Energy 15 February, 2018 12:00 pm   
COMMENTS: Mateusz Gibała

Menkiszak: Russia is afraid of US revenge (INTERVIEW, part one)

Marek Menkiszak, head of the Russian team at the Centre for Eastern Studies, describes Russia’s struggle with economic problems in the face of Western sanctions. How does the threat of new US restrictions affect Russians? Will it harm the disputed Nord Stream 2 project? How does the Russian economy cope at a time when petroleum prices are rising?

Marek Menkiszak: It remains dependent on the raw material model, oil and natural gas exports. It needs foreign investment. Russia emerged from recession and went into stagnation. It is clearly better because there is no decline in GDP. According to the first assessment, last year saw an increase of 1.5 per cent. However, it is worth noting that this is below expectations, which assumed growth of 2.1 per cent. There is a certain disappointment of the Russian authorities. Quarterly indicators show that after the first enthusiasm in the first quarter, when GDP growth amounted to 2.5 per cent, there was a clear slowdown. Industrial production recorded 1 percent growth. That is bad. This pace confirms the predictions of independent Russian analysts who claimed that the problem of the Russian economy would be the lack of sustainable, dynamic economic growth. The prospect of stagnation is emerging: growth of 0-2 per cent of GDP per year, which, given the poor investment climate and low inflow of foreign capital, does not provide a chance for dynamic economic development that will allow Russia to improve its international position. However, such growth is enough to ensure financial stability and maintain the level of socio-economic indicators. The Russian economy may remain at this level for many years.

And go calmly through the elections….

…exactly. Maintaining political stability is a priority for the Kremlin. The main threat to this is the pauperisation of society, which is large enough to translate into stability. If you look at the social indicators, the Russian income is falling for the fourth consecutive year. In 2016 it reached almost 6 per cent, and in 2017 it was 1.7 per cent. The negative downward trend in real income has still not been overcome. About 40 per cent of the Russian society does not have enough for some basic expenses such as clothes and food. Their savings are melting down. More than two thirds of Russians do not have any. In addition, the problem is that this mainly affects pensioners, whose problems are not compensated by the indexation of pensions against rising food and medication prices. You can see that the government is aware of this. This issue will be important in the election campaign. The authorities will take some action or try to give the impression that they are doing so.

What role will the military and energy industries play here?

These two sectors are crucial in Russia. Oil and gas revenues last year amounted to about USD 190 billion. Half is accounted for by petroleum exports, 30% by oil products and only 20% by gas exports. This is more than in 2016, because then it was USD 150 billion, but much less than the record-breaking 2013, when Russia earned almost USD 350 billion in energy raw-material exports. Russia is pleased with this increase, as the annual average price of Urals petroleum has risen from USD 42 in 2016 to USD 53 in 2017. Monthly prices have increased even further. This helps the budget and reduces its deficit. At the same time, Russia is trying to save money. The budget calculations are conservative and assume an average oil price of USD 40 per annum.

At the moment it is almost USD 70.

Yes. Another element is the armaments industry complex. It is difficult to separate, because there are factories working for both the civilian and military sectors. In addition, a quarter of the federal budget is also kept secret. It is a fact that Russia’s military expenditure, which has been steadily growing even in spite of the crisis, has a purely military and geopolitical function, namely to build up the image of a superpower and deter enemies, but also a social function. It is a sector in which large sums of money are pumped in order to maintain social stability in Russia. These more than a dozen million people employed in this sector, together with their families, are an important part of the society.

Is this a new middle class in Russia?

It depends on how to define it. The middle class in Russia is defined less by income and more by aspirations. In Russia, it includes not only entrepreneurs but also representatives of the public administration in its broad sense. The size of this group is therefore estimated at 20-25 per cent of the population. This concept does not coincide with the West’s understanding of it, especially in terms of income.

The hopes of some of Vladimir Putin’s regime’s critics are placed in these people. Will the sanctions convince them to rebel?

On the one hand, if we look at economic data, the Russian economy has adapted to a large extent to sanctions. However, this does not mean that sanctions do not work, and the authorities have no interest in making them more lenient. However, they do not believe that this is a necessary condition for maintaining current stability, because this is not the case. In particular, sanctions can have a long-term impact on the potential of the energy and armaments sectors. Moreover, the mere fact that they exist and there is a risk of their escalation, especially in the USA, is a deterrent for investors. This is very bad for the Russian economy. In order to develop, it must have an inflow of foreign capital. There is a systemic problem of corruption, a lack of legal certainty and property security, a lack of an independent judicial system. Sanctions are added to this.

Will aid from outside the West help?

The agreement with the OPEC oil cartel, including Saudi Arabia, to freeze production contributed to an increase in petroleum prices on the markets. This had an obvious positive effect on the Russian economy. Nevertheless, the figures show that, before the agreement was concluded, the Russian companies started to pump petroleum in huge amounts followed by the agreement to freeze the production ceiling that came into force. The effect is therefore more psychological than economic. The markets react emotionally to such signals, but their significance cannot be overestimated. Great money from Saudi Arabia does not flow either. Talks are constantly taking place regarding symbolic funds. This is a virtual topic. China is a more serious issue. On the one hand, Russia is trying and succeeding in gradually diversifying its economic cooperation in this direction. We have major infrastructure projects, such as the Siberian Power Pipeline. Its importance is also overestimated, because at the beginning it will be pumping a few of the planned 38 billion cubic meters annually, and its use will grow slowly. In addition, the large Rosneft oil export contracts to China create an image of Russia, which wants to show that if Europe does not want to open up to supplies, it is an alternative in the East. This is only partly true. The European market will continue to be the dominant market for Russia in the foreseeable future.

They even communicate it, Gazprom did so at a time of increasing sales to Europe.

The degree of involvement of Russian lobbying in the Nord Stream 2 project shows where the priorities really lie. So far, the Chinese have been very restrained in saving the Russian economy from sanctions. This was one of the indirect effects of Western sanctions. Chinese companies were concerned about the risk of being exposed to American sanctions. Beijing began to selectively invest in those companies and individuals who belong to the informal elite in Russia. It is of course Igor Sechin and Rosneft, Gennady Timchenko and Novatek. Spot support for projects and people who have a strong political impact is a clever Chinese strategy, which on the one hand does not expose China to large financial expenditures, and on the other hand strengthens the political aspect of Russian-Chinese cooperation. The Chinese are investing in the political elite of Russia in order to gain certain benefits. The advantage, for example, is that Sechin is a well-known lobbyist for cooperation with China and this translates into real cooperation. What is less well known to the public is, for example, the Chinese-Russian exchange of experience on citizen surveillance systems, blocking the Internet and human resources policy.

Interview conducted by Wojciech Jakóbik