Despite the demonstrated unjustified “economic” optimism, V. Putin's bellicose monologue at the plenary session of the international discussion club “Valdai” in Sochi now once again demonstrates effectiveness of the sanctions of the international community in relation to the aggressor state: the return, in order to please average Russians, to the rhetoric of the “cold war” and outspoken anti-Americanism of the Russian leader are not able to hide the real economic problems and inaccessibility of high social standards declared by the “caring” dictator. For the first time in the last five years in Russia, real wages have decreased and the ruble tops antirecord levels (more than 42 and 55 rubles respectively for a dollar and a euro), and the Russians have already questioned the reliability of bank savings in the national currency. So analysts of the largest Swiss bank UBS AG believe that the Russian economy will be able to hold out till the middle of, or at most till the end of 2015.
The very next day after the speech in Sochi, Finance Minister A. Siluanov said that the Russian Federation is forced to cut budget spending by 10 % because of the sanctions and uncontrollable decline in oil prices. Because the draft state budget for 2015-2017 years was based on the following projections of the Ministry of Economic Development: during the next three years, the price of oil will be 100 US dollars per barrel, the sanctions against Russia before 2015 will not be noticeable, and the rate of economic growth from the next year on will also consistently increase.
It is also estimated that the additionally reduced by 2017 by almost 2 trillion Russian rubles, plan of incomes is also under threat, as Russia's external economic problems only add to its domestic ones. According to the Center of the Higher School of Economics, the decline in oil prices on every dollar leads to the budget's loss of 80 billion rubles of oil and gas revenues. And with such a trend the budget will lose 1.2 trillion rubles, but part of the loss is compensated by the weakening of the ruble (according to the Finance Ministry's estimates, the slump of exchange for each 1 ruble brings 190-200 billion rubles extra). But devaluation leads also to the inhibition of the economy, reduction of the tax base, which is why the total loss may be even higher than the oil and gas one, about a quarter — 1.5 trillion rubles.
By the way, even the apologist of V. Putin's regime T. Golikova has advised Duma Deputies to adopt the “anti-people” version of the budget for 2015-2017 years in the first reading.
In the national and sectoral aspects the situation is as follows.
The high-cost annexation of the Crimea and the “hybrid” war against Ukraine, enhanced by the effects of the global recession and the EU and US sanctions, give reason to believe that with the beginning in 2014 of the period of stagnation, within the next decade Russia will be unable to resume the previous trend and keep the previous growth rates. These fundamental causes and structural problems form the stable trend of degradation of the Russian economy, which Putin and his radical environment are not able to stop. They cannot stop it because of their restless imperial consumer ambitions and, because of the unwillingness to spend money received from oil and gas on domestic investments — infrastructure, industrial equipment, or scientific research. But the Russian capital, following the foreign one, is leaving the country.
During Vladimir Putin's staying in power, the ratio of investments to GDP in Russia was approximately half of the required parameter in countries seeking to develop/progress, which was also one of the reasons hampering the country's economic growth.
The President, the Prime Minister of the Russian Federation and other Kremlin and government officials-oligarchs do not express a desire to take up the case of large-scale liberalization of domestic industrial monopolies or foreign trade. Declarative steps such as entry into the WTO and “measures” to improve the business and investment climate, often based on the direct bribery of foreign government officials and officials of international organizations, are insufficient for the Russian economy, which is holding out exclusively due to the development of mineral resources and the undeveloped and unprotected right to property.
The subjective, voluntarist reluctance to modernize scientific and industrial potential and to overcome structural problems of the national (raw material producing) economy will sooner or later lead to the collapse of Putin's economic model and the political regime as a whole. Strengthening of the negative impact of sanctions on the Russian economy, which has a double effect — reduction of investments and access of state-owned enterprises to long-term financing + falling of household consumption and public spending — will be an additional catalyst in these processes.
As the sanctions become tighter, signs of such a scenario of the development of the situation in the Russian Federation, clearly show themselves in key sectors such as energy, defense and finance ones.
The raw material producing sector, providing nearly half of Russia's exports and 50 % of the immediate profit, and the major players in the oil and gas markets in Russia (state-controlled “Rosneft” and “Gazprom”) are already suffering losses from such restrictive measures of the EU and the USA, as prohibition of the export of technologies and equipment for deep water, arctic and offshore drilling and exploration; restricting Russia's largest oil companies access to European markets debt and securities markets.
Their top managers optimistically claim that sanctions will not affect production plans and the operational mode of Russian oil companies. But they either forget or are afraid to admit that it is only in the short term. Energy Minister of the RF A. Novak has pointed out that he has no plans because of the sanctions to change Russia's energy strategy for the period until 2035, however, the medium- and long-term effects will be quite negative.
Let us remind forgetful officials about them.
Prohibition on the access to technologies of offshore drilling will result in a significant slowdown in exploration of deepwater and Arctic resources. Thus, the company “Exxon Mobil” was forced to stop nine out of ten joint with the company “Rosneft” projects, among which the most promising is the project for oil production on the continental shelf of the Kara Sea. The overall production of oil in Russia today is lower than the Soviet index of 1989 — 12 million barrels per day, and there is little hope for the increase of the volumes of oil production even in the future. Because almost 25 % of Russian oil is extracted using the “forbidden” for supply to the RF technologies and equipment for horizontal drilling and hydraulic fracturing.
According to the Trade Ministry and the Ministry of Energy of the Russian Federation, despite the presence of more than 200 companies-producers of oil and gas equipment, import substitution of the majority of nomenclature will become possible not earlier than 2018-2020, and at the moment of the 45 positions only five can be substituted. Therefore, the mentioned Ministries propose to consider the possibility of supply from China, South Korea, Singapore, India, Latin America, and the United Arab Emirates, Saudi Arabia and Israel. We are sure that in Abu Dhabi, Riyadh and Jerusalem they are looking forward to seeing “Putin's messengers.”
The company “Lukoil” has stated that, due to the limited access to debt capital markets, it plans within five years to accumulate at the expense of its own free cash flow the reserve fund of 30 billion US dollars “to protect the market from undermining”. It is obvious that such measures would block investment into the growth of production in the long term.
It would be difficult or even impossible for the gas companies “Novatek” and “Gazprom” without massive use of Western technologies to complete the construction of plants for production of liquefied natural gas for its further “diversified” supply to the Asia-Pacific region.
With the increased capital and operating costs, complicating the fulfillment of production plans in the medium term and making unprofitable the development of hydrocarbon reserves in difficult conditions, “Rosneft” and “Gazprom” have to go to the National Welfare Fund for the 40-billion US dollar assistance to cover the existing debt in foreign currency. Even if these requests are met (Ministry of Finance proposes 20 billion US dollars), then there will be a talk about additional constraining factors to limit production growth in the future.
Let us remember also that Western sanctions will seriously affect the financial sector of Russia because of its high level of being monopolized by the state “Sberbank” and “VTB”, as well as Russia's total external debt of 715 billion US dollars, of which 214 billion US dollars are the external debt of the banking sector, 432 billion US dollars — other corporate debts, 69 billion US dollars — the public sector's debt. Moreover, over the next 24 months Russian banks will have to pay about 55 billion US dollars (11.5 % of the total debt) on short-term loans, two-thirds of which are the debt of the banking sector.
The deterioration of the macroeconomic situation and the reduction of real income of Russian consumers will increase the portion of bad loans in bank portfolios (10-15 percent), which will further complicate the situation with liquidity of financial institutions.
Due to Western sanctions Russia's banking sector in the nearest future will have to deal with the increasing demand for loans from the domestic corporate sector, and the need to write off bad loans in the absence of access of the biggest banks to the western debt and securities market. And the expected tight monetary policy will have a negative impact not only on the rate of re-growth of the economy, but also on the “welfare of Russian citizens”.
The impact of sanctions will be felt by another “locomotive of Putin's economy” — the military-industrial complex (MIC). TheWestern countries' ban on supply to Russia of military or dual-use products will create serious problems for the Russian “defense” and rearmament programs. This concerns not only the systems, but also the components produced in western countries. In most modern weapons, which Russia plans to buy in the domestic market, are used imported, including Ukrainian, components which cannot be bought.
D. Rogozin and MIC Directorate's optimistic calls regarding the existing potential of rapid expansion of production capacities does not stand up to scrutiny, and the pledged to the federal budget increase of financial stimulating of defense programs will involve acceleration of inflation. Russian citizens, applauding the imperial expansionist plans of the Kremlin leader, should get prepared for the increase in spending on military needs and growing of the share of the MIC in the national GDP.
Apart from the desire to “get into the Russian history,” V. Putin is trying to demonstrate that Russia allegedly has an alternative to relations with the West — the Eurasian Economic Union, which will start functioning from 1 January 2015, and strengthening of ties with the BRICS and the SCO. The Russian president is also trying to widen the circle of allies, speaking, for example, for the expansion of the SCO with the help of India and Pakistan. The Asian course is becoming a priority for the current Russian leadership.
At the same time, we should be happy with the fact that such a forced “turn to the East” will only exacerbate the existing strategic asymmetry between Russia and China in the Far Eastern Russian regions with low population density. Besides, the new crisis of the Russian ruble will put an end to the started in 2007 Kremlin's policy of turning the ruble into a global reserve currency, and Moscow — into its emission center.
Low levels of consumption and investment, the negative trend in GDP growth, deterioration of the business climate and reduced investor confidence already by the end of 2014 will have led to a record outflow of capital (120 billion US dollars, accounting for 5 % of Russia's GDP), the collapse of the national currency (ruble against the US dollar will fall by 25 %) and of the Russian stock market (MICEX index has fallen by 7.5 %). All this expands the list of Russia's macroeconomic problems. Besides, the ban on the import of agricultural products has significantly influenced the rate of inflation, with the result that food prices have increased by tens of percent, and the overall rate of inflation now stands at 8 %.
In the nearest future, such a combination of negative factors will significantly complicate the implementation by the Russian government of its obligations to the Russians and newly minted citizens of the “ultra-democratic” Russian Federation, according to V. Putin and his apologists' estimates, whom the Kremlin long-liver “guarantees” economic security and increasing prosperity.
Roads and fools, as well as schools and hospitals can wait!
