Russia’s economic outlook in the shadow of economic sanctions

I am writing down my thoughts during my holiday in the heat of July – with my feet in the lake Saimaa! The thermometer shows almost + 30 degrees Celsius. Life in Finland feels heavenly:’ Distant the treacherous world.’ Until shocking news of war hit into my consciousness: the Malaysian passenger plane shot down from the sky in Eastern-Ukraine; in a fraction of a second almost 300 innocent people experience a violent, senseless, unnecessary death. The deep sorrow of the families: No! Who? Why did my child die? In Gaza, almost 1000 people have died, most of them innocent civilians. Much more violence is reported daily. Where have the humanity and love disappeared from the world?  

But what is up with Russia during the heat of July?

Russia’s economic growth is stagnating. Despite the slight strengthening of the Ruble, economy has not showed any signs of recovering. This year the economic growth has been slower than budgeted. GDP is expected to grow by approximately 0.5 %. At least four reasons can be found for this situation:

  1. The deep fall of Russia’s trust index in the eyes of foreign investors after invasion of Crimea and the prolonged crisis in Ukraine. The crisis started in November after the president of Ukraine refused to sign the free trade agreement with E.U. due to Russia’s pressure. Later on, the current president Petro Poroshenko signed the agreement in the end of June. 
  2. Russia’s reluctance to participate in the Ukraine’s situation that has turned in to a war. Comments - which can be interpreted as mildly positive- from Russian government concerning the passenger plane tragedy, are a good thing. However, as the Foreign Minister Tuomioja pointed out in an interview, what matters is not what is said, but what is left unsaid. Arms deliveries to Eastern Ukraine will continue in silence.
  3. Modernization and improving of Russia’s economy and industrial sector are not moving forward. Being frustrated from the situation, President Putin gave the government an order to revitalize the economic growth by following steps:
    • Replacing the foreign exports by local production
    • Modernization of production and industrial sector by new investments, technologies, starting new companies etc.
    • When making public procurements products made in the area of Eurasian Customs Union must be favored under a penalty of fine
    • Establishing an industrial support fund to accelerate renovation and efficiency of production
    • Capitalization of banks in order to finance the modernization of industrial investments.   T he  aim of the program is to reduce dependence on western countries in all industries.
  4. The economic sanctions of the West are threatening the stock markets, Russian funds, finance sector and dividends. Third degree sanctions – meaning sanctions that affect Russian companies and whole industries – could push Russia’s economy in to a recession for many years if they should come to action.

Sanctions and counter-sanctions injure the economic interests of all parties. In a global economy, issues and problems must be solved in a cooperation and by negotiating; without pressuring and by respecting the sovereignty of each country.

 

Pirjo Karhu,
Yrittäjäneuvos, CEO
Centre d’ Expertise Oy

 

A version of this blog entry has been published also in a member magazine of Hämeen Venäjän kaupan kilta ry, magazine no. 4/2014.