Global Economy
Russia would be vulnerable to tough economic sanctions
By Michael Hennigan, Finfacts founder and editor
Mar 3, 2014 - 6:02 AM

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If the powers of the West have the backbone to respond to President Putin's military aggression in the Ukraine with tough economic sanctions, they would come at a fragile time for the Russian economy.

It's not that the petrostate is going to run out of funds anytime soon but in 2013, Russian GDP (gross domestic product) rose only 1.3% in 2013 in a year when the US produced more oil than it imported for the first time since 1995 and is due to become the world's biggest producer in 2014.

Oil and gas account for 70% of Russian exports and over 50% of all state revenue according to Nick Butler, a visiting professor and chair of the Kings Policy Institute at Kings College London.

Economists estimate that Russia needs an oil price of about $117 to balance its budget. The Brent crude price has been in a range of about $110 in recent months.

When the Soviet Union collapsed in 1991, the population of Russia was at 148.5m and it was 143m in 2010.

Life expectancy at birth; male (years) in Russia was last measured at 63 in 2010, according to the World Bank. This compared with 78 in Ireland, 79 in the UK, 72 in Malaysia and 74 in China.

The Organisation for Economic Co-operation and Development (OECD) said in a survey published last month that Russia made major strides in the decade before the 2008 crisis, helped significantly by oil and gas revenues. "But productivity and living standards are still well below those of the most advanced market-oriented countries, and the speed of convergence since the crisis was lower than in most BRIC (Brazil, Russia, India, China) countries. Moreover, growth has slowed since 2012, partly for cyclical factors but mainly because potential output growth has slowed. The Ministry of Economic Development slashed in November 2013 its projected long-term average growth to just 2.5% down from 4.3% projected in April, warning that Russian growth until 2030 would lag behind the global average. Making further sustainable advances and fulfilling the presidential decree of May 2012 to increase labour productivity by 50% by 2018 and create 25 million highly productive jobs by 2020 will require a new pace of reforms."

The OECD added that while education enrolment rates are very high, insufficient quality and poor links with the business sector limit the supply of employable skills. Public spending on education is low and the high inequality of educational opportunities adds to the problem. Despite a long tradition of scientific excellence, Russia performs worse than most OECD countries in term of scientific output and patents, which is partly linked to the unfinished reform of the public R&D sector. Firms rarely see innovation as part of their business model. Innovation policies have recently become more focused at firms but results are not yet visible.

Russia has a poor road network and the railway's share of freight transport (excluding energy pipelines) is almost 90% -- one of the highest rates in the world.

The Federal Antimonopoly Agency (FAS) has called the public-owned Russian Railways, the country's biggest employer with a 1m payroll, as a "typical soviet monopoly."

The  minimum wage in Moscow is US$385 per month, Interfax reported last month and the monthly average Russian salary was $780.

Russia had foreign exchange reserves of $499bn at the end of January, down from $597bn in mid-2008. Public debt as a ratio of GDP is at 11%.

Persistent capital outflows that amounted to $63bn in 2013, reflect poor investment opportunities in the country.

The current account surplus has also shrunk in recent years because of a rapid growth in imports and the central bank recently forecast that the surplus, which was over 10% of GDP a decade ago, will disappear altogether by 2016.

Sanctions

"We want no hypocrisy in Europe regarding Crimea," Donald Tusk, Polish prime minister, said on Sunday. "Europe must act rationally but firmly."

Frank-Walter Steinmeier, German foreign minister, was either hopelessly naive or a hypocrite.

"I'm more with those who say the G-8 (group of eight) format is actually the only format in which we in the West still talk directly with Russia. Should we really sacrifice this only format?" Steinmeier said in relation to suggestions that Russia should be ejected from the group.

The Wall Street Journal reports that Germany is the biggest importer of Russian gas, which covers just under a third of Germany's overall gas needs, and is Russia's third-largest trade partner. German companies had $22bn in direct investments in Russia in 2013.

"Economic sanctions against Russia would damage Germany itself," said Philipp Missfelder, a senior politician and key ally of Chancellor Merkel. "Sanctions are always bad for Germany as an export-driven nation," he added.

President Obama may lead or not on sanctions and the experience with Iran has shown that banking sanctions are the most potent.


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