Russia’s Financial System: How Vulnerable?
On September 10th, Dr. Sergey Aleksashenko, a former senior economic official under President Yeltsin, discussed Russia’s financial sector at an event at the Center for the National Interest. Dr. Aleksashenko, who is currently a Nonresident Senior Fellow at the Brookings Institution, explained the state of Russia’s economy and the impact of Western imposed sanctions. The event, entitled “Russia’s Financial System: How Vulnerable?” helped to shed light on exactly how sanctions will influence Russia’s economy, and what to expect of Russia in the future.
A summary of the event follows below. A summary written for The National Interest may be found here.
Dr. Sergey Aleksashenko, a former senior economic official under Russia’s President Yeltsin, speaking at the Center for the National Interest on September 10, was adamant that Russia’s economy will not collapse, despite all of the hardship that the country is enduring.
“Russia’s economy is very simple,” Aleksashenko stated, “it is based on the export of raw materials. If Russia produces raw materials, it needs supporting infrastructure and the military—that’s it.” Russia’s economy will not collapse; the demand for Russia’s raw materials has been high, and will continue to be so for the foreseeable future. Sanctions may take a toll on ancillary areas of Russia’s economy, such as services and transportation, but the core strength of its economy, which lay in its exports, seems likely to endure. Aleksashenko compared the current economic hardship on Russia to the recession of 2008. Reduction in global demand for Russia’s resources prompted the 2008 recession, whereas the recession of the past year is caused by a reduction in the domestic demand for Russia’s resources. Notably, Russia’s economy is more stable now than it was in 2008, so it should be able to weather the recession without risking an economic collapse.
Aleksashenko was nuanced in explaining the impact of Western sanction on Russia’s economy. The initial impact of sanctions on the banking sector increased their apparent effect on the Russian economy, but over time their significance has waned in most areas of the economy. The true effect of sanctions, Aleksashenko explained, is related to the way Russia handles its reserves of funds. Russia possesses a large reserve of funds which allows it to overcome the challenges of economic recession, but the sanctions are forcing Russia to reform its budgeting practices to minimize its reliance on reserves since they will eventually be depleted. Russia has struggled with a reduced ability to borrow money, and the weak level of privatization coupled with the sanctions is crippling foreign investment. Aleksashenko concluded his opening statement with a forecast—“the future of the Russian economy is gloomy, but it won’t take a nosedive.”
While the types of sanctions and level of enforcement of sanctions have varied significantly from country to country, the key objective of the sanctions regime—preventing Russia from receiving foreign funds—has held universally among those who have imposed sanctions. However, he said, other areas of the sanctions regime, such as bans on oil extraction technology or military related technology, have had little impact. The inability to import such technologies will inhibit Russia’s ability to expand its energy operations eastward in Siberia, but will not have much impact on its existing oil operations. Aleksashenko also pointed out that sanctions’ impact on military technologies may appear more significant than they truly are. Russia’s navy will be downsized not because of sanctions, but because it was too large to begin with. The impact of sanctions on military financing will not be severe, since Russia finances its expenditures early, and will find ways of financing its military budget even if it means having to rely on inflation.
When the discussion opened to questions from the audience, Aleksashenko addressed the issue of privatization, explaining that it is an unlikely scenario for Russia. Putin favors direct control over resources and has only privatized minor companies. This is consistent with the centralization of decision-making under the current leadership. “In many ways, Putin resembles a monarch, though he lacks an heir,” commented Aleksashenko. As such, Putin has very little incentive to implement policies which could curb his authority. Despite having well-educated and respected financial ministers, they are still beholden to Putin, thus privatization and other standard mechanisms of economic governance are unlikely to take hold in Russia given its political climate.
Oil has had an enormous economic impact on Russia, and Aleksashenko estimates that falling oil prices account for roughly 40% of the country’s economic decline. Noting that many experts say the price of oil may never recover to its previous $100 per barrel levels, one audience member asked how long the Russian economy could endure the low oil prices. In his response, Aleksashenko was keen to point out that the dynamics of Russia’s raw material industries is different than that of other countries. “About 65-70% of oil revenue goes to Russia’s budget,” he explained. While low oil prices do have a serious impact on the national budget, they are not the sole determinant of Russia’s overall economic health. Furthermore, all of Russia’s oil operations are still profitable and will continue to be so even if prices slip to as low as $30 per barrel. Aleksashenko also noted that existing operations have only extracted an estimated 25-30% of total resources. Despite the fall in prices, it seems that Russia not only has a profitable oil industry, but will continue to have one for quite some time.