eastern Partnership” of the EU in Vilnius, where it is planned to conclude an association agreement and to create free trade areas between the EU and Ukraine, Moldova, Georgia and Armenia. That is why representatives of the Russian government leadership, Russian media keep talking about “the inevitability of the collapse of the economies of these countries if they share the commercial and economic area with the EU”. At this, they tirelessly repeat that “economic problems of Ukraine will get dramatically exacerbated”, which, they say, can be avoided only under one condition — if our country joins the Customs Union of Russia, Belarus and Kazakhstan.

As it is extremely important for Ukraine not to make a mistake in its geopolitical choice, we should very carefully study economic prospects of our potential strategic partners both, in the East and in the West.

It is clear that first of all we mean Russia, which on the one hand, is focused on the economic reintegration of Ukraine, and on the other — keeps losing both, its economic attractiveness in the eyes of other countries, and adequate capacity to implement its geopolitical goals.

Thus, since the beginning of this year there has been a steady trend towards worsening of the economic situation in Russia. According to the state statistical bodies of the RF, published in mass media, in the first half of 2013 the pace of economic development of the country has dropped significantly (more than 2.5 times), and made only 1.7% (in the first quarter of this year — 1.6 % in the second — 1.2%).

For comparison — last year the rate was fixed at 4.5%. At this, during the first six months of 2013 there was a decline in all major industries of the Russian economy, including in manufacturing — to 1.3% (last year this index was 6.2%) in the construction industry — to 0.4% (2.6%), in agriculture — to 1.6% (3.1%), transport and communications — to 0.6% (1.4%). At the same time, production of electricity, gas and water supply have decreased by 2.4 %.

All this has led to a drop in profits of Russian enterprises, in particular, of manufacturing industries — by 37.8%, the construction sector — by 61.5%, railway transport — by 65%. Even more serious problems have arisen in “Gazprom” — its income has fallen by more than threefold. The reason is a forced reduction in the price of gas for the European Union under the pressure of European energy companies, as well as a significant reduction (by 40%) of purchases of gas by Ukraine.

Some growth of the Russian economy was in fact only due to speculative and trade and intermediary activities, as well as the privatization of the budget sector, which, of course, does not refer to the real production sector. As a result —the Federal and local budgets have been reduced while additional foreign loans have made the country's foreign debt larger. Since the beginning of this year the total amount of external debt has increased from 541 to 700 billion US dollars, which is 40% higher than the gold reserves of the Russian Federation (about 514 billion US dollars). The declared surplus of the RF budget between January and June of this year was caused not by strengthening of the Russian economy but by its underfunding. Thus, the expenditure part of the annual budget was implemented only by 44% of the plan, including: national economy was financed by 34%, utilities — by 40%, social policy — by 45%, fuel and energy complex — by 38%, road maintenance — by 27%, transport — by 23%.

Deterioration of the economic situation in the Russian Federation intensifies its social problems. By the results of the first quarter of 2013, growth in consumer prices in Russia amounted to more than 7%, which is twice higher than the figure for the same period last year. In fact, it means the failure of government plans to maintain inflation at 5.5%, as provided in the state budget.

The increase in prices of essential commodities is 2-2.5 times higher than the official inflation rate. In particular, during the first half of this year bread in Russian shops had become more expensive by 15.7%, pasta — by 11.8%, alcohol — by 18%, fruit and vegetable products — by 15.2%.

Rapidly has grown cost and basic care, such as: maintenance and repair of housing — by 8.1%, waste disposal — by 9.6%, utilities — by 10.7 %, hot water supply — by 12.7%, heating — by 10.9%, gas supply — by 14.2%, medical services — by 7.9%, passenger transport services — by 9.9%, education — by 10.5%, services of cultural institutions — by 9.2%, domestic services — by 7.9%.

It is clear that the effect of these processes has become the “leap of poverty” in the strata of the Russian population. Comparing the first halves of 2012 and 2013, during this period, the number of Russian citizens with incomes below the subsistence level, has increased by 500 thousand and makes 19.6 million. At this, adjusted for inflation, for the period 2010-2013 in Russia the cost of living in real terms has fallen by 15.5%.

The non-compliance of the Russian economy in a favorable situation for Russia at the world oil market, when favorable conditions for its development have been formed, can't help attracting attention. In particular, this refers to the preservation of relatively high prices for the Urals crude oil — an average of 106.5 US dollars per barrel. But the Russian economy did not use it, if not to take into account the growth of the domestic price of petrol — by 8%.

All these processes are due to both internal and external factors, the main ones being inefficient management of the country's economy by the Russian government (including the growth of bureaucracy and corruption), reduction of investment attractiveness of the Russian economy (due to excessive intervention of the state into economic processes), mass outflow of capital from Russia (during the first half of this year — 38.4 billion US dollars) and falling foreign demand for Russian goods.

In fact, all this explains the enhancement of the Russian Federation's measures for bringing Ukraine into the Customs Union of Russia, Belarus and Kazakhstan, which will allow the Russians to expand their presence in the Ukrainian market, and somehow to reduce their economic woes. It should also be noted that the process of attracting and related with it high-profile events in the political, economic and information spheres are being used by Russia to distract Russian citizens' attention from their own economic problems.

Also it should be noted that completely are being concealed economic problems of Russia which actually lead to stagnation of the Customs Union, adversely affecting the economy of partners of the Russian Federation. Thus, during the first half of 2013, the volume of reciprocal trade between member states of the Customs Union, compared with the same period in 2012, has decreased by 6.4%. In particular, the volume of bilateral trade between Russia and Belarus has fallen by 14% and between Belarus and Kazakhstan — by 9.6%.

At the same time, economic problems of Belarus have got aggravated. During the first quarter of this year, GDP growth was 1.4% (within the same period last year it had increased by 3.2%) and industrial output, compared with the same period of 2012, has decreased by 4.2% (last year this figure had risen to 10.9%). Exports of Belarusian goods have also decreased — by 22.1% and imports — by 8.4%. Accordingly, like in Russia, living standards of Belarusian population have fallen too. During the first six months of 2013 inflation in Belarus had increased by 7%, while the number of unemployed had increased by at least 50 million people.

The same situation is observed in Kazakhstan. In particular, in the period from January to June of this year, exports of raw materials and metals from Kazakhstan had fallen by 23.2%.

Given these parameters, the efficiency of the Customs Union and, in general, the prospect of cooperation of the leadership of Belarus and Kazakhstan with Russia is quite questionable. According to President of Belarus Alexander Lukashenko's statement at a press conference on August 16 this year, the Customs Union does not work, and Russia is not fulfilling promises that it gave during the implementation of this project. According to him, the government of the Russian federation has ordered not to let Belarusian goods to the Russian market.

Kazakhstan's President Nursultan Nazarbayev has also mentioned a possibility of his country's leaving the Customs Union, especially when its membership in the organization threatens Kazakhstan's interests. As a sort of Kazakhstan's demarche can be considered its leadership's refusal to join the Russian ban on imports of the Ukrainian confectionery company Roshen. Due to this, Kazakhstan prevented Russians' attempts to control the relevant segment of the Kazakhstan's market.

Based on these circumstances, Belarus and Kazakhstan are actively looking for an alternative to Russian integration projects at the post-Soviet territories. And one of the most promising directions is considered cooperation with the European Union, which shows a very different from the Russian one, dynamics of development.

Thus, since the beginning of this year, the European Union has been gradually emerging from a lingering recession that had been caused by the global financial and economic crisis. In particular, in the second quarter of this year the total GDP of the EU member-states, compared to the first quarter of this year, had increased by 0.3% (in 2012 GDP of the EU member-states fell by 0.3%). According to European experts, this trend makes it possible to expect growth of GDP of the European Union in 2013 by at least 0.5%.

Besides, an important achievement of the EU has become reduction of its energy dependence on Russia thanks to targeted efforts of the leadership of the European Union, which has united European energy markets, provided access to alternative sources of energy carriers, and uses the latest energy-saving technologies.

This gave the management of the EU and individual member-states of the European Union much more opportunities to conduct their policy towards Russia and at the former Soviet Union's territories. In particular, the evidence for this is direct support by the European Union to Ukraine's position in its confrontation with Russia on issues of European integration.

For its part, Russia has in fact lost the ability to influence the EU using the energy factor, as was the case during Moscow's “gas war” against Ukraine and the European Union in winters 2005-2006 and 2008-2009. On the one hand Russia has lost its positions in the European energy market, on the other hand — Russia's dependence on trade and economic cooperation with the European Union (as a major partner of Russia in this sphere) is growing and is becoming of particular importance for Moscow in the situation of problems in the Russian economy getting worse.


On the whole the situation reaffirms rightness of Ukraine's course to the EU with the ultimate goal of integration into the European Union. It is difficult to overestimate the importance of the Association Agreement between Ukraine and the European Union during the November EU Eastern Partnership Summit in Vilnius. It's the most important thing for Ukraine at the present stage of its historical development.