Russia More Dependent on Raw Materials Exports Now Than in 2008

Perhaps no failure of Vladimir Putin’s casts a darker shadow on Russia’s future than the decisions he has made that increased Russian dependence on the export of raw materials. This economic reliance is today higher than it was at the time of the 2008 financial crisis. And the Kremlin leader’s commitment to this sector above all others has had the effect of slowing, stopping or even reversing the development of other parts of the economy. Russia is not in a position to set prices for raw materials. And in the event of another collapse, like the one that occurred a decade ago, the government would likely be in an even worse position to respond. Furthermore, the political decisions that led to this point reflect the Kremlin’s proclivity for giant projects and the inability of the regime to find a common language with business leaders. As a result, if this current trend continues, it may lead to an economic crisis in Russia even if there is no collapse in world commodity prices.

Anton Chablin, a commentator for Svobodnaya Pressa, notes that Russia is dependent on raw materials exports “ever more and more” because they guarantee economic growth and ensure the flow of money into government coffers. This trend illustrates that all Kremlin promises to ease Russia “off the oil needle” have been “completely forgotten.” Even the second crisis of the last decade—the one related to sanctions—has not changed Moscow’s direction in this regard, even though it, like the one after 2008, gave the government every reason to do so, Chablin argues (Svobodnaya Pressa, September 12).

In the second quarter of this year, he continues, Russia’s economic growth was secured “primarily by an increase in the extraction and export of raw materials, according to the government’s own figures” (Gks.ru, accessed September 20). Indeed, when the economy grew overall at 1.9 percent between April and June, raw material production and exports expanded by 2.6 percent while all other sectors of the economy increased significantly less, with agriculture rising only 0.3 percent, construction, only 0.8 percent and commercial trade 1.9 percent (Svobodnaya Pressa, September 12).

Figures from the Federal Customs Service are even more dramatic. “If in the first half of 2017, energy exports amounted to 62.6 percent of Russian exports; in the first half of 2018, they had risen to 63.9 percent, exactly the reverse of what would have been the case if the government had pursued the policy of diversification it has routinely declared to be its goal,” Chablin contends (Svobodnaya Pressa, September 12; Customs.ru, August 7).

Because the government takes in so much money from the sale of raw materials exports, pressure to diversify the Russian economy has declined. Instead, officials from Putin on down focus on huge projects like the bridge to Sakhalin, which most likely will never be built, as a way to funnel cash into the hands of senior administrators and their friends (see EDM, September 6) rather than use the money from oil and natural gas exports to finance the development and diversification of the Russian economy as a whole. This strategy works for the regime in the short term but undercuts the country’s prospects over longer time frames.

The dependence of the Russian economy and the government on raw materials exports is having another serious and negative consequence as well, Chablin says: Officials increasingly view any sectors other than the politically protected oil and gas as targets for extracting more money for the regime. Illustratively, such thinking is behind the proposal of Andrey Belousov, the former economic development minister who now works as an aide to Putin, to tax the “super-profits” of chemical and metallurgical producers. On the one hand, such a tax would only harm these two processing branches; and on the other hand—and more seriously—its application will provoke questions as to why similar taxes are not being extended to Putin’s favorites, the oil and gas exporters.

Sergey Volopetov, a specialist on economic policy at the Russian University of Friendship of the Peoples, told Chablin that Belousov’s proposals “very clearly demonstrate several current trends in the relationship between the Russian authorities and business—and not only big [corporations], but business in general… The powers that be and business live in different universes and speak not simply different languages but with entirely different value systems.”

“On the one hand,” Volopetov said, “the authorities today view business not as a self-standing element of public life, economics or politics but only in terms of their own projects and tasks.” On the other hand, business is not prepared to be simply a cash cow for government projects, an unwillingness that is increasingly reflected in the comments of business people that the government “must not interfere with our work.” Moreover, “big business today does not see any need for planned and multi-faceted dialogue with the authorities, preferring personal accords” based on lobbying and seeking tax avoidance—a reality that further restrains the development of most branches of the Russian economy.

As a result of the continuing profitability for the government of raw materials exports and this strategy of major business, the Russian economy is not going to diversify or grow, even if world commodity prices remain at the current levels. And if those prices collapse, the Russian economy will fall right along with them, perhaps even more dramatically than a decade ago.