December 3, 2013

Vain Hopes

Opponents of the Association Agreement between Ukraine and the EU and, in general, of the strategic course of the European integration of our country, as an example, voice their main argument: relations with Russia will get worsened and that will soon result in “catastrophic consequences for the Ukrainian economy".

And stubbornly impose their views on the opportunities of getting, as opposed to the Agreement, “economic preferences from Russia” and the latter's “effective assistance in solving economic problems in Ukraine”, including through a 20 billion US dollar Russian loan, access to the Russian market, reducing the price for Russian gas.

In terms of strategic development of Ukraine the above mentioned promises, from a historical perspective, can safely be questioned. Especially now that the Russian Federation is not prepared to fund its so-called integration projects, or to fulfill its financial obligations to the potential partners. The reason is obvious — Russia's economic problems are exacerbated to the limit.

Pros and cons of joining the Customs Union http://news.eizvestia.com/

Despite all the measures having been and being taken by the Russian leadership, the economic situation in the country is not just extremely difficult, but also tends to deteriorate further. According to the Ministry of Economic Development of the Russian Federation, in October of this year, Russia's GDP growth in 2013, compared with the previous year, is expected to be no more than 1,8 % (was planned at the level of 3.5%).

This is evidenced by the results of the economic development of Russia in January-October this year, demonstrating low growth of the Russian economy — 1.5%, reduction in the volume of trade — by 3 % and an increase in unemployment — by not less than 5.3%. At this, is seen a decline in all the basic industries of the Russian economy and, consequently, decrease of  the total income of the Russian enterprises, including: agriculture — by 55.6%; finishing production — by 37.8 %; the construction sector — by 61.5%; rail transport — by 65 %; in wholesale and retail trade — by 23.8%.

Attracting additional loans has led to the fact that the total volume of Russia's external debt since the beginning of 2013 (both, of the state and commercial structures) has increased by 30% — from 540 to more than 700 billion US dollars. This is 40 % higher than the gold reserves of Russia (about 515 billion US dollars).

More restrained are independent Russian experts' forecasts on the prospects of the Russian economy. For example, the former Finance Minister of the RF, O. Kudrin predicts that in 2013, the GDP growth will not exceed 1.1%, and in the next two to three years — not more than 2 %.

The reasons lie in the critical dependence of the Russian economy on oil and gas exports. Even with the policy of President Vladimir Putin on building Russia as “the great energy state”, this dependence has not decreased, but vice versa —it has increased — from 40% to 60 %. And today part of innovative technologies in the Russian Federation's economy is not more than 15%, while this figure in leading countries reaches 60-70%. It is no coincidence that Russia occupies the 51th step in global innovation ranking.

This explains the increase in Russia's dependence on the state of affairs at the global energy market. For the Russian Federation, this situation is getting worse because of falling prices for oil and gas, active development and implementation in the world of new energy technologies (in particular, the industrial production of shale hydrocarbons in the United States, Canada, Australia and several other countries), but also because of the decreased demand for Russian gas in Europe (as a natural response of the European countries to Russian “gas wars" against Ukraine and the EU). Thus, because of the forced reduction of “Gazprom’s” gas prices for European partners, reductions in gas deliveries to Ukraine and increase of the cost of its production, in the current year the net profit of the Russian gas monopoly has decreased by 35%.

Should be noted the following feature: foreign investors less and less trust Russia as a state. The reason is the aggressive and unpredictable foreign policy of the Russian leadership (including in relations with the European Union), as well as, of course, the problematic nature of the Russian economy. And, as a consequence — keep drastically getting reduced amounts of foreign investments into the Russian economy, the scale of the outflow of capital from Russia keeps growing. According to the International Monetary Fund, confirmed by the Central Bank of Russia, since the beginning of 2013 this outflow has made at least 60 billion US dollars (5 billion US dollars more than in 2012).

In general, due to such problems, the losses of the Russian state's budget in the current year have already exceeded 1 trillion roubles. At this, independent Russian experts point out that the current Russian government is actually not able to regain an effective control over the economy of the state and to quickly solve the urgent problems. Therefore, the economic situation in the Russian Federation is rapidly becoming more and more complicated and the government was forced to curtail basic social programs. The leadership of the Russian Federation has less and less abilities regarding implementation of the main directions of its foreign policy, including the construction of the Eurasian Union and providing assistance to its partners.

Our trade with the European Union and the Customs Union http://finance.bigmir.net

To verify this, just pay attention to the key indexes of the activity of the Customs Union. Lately, they are getting reduced, including the volumes of bilateral trade between Russia, Belarus and Kazakhstan. Note that the problems of Russia severely affect its closest partners, in the first place — the CU members, in particular, Belarus. The latter's Republican National Statistical Committee shows that in January—September this year the growth of the Russian economy accounted for only 1.1% against the projected 8.5%. As a consequence, automatically decreased production in virtually all basic branches of the Belarusian economy: in industry — by 4.6%, in agriculture — by 2.2%, etc. Since the beginning of this year, the Belarusian foreign trade volume has fallen by more than 18 %. Thus, because of the discriminatory actions of Russia, actually has stopped the export of Belarusian potash (the main source of foreign exchange earnings of the country). Positions of Belarusian tractors and automobile industries at Russian and foreign markets have been lost. Despite the allied relations within the Customs Union, Russia continually increases the price of Russian energy carriers for Belarusian consumers. In 2013, the price of Russian gas for Belarus has increased from 165.6 to 175 US dollars per 1 thousand cubic meters, the rate of export duty on oil products — from 403.2 to 420.6 US dollars per 1 ton, and as a result the republic has lost at least 7 billion US dollars. Belarusians, trying to compensate for these losses, to cover the deficit of the state budget and to maintain the stability of the Belarusian economy, have to use their gold reserves. In general, these expenses have amounted to 1.3 billion US dollars, which has put the country on the brink of default.

At this, the Belarusian leadership was forced to take openly extortionate measures against its citizens, “deflating" the money of the citizens, including by increasing the bills for housing and communal services and prices of the main types of goods, by increasing taxes. In the nearest future the prices for housing will be increased by an average of 40 %, including the increased cost of electricity, gas and public transport (by 15%) and passenger trains (2-2.5 times). 7-10% more expensive will become bakery, meat and dairy products. Are being concerned questions of establishing additional taxes, in particular, on cars (40 to 100 US dollars), as well as on use of inter-city roads.

Unfortunately, similar measures are typical for Ukraine, due to both, domestic reasons, and the maintained close relations of our country with Russia.

From all the above said, the following conclusions can be drawn: Belarus, Ukraine and, in general, most of former Soviet countries have the same problems. Their economy is ineffective because it does not allow to ensure the state's stable development and to bring standard of living closer to those of the leading states. We should remember that the above mentioned problems of post-Soviet territories create preconditions for the spread and deepening of stagnation processes. To all this, Russia, under weight of its own problems, can no longer within the framework of its integration initiatives really help CIS countries. That is why it is resorting to the use of the situation only as a lever of pressure on its partners.

In that case there are three ways to save the viability of the country and to maintain its economy. To improve the efficiency of the entire economic complex, the latter must be thoroughly reformed and modernized according to innovations; it is necessary to stick to fiscal austerity and thus to avoid the critical state of the state debt and the collapse of the financial and economic system of the country; to use the policy of external loans with which to cover the state budget deficit and to ensure relative social and political stability of the society.

To implement all the mentioned above, it is necessary:

  • to give priority to the development of relations of the country with leading Western countries and international organizations, which would enable access to modern technologies and investments. It is the path having been chosen by the majority of developing countries, actively implementing programs of modernization, economic, trade and investment cooperation with the United States that the EU;
  • to reduce dramatically social expenditures and benefits, to raise taxes and prices for basic living resources (energy, utilities and the like). As the experience shows, such an approach makes it possible to keep the economy “afloat", but, of course, exacerbates social tensions in the society, laying the ground for massive social unrest in the country;
  • to provide the necessary conditions for outside funders — economically developed countries and international organizations — for beneficial financing of the economy of the country.

Without taking into account the obviously disastrous third option, which only gives the appearance of solving economic problems and temporarily delays the "payback time", today, both Belarus and Ukraine have actually chosen it. How it ended for Belarus — demonstrate its current problems, which have just been mentioned.

Ukrainian exports to the EU http://voprosik.net/

If Ukraine chooses such a course, then it will certainly have the same problems in the nearest future, right after the presidential elections of 2015. Even the Russian loan of 20 billion US dollars will not rescue it, despite the hopes of the Ukrainian government. Indeed, without true reforming of the Ukrainian economy, without its decriminalization (which is very unlikely in terms of retaining power in the hands of the current leadership of Ukraine), the foreign debt will result in a default.

And then the Ukrainian government will have no choice but to take the same steps taken by the current leadership of Belarus: to raise prices for basic goods, to increase the cost of housing and communal services dramatically, to the dizzying heights to rise taxes.

But having received financial assistance from Russia, our government will completely make its independence formal, which will inevitably result in the growing influence of the Russian Federation and resuming its control over Ukraine.