Russia has thrived by integrating with the West – a new Cold War is unfolding
Russia’s annexation of Crimea in 2014 was a turning point in globalization. The economic integration between East and West that began with the fall of the Berlin Wall in 1989 has begun to unravel.
This process will greatly accelerate if Russia invades Ukraine and faces punitive sanctions from the West. The resulting split would effectively leave Russia and China in their own economic bloc and Western market democracies in another. It is too early to predict who will win this new economic cold war, but not too early to say that Russia will lose.
The end of the first Cold War transformed the Russian economy in two ways: markets replaced central planning, and Western trade, investment and know-how flowed in. Certainly the benefits took a long time to materialize. The transition was marred by an initial depression, privatization that left the crown jewels of the economy in the hands of the oligarchs, and a catastrophic devaluation and default in 1998.
But in the process, a recognizable market economy emerged. Prior to 1999, Western investments were typically invested in stocks, bonds, and other paper assets. From 1999, direct investment in companies exploded.
Sergei Guriev, an economist and former adviser to the Russian government now at Sciences Po University in France, said the impact was particularly profound in services. Swedish furniture retailer IKEA, for example, helped create a Russian consumer goods industry and boost local competitors such as Magnit and X5 Retail Group.,
who now operate Western-style hypermarkets across the country.
An abundance of engineers and mathematicians combined with access to Western know-how has spawned several world-class technology companies such as Kaspersky Lab in the field of cybersecurity. Although Google and Facebook are allowed to operate in Russia, unlike China, the battle for market share has been won by local startups Yandex in search and VKontakte in social media. Russian private banks have become relatively proficient in digital services and payments. Meanwhile, high commodity prices in the 2000s allowed Russian President Vladimir Putin to restore discipline to fiscal, currency and monetary policies while funding the social payments that kept him popular. Russia had completed the “long and perilous road to complete autarky as the Soviet Union,” said Elina Ribakova, a Latvian-born economist who currently works at the Institute of International Finance in Washington, DC.
Then he encountered headwinds. One, Ms Ribakova said, was the “resource curse”. The ease of making money from energy and minerals starved other industries of capital and kept the Russian currency too high for manufacturing to be competitive. Then, beginning with the dismantling of the private oil company Yukos and the imprisonment of its managing director, Mr. Putin signaled that henceforth he and his entourage, and not the entrepreneurs, would control the fruits of economic progress.
Western investment slowed after the global financial crisis and Russia’s 2008 invasion of Georgia, rebounded, then crashed after Russia’s annexation of Crimea in 2014. The resulting sanctions have been “very, very costly for Russian economic development,” said Mr. Guriev of Sciences Po. They “undermined the further development of knowledge-based sectors. If you are an IT company or a bank that wants to expand beyond Russia, you should forget about this. A Russian address for your head office is toxic for investors, customers, partners. Indeed, many of Russia’s leading private companies are domiciled elsewhere. The founder of VKontakte left the country. In 2017, the United States banned Kaspersky software from federal government computers as a security risk. The company said there was no evidence of this.
If Russia invades the rest of Ukraine, the sanctions that the United States and its allies are now considering, which could include limiting its banks’ access to the dollar and cutting off its access to certain Western technologies, would accelerate the decoupling between East and West that began in 2014.
After the Cold War, economic logic made Russia Europe’s leading gas supplier and Russia’s leading customer. Both now see this mutual dependence as a strategic handicap. In the short term, a loss of Russian gas would be very damaging for Europe, which lacks the infrastructure or suppliers to completely replace it with liquefied natural gas. Yet the increase in LNG imports from the United States has proven to be a safety valve. “No one would have thought that six months ago Europe could get…twice as much LNG as the Russians,” said Georg Zachmann, energy expert at Bruegel, a Brussels-based think tank. . By the 2030s, he said, decarbonisation will significantly reduce gas consumption in Europe. Meanwhile, Russia, seeking to reduce its dependence on Europe, opened a pipeline from Siberia to China in 2019 and is pushing for a second.
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Putin and Chinese leader Xi Jinping used their meeting last week to celebrate the deepening ties between their countries. Whatever the strategic advantage, however, an economic bloc with China will be of dubious economic benefit to Russia. It is likely to increase its dependence on natural resources at the expense of knowledge-intensive sectors. Ruben Enikolopov, an economist at the New Economic School in Moscow, said that Russian companies that do not sell what China lacks, such as gas or resources, cannot expect easy access to the Chinese market: “In China, Chinese companies will always get preferential treatment. processing. It’s just their way of doing things. As opportunities dry up for Russian tech entrepreneurs, often educated at American universities, he fears a talent exodus.
Abundant foreign exchange reserves, a competent central bank and low public debt will protect Russia from the worst effects of sanctions. And a new cold war does not mean a return to central planning. Russia is, and will remain, a market economy, albeit heavily distorted by an intrusive state sector, Enikolopov said. But, he said, it’s destined to fall even further behind as the rest of the world grows.
Write to Greg Ip at [email protected]
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