In order to win it is necessary to make the economy more market-based
Ivan Timofeev, the Russian Council on International Affairs (RSMD) programming director spoke to Capital Ideas about sanctions, the ruble exchange rate, and the role of the market in the Russian economy.
Presently, the mass media does not supply the most optimistic assessments concerning sanctions introduced against the Russian Federation. According to statistics, the number of restrictive measures, introduced by western countries, had Russia overtaking a number of countries including Iran, which used to be number one on this list. Today the country is under extreme pressure due to the blocking of a high number of individuals and legal entities as well as sectoral sanctions, covering the majority of the banks of the country.
Unfortunately, such measures cast a dark shadow on economic development, however, as Ivan Timofeev reiterated, our situation remains unique. Unlike Iran, which was under overwhelming sanctions for many years, Russia was immediately subjected to practically the same sanctions package. Among the most important sanctions – already introduced was the prohibition of the Russian ferrous metallurgy goods export to the EU; the ban on Russian coal export will be put in force in August 2022. Moreover, it should not go unnoticed, a number of points that do not allow discussion are complete and final separation from the world community, for example, about the export of oil and gas.
As the expert noted, Europe will not be able to forego natural gas in the near future although it will very actively try its best. ‘In the long run until 2028-2030 the EU will substantially boost its capacity for receiving liquefied gas. Such heavy infrastructural investments will definitely damage the EU economy’s competitiveness; the price of that gas will be higher than Russian pipeline gas; but it ought to be expected for political reasons – reiterated Timofeev. For decades GAZPROM was a reliable gas supplier, but it is highly probable that the EU will head for a wrapping up of supplies and diversification, ideas of which have hovered for a long time in Europe.
The petroleum market situation is more flexible. America has already introduced a ban on Russian oil in its market; the EU, Japan and the UK are currently planning to introduce similar measures. However, in general, western countries do not have the power to influence Asian countries in this crisis, despite the risk of even higher oil prices. In a nutshell, Russia is still in a position to switch oil volumes toward other markets, although with big discounts.
The ruble and the increasing role of the yuan
Today, Russia has entered a stage of super-strengthening of the ruble, which was enabled not only by an imports decline, but also irregularity of logistical chains, excessive compliance of foreign suppliers as well as the mechanism of ruble payment for gas in Europe. The exchange rate that we have today is in fact part artificial, and caused by political reasons, but these reasons were created by purely economic triggers, which keep it low. Inflation in the near future, this and next year, remains sufficiently high for a number of reasons, one of which is a need of the state to support business and the population and somehow boost liquidity in the economy.
Complications of forex circulation have touched business; for more than 30 years the dollar was the universal currency. Still today, unlike in previous years, searching for a solution with the help of foreign capital will be ham- pered. On the political side, BRICS became the right solution of diplomacy and presently Russia looks precisely in that direction.
However, according to the analyst’s view, in terms of world finances BRICS will not be able to play a key role in the near future, still, within the framework of the association there is a promising opportunity to start using alternative transaction channels. On the strength of the wide scale of financial sanctions, the banks will have to change direction and the new direction will be China. ‘Obviously the yuan’s role in Russian international settlements will increase. The currency is supported by the rather developed and diversified Chinese industry. Strictly speaking the Chinese market has got all that we need’ – noted Ivan Timofeev.
Business must adapt
Artificially created driving forces push business not only because of the sanction bans. It was necessary to stand against public opinion and own ethical considerations. Yet, the appetite of the Russian market must not be underestimated; domestic companies and companies from friendly countries actively fill empty niches. The quality is changing, but it does not mean lesser quality, as it was during food embargo in 2014.
The chief domain, where we feel a shortage today is electronics and everything related to high tech goods. In the eyes of Timofeev, the main path now is adaptation of business and the mindset of the general consumer.
It can be a big mistake to fear repetition of the Soviet Union experience; Russia has an advantage and differs a lot due to presence of market economy. ‘I think, currently, the right solution is liberalization of the economy by the government, which never happened in Russian history under geopolitical pressure’– suggested Timofeev. Rare audits, less bureaucracy, etc. could help business and provide maximum freedom for development under extreme conditions.
The situation’s uniqueness is created, among many things, by the investment climate – after the deprivation of Russia from a substantial share of foreign capital, Russia does not ban it. Finally, business will need to become more attractive for potential foreign investors. It is quite a paradox, entering confrontation with the west, which claims position of a core of the liberal world order, we ourselves will have to make our economy more market oriented, to a greater extent transparent, and based on the rule of law. ‘We will not win against the West unless we use its methods’ – reiterated Ivan Timofeev.