íÜÉ|êìëëá~å|ÉÅçåçãóKéÇÑ===N===OQKMOKOMOM===OOWPSWRO The Russian Economy The Russian Economy: Prospects for Putin 4.0 Editors: Andis Kudors, Jānis Hermanis The Russian Economy: Prospects for Putin 4.0 Editors: Andis Kudors, Jānis Hermanis Centre for East European Policy Studies University of Latvia Press Riga, 2020 UDK 32(470+571) Ru766 This project was implemented by the Centre for East European Policy Studies in cooperation with the Friedrich-Ebert-Stiftung in the Baltic States and European Commission Represen- tation in Latvia Editors: Andis Kudors, Jānis Hermanis Assistant to the Editor: Anna Lasmane Authors of articles: Mārcis Balodis, Maria Domanska, Aleksandr Golts, Mārtiņš Kaprāns, Kai-Olaf Lang, Marius Laurinavičius, Vladimir Milov, Dmitry Oreshkin, Vita Spivak, Kirsten Westphal English language editor: Translation agency “Valodu koks” Layout: Andra Liepiņa Cover design: Agris Dzilna © Authors of articles, 2020 © Centre for East European Policy Studies, 2020 © Friedrich-Ebert-Stiftung, 2020 © European Commission Representation in Latvia, 2020 https://doi.org/10.22364/ceeps.repp.20 ISBN 978-9934-18-510-6 Table of Contents Jānis Hermanis Foreword . 5 Andis Kudors Introduction . 9 Part I: Domestic Development Maria Domanska State of Russian Economy and its Influence on Putin’s Politics at the 4th Term . 15 Vladimir Milov Russia’s Dependency on the Energy Sector: How Long? . 27 Dmitry Oreshkin Putin’s Vertical and the Regions . 41 Alеksandr Golts Military Expenditure During Putin’s Rule . 61 Part II: International Dimension Kai-Olaf Lang, Kirsten Westphal Russia and the European Union – The Changing Role of Energy . 75 Vita Spivak Russia-China Economic Relations under Putin Version 4.0 . 95 Mārcis Balodis Eurasian Economic Union: Numbers and Trends . 109 Marius Laurinavičius Money River from Russia to the West. How Toxic is it? . 125 Mārtiņš Kaprāns Russia’s Economic Narratives Towards the Baltic States: Structural Elements and the Potential of Ideological Alignment . 143 Andis Kudors, Jānis Hermanis Conclusion . 157 Attachment: State of the Russian Economy . 163 Author credentials . 177 Foreword Russia’s international role and its developmental trends have always been the subject of widespread debate, as it is a country with a particular mentality. In May 2018 Vladimir Putin has assumed the office of the President of Russia for the 4th time. As he begins his term, the president has also defined a number of rather ambitious economic and social goals that Russia should achieve over the next six years. However, Putin has held power long enough so his potential could be judged not only by his promises, but also by the results of his political activities so far. Putin has previously said that the collapse of the Soviet Union is the biggest geopolitical disaster of the last century. This quote says a lot about today’s true goals, ambitions and foreign policy priorities of Russia. Such expressions are more of a yearning for the past than a desire to change for the sake of development. The USSR was once one of the two most influential world powers. By contrast, Russia, the legal heir of the Soviet Union, has today lost much of its former influence, including in the economic sphere. Russia’s share of the global economy is currently only 3.1 percent. The Russian economy ranks sixth in the world (in terms of GDP PPP; eleventh in terms of nominal GDP) with China, the United States, India, Japan and Germany ahead of it. Russia’s presidential decree of May 2018 stipulates that the country should reach the top five of the world’s largest economies by 2024. Since the collapse of the USSR, Russia has undergone significant changes. In the 1990s, when Yeltsin was president, country’s economy shrank almost every year. According to the International Monetary Fund, Russia’s share of the global economy fell from 5.2 percent to 3.1 percent between 1992 and 1999. Against this background, it was easy to denigrate the economic, political and social transformation of Russia under Yeltsin’s presidency as a submission to the conspiratorial interests of the West. The effect of ’shock therapy’ in Russia – a country without democratic traditions – has certainly proved more harmful than, for example, in Western Europe. When Putin became president, Russia experienced rapid economic growth (on average 7 percent per annum) for almost 10 years, largely due to the significant rise in oil prices. This relatively successful period has not only secured an increase in Russia’s share of the global economy (from 3.1 percent to 3.9 percent), but also boosted president Putin’s popularity. In 2007, Time named Putin Person of the Year. However, further development was no longer so convincing. As a result 5 The Russian Economy: Prospects for Putin 4.0 of the global financial crisis, Russia’s economy fell by 7.8 percent in 2009, followed by a more moderate growth period than at the beginning of the century. Following the military conflict in Ukraine, sanctions by the EU and the United States were imposed on Russia and the following drop in oil prices led to a further decline in its economy in 2015. Russia experienced a sharp fall of its currency exchange rate, consumer price inflation and the depletion of the government reserve fund accumulated during ‘the good times’. Lately, Russia has been able to return to weak economic growth due to global economic development and higher level of oil prices. The FIFA World Cup also provided a temporary boost to the economy in 2018. Meanwhile, Russia’s share of the global economy has fallen to 3.1 percent in 2019, the same level as before Putin took office. In addition, the IMF forecasts that this share will fall to 2.8 percent in 2024, meaning that Russia’s position in the global economy will deteriorate as a result of Putin’s rule. Russia undoubtedly has great potential for development. It has an extensive natural resource base, and virtually every element of the Mendeleev table is available in the country. Russia is estimated to hold about 30 percent of the world’s natural resources. According to the World Bank’s estimates, Russia’s total natural resources value reaches $ 75 trillion, 3 times the annual gross domestic product of the United States. The experience of countries around the world shows that the economy is undergoing gradual structural change over time, and that the level of development of the countries is linked to their economic model. Lower income countries have a high share of the primary sector, which includes the extraction of natural resources and raw materials. Middle-income countries have an increased share of the secondary sector (including the production of goods using materials supplied by the primary sector), while the tertiary sector (comprising a variety of services) dominates the advanced economies. The technological level of the countries concerned, the quality of the educational system, investment in research and development, etc., are essential for moving towards a higher level of development. Russia can be considered as a country with a high share of the primary sector. Both Russia’s economy and its budget are highly dependent on commodity prices (especially oil and gas) in the global markets. The mining industry’s share of the Russian economy in 2018 was 13 percent. The share of natural resources and raw materials in 2018 was more than 60 percent of all Russian export revenues. These conditions are beneficial in times of global economic growth and increasing demand for raw materials. However, such an economic model is also associated with increased vulnerability and impedes its long-term development. Increased returns from the primary sector dampen business interest in other ‘tradable sectors’, in particular industrial production, leading to increased imports and limited domestic export potential. It also contributes to the concentration of 6 Foreword resources in the hands of a narrow elite group, income inequality and corruption. This is called ‘a resource curse’. Some resource-producing countries (such as Canada and Norway) have managed to avoid this curse with well-targeted policies. The negative spill-over effects of the energy sector can be mitigated by promoting transparency in public administration and utilizing resource export revenues for public investment, development of other sectors and economic diversification. Russia would need to change its economic model and ensure a technological breakthrough. Such a desire has been seen in Russia before, with President Putin repeatedly talking about the country’s far-reaching plans. What hinders their implementation? Here comes the sacramental question of American commentator David Remnick: “Can Russia Change?” (Foreign Affairs, 1997, No. 1). In the 1990s, this country at least tried to break the umbilical cord with its past of dictatorship and imperialism, while in recent decades we have seen more nostalgia for worship of the ‘great past’, its symbols and values. Unfortunately, this is also reflected in Russia’s international behaviour, where, according to Lithuanian foreign minister Linas Linkevičius, it is no longer ‘a superpower but a super-problem’. Russia is a country with its own specific ambitions, seeking to translate international norms and treaties in a way which is only good for itself – a similar policy is currently being pursued by US President Donald Trump. Putin’s ability to deliver an economic breakthrough is questioned by a number of indicators of development potential, where Russia lags far behind other leading nations. Russia currently ranks 46th in the Global Innovation Index. According to the World Bank, its R&D expenditure (1.1 percent of GDP) is twice as low as the OECD average (2.4 percent). Expenditure on education (2.6 percent of GDP) is also below the OECD average (4.4 percent). Meanwhile, Russia spends relatively much on military spending (3.9 percent of GDP), and is one of the few countries in the world to spend more on defense than education.