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Aleksashenko: Russia’s Economy Sinks, but Don’t Look for Change

Sergei Aleksashenko

Western sanctions don’t play a decisive role in determining trends in the Russian economy and have little effect on Kremlin decisions, said Sergey Aleksashenko, former deputy chairman of the Russia’s Central Bank. But, he said, the economic situation is more dire than the image authorities try to portray. Aleksashenko, now a senior fellow at the Brookings Institution in Washington, made his comments in an interview with RFE/RL.

The interview, as edited, appears below:

RFE/RL: How deep is the economic crisis in Russia? The Kremlin claims that the EU is hurt more by Western sanctions against Russia than Russia is.

Aleksashenko: The recession in Russia has continued for six consecutive quarters. If you look at statistics, it seems that the Russian economic crisis is not as deep as it was in 2008. According to statistics by the Russian statistic agency, GDP fell by 3.7 per cent in 2015. This is not a lot if we take into account that six years ago GDP fell by 10 per cent. However, as the saying goes, there are lies, damned liesand statistics. If we slice and dice [statistical data], it would be evident that the only growing component of Russian GDP was a net export. All other components, such as private and public consumption, then investments are going down. These negative trends cumulatively drag down GDP by 9 per cent. Further, the growth of net exports was the result of import decline.

Therefore, this supposed fall of GDP by 3.7 per cent is a “statistical miracle” which does not reflect the real problems…. Russia is in a deep crisis, it lacks investments, and it suffers from high inflation. In last two years, consumer inflation has reached 25 per cent, the value of the ruble has fallen more than twice, while private consumption has gone down by 10 per cent. That means the crisis is not over, as the Kremlin claims. On the contrary, the Russian economy is set to continue downward.

RFE/RL: Which sector of the Russian economy has been most affected?

Aleksashenko: The construction sector is being hit worst, and then wholesale trade. Manufacturing fell by 5.5 per cent although the military sector has grown by 12 to 15 per cent. That means that the so called “civil part” of manufacturing fell by 8-9 per cent. At the same time, the sale of new cars declined by 36 per cent while new mortgages fell by one third in spite of state subsidies. Retail sales declined by 11 per cent.

RFE/RL: Meanwhile, Russian authorities have announced they will rely more on domestic production, and will search for new markets and substitute them for Western markets.To what extent have they succeeded?

Aleksashenko: The Russian authorities have not acknowledged the real nature of the crisis, at least publicly. They talk a lot about a pivot to Asia, relying more on domestic production and so on. However, I would say that statistics don’t support those ideas. Russia’s net exports rose last year by 0.6-0.7 per cent. It means there was essentially no growth. It is quite understandable, because the bulk of Russian exports constitutes raw materials and commodities – between 75 and 80 per cent. And, as you know, there is not a huge global demand for those products. Therefore, Russia cannot sell more. Of course, Moscow would like to rely more on exporting armaments. But, that accounts for just about 5 per cent of the overall Russian exports. It has also tried to export Russian cars to neighboring countries. However, that accounts forless than two per cent of exports. Therefore, external demand cannot be a significant driver of the Russian economy.

Nor can domestic production. Yes, Russian agriculture is doing quite well: since 2003 it has grown an average 3 per cent annually. It is the only sector of Russian economy that shows continuous growth. However, agriculture’s share of Russian GDP is slightly above 3 per cent. Agriculture needs togrow by 10 per cent annually to become a significant factor in overall growth of the Russian economy, which is not doable.

For that reason, the optimism of Russian authorities has not been based on reality. The Russian economy is not going to grow and the most likely scenario is stagnation in the medium term. The main reason for that is a poor investment climate. There is a desperate lack of property rights protection, which results in the decline of investments, and there is no economy in the world that could grow without investments.

RFE/RL: So, the plummeting oil prices have badly affected the Russian economy. However, it has not decreased oil production to balance a market price, as Saudi Arabia and other OPEC countries have done in the past. Is there an economic reason behind this move or a political one, too?

Aleksashenko: Those factors play a certain role in the decline of the Russian economy but it is not a decisive one. Let’s talk first about oil prices. The Russian tax system is constructed sothat oil prices account for 65 to 70 percent in revenues. Of course, when they go down, it is a serious blow to the federal budget. However, fluctuation in oil prices doesn’t much influencethe Russian oil industry. Last January it produced a historically high amount of oil. The marginal price of oil production is rather low and so Russian companies are rather competitive on cost bases. In addition, the devaluation of the ruble has reduced the cost to Russian oil producers. They don’t cut production because they are commercial companies looking for profits and given their relatively low costs between 15 to 17 dollars per barrel, they can make a profit even under the current oil prices of around 30 dollars.

When it comes to sanctions, oil prices do affect the Russian military production but not a lot, because it has been able to find substitutes. Moreover, there are huge stocks of military components that were imported from the West in the past that allow the Russian industry to continue production for another year and a half or even two years.

But financial sanctions prevent many Russian banks and companies from borrowing money in foreign markets. That played a huge role by the end of 2014 and at the beginning of 2015 when Russia had to repay its foreign debt, amounting to 10 per cent of its GDP. However, in the last three quarters of 2015 that burden fell dramatically to less than 3 per cent and it will continue through 2016. It’s still a huge burden but it cannot destroy the Russian economy.

RFE/RL: Is it a conspiracy theory that the plummeting of oil prices from 110 dollars in June 2014 to about 30 dollars is politically motivated to force Russian to change its policy toward Ukraine? There were the situation from the 1980s when the price of oil plummeted because Saudi Arabia pumped more oil flooding the market, allegedly, as a part of a campaign to destroy the socialist system in the Soviet Union.

Aleksashenko: This is a conspiracy theory. If you look into the history of the Russian economy in the past 30 years, yes it is very strange that at times when Russia has faced a crisis, oil prices have gone down. However, the Russian economy has not declined in all situations when oil prices have fallen. For example, oil prices plummeted following 9/11 terrorist attack while the Russian economy grew pretty fast. Another example was the drastic decline of oil prices from 148 dollars in the summer of 2008 to 35 dollars in January 2009, but no one said that it was done deliberately in order to destroy the Russian economy.

RFE/RL: Now, about pipelines. Moscow and Beijing signeda 400 billion dollars deal in 2014 to supply China with the Russian gas. To what extent is that realistic? Meanwhile, Russia cancelled the “South Stream” pipeline. In addition, it has recently shelved its successor, the “Turkish Stream” pipeline due to political tensions with Turkey. This has occurred in the face of Gazprom’s announcement that it will cease exporting gas through the Ukrainian pipeline by the end of this decade. Does this mean that Russia has been steering away from the European market as the most important before the crisis in Ukraine?

Aleksashenko: It is quite reasonable for Gazprom to sell gas not only in Europe but in Asia as well. I was a participant in negotiations with China on Russian gas in 2003. The company “Russia petroleum” was interested in signing a commercial deal, but Gazprom was not interested in the Chinese market and blocked this. So, it has taken Gazprom 12 to13 years to change its position. If Gazprom has signed a deal back in 2003, it would have been capable of supplying the Chinese market by 2005 and the situation today would be different.

Also, we should not treat the Chinese market as a substitute for the European one. This gas is provided from different deposits and fields. Eastern Siberia, whose gas would go toChina, and Western Siberia, whose gas goesto Europe, arebetween 1,500 and2,000 kilometers and they are not connected.

As for "South Stream", "Nord Stream 2" and then “Turkish Stream”, the problem is that Gazprom is a Kremlin political instrument. If the Russian giant could build “Turkish stream” and “Nord Stream 2” – and make Europe more dependent on Russian gas – it would definitely seize that opportunity.

RFE/RL: Is the Russian announcement that it will cut off the supply through the Ukrainian corridor by 2019 just a political threat?

Aleksashenko: It is a political threat, but Gazprom’s representatives acknowledge that cannot completely cut off this transit route because there are some markets that could not be reached even if the “Turkish stream” were built. It means that Gazprom will continue to use the Ukrainian pipeline even at the beginning of next decade.

RFE/RL: “South Stream” was perceived as important leverage to preserve and strengthen Russian influence in the Balkans, particularly in countries that would like tojoin the EU. Does this mean that Russia lost an instrument of influence in the region following South Stream’s cancelation?

Aleksashenko: Yes, Russia wanted to use "South Stream" as political leverage to build alliances across Europe. Of course, Russia lost this instrument after announcing its cancelation. But, don’t worry, Russian politicians will try to find something else because it is evident that Putin’s policy is aimed at destabilizing European unity, to find ways and means to increase tensions within Europe.

RFE/RL: Dmitry Medvedev, when he was the Russian president, said that he intended to build a Silicon Valley equivalent in his country and to modernize Russia’s overall economy. Did anything come of that?

Aleksashenko: The biggest problem is a lack of the rule of law. You cannot build a “Silicon Valley” and a competitive economy without the rule of law and property rights protection. You can have dreams, you can have sophisticated military technologies, but the rule of law is key to a civil economy.

​ RFE/RL: Will Western sanctions and the plummeting oil prices eventually lead to a change of the Russian policy?

Aleksashenko: As I said, Western sanctions don’t play a major role in determining trends in Russian economy…But the poor economic situation affects the political situation. A recent public poll in January indicated a significant and rapid decline of approval of the Government, regional governors and the Parliament. Mr. Putin has still enjoyed strong public support. However, even if his popularity is to fall, I don’t believe it would lead to a change of the Russian policy. On the contrary, I’m afraid that tightening of control and pressure on the opposition, less free elections, and maybe even more political persecutions of opposition leaders.

​ RFE/RL: For how long this situation may last?

Aleksashenko: It can last for another decade or two – while Mr. Putin is in power.