Russia’s economy weak despite huge resources

Maksud Djavadov

Sha'ban 03, 1435 2014-06-01

Special Reports

by Maksud Djavadov (Special Reports, Crescent International Vol. 43, No. 4, Sha'ban, 1435)

Russia is emerging as a major power but its economy is still weak despite being endowed with enormous natural resources.

In a series of articles, Maksud Djavadov will examine the economic condition of Muslim and neighboring countries to determine the underlying reasons for their weak performance.

In evaluating a country’s economy, it must be viewed as continuation of its socio-political orientation and situation. The economic weakness and dislocation of Muslim countries is the direct result of their socio-political and military subjugation by imperialist-Zionist powers. That is why examining economic indicators alone are not enough to explain economic problems. Thus, economists invented the discipline of political economy. The current series of evaluations will analyze this in light of political economy. Our political economic evaluation does not aim to produce concrete economic solutions. This requires access to real data that governments themselves often find impossible to collect. The aim is to present the existing conditions without hiding behind economic jargon and offer general options of a political economic nature that can create a more just, peaceful and prosperous world.

Basic Data

Russia is the largest country in landmass with a significant Muslim population. The exact number of Muslims in Russia is a politically sensitive issue, but estimates put the number of Muslims between 12 to 18 million. Russia is an important state not only due to its size and presence of large Muslim population, but also because it is a country where due to its federal state system Muslims exercise some political, economic and security control, all of course within the framework tolerated by Moscow.

As the ongoing crisis in Ukraine is escalating and Russia is sketching the first lines of a multipolar global order, it is becoming clear that the US and its imperialist allies will resist the emergence of a multipolar order by using economic leverage. It is, therefore, crucial to analyze the state of Russian economy as this would give a clearer picture of how US-Russian disagreements will play out in the emerging multipolar world:

• Russia is the world’s richest country in terms of natural resources. It leads all other countries in natural gas and timber reserves. Russia has the world’s second-largest deposits of coal and the third-largest deposits of gold. Additionally, it has the second-largest estimated deposits of rare earth minerals, although none are currently being mined (247Wallst.com, April 2012).
• Russia ranked second in Europe in 2012 in terms of employment generated through Foreign Direct Investment (FDI), up from sixth position in 2011, and accounted for 8% of the total jobs created in the region, resulting from a rise in labor-intensive industrial activities (Ernst & Young attractiveness survey: Russia 2013).
• North America and Europe continue to provide the bulk of Russian FDI investment. Companies from the US, Germany and France were the top investors in Russia in 2012. The number of FDI projects from Germany more than doubled, mainly because of increased investment from automotive companies. While Moscow and St. Petersburg attracted the largest number of FDI projects, Kaluga and Nizhny Novgorod are also emerging as major investment sites (Ernst & Young attractiveness survey: Russia 2013).
• The Russian oil and natural gas industries are key players in the global energy market, particularly in Europe and Eurasia. In 2012, Russia had by far the largest natural gas reserves in the world, possessing about 18% of the world’s total. It has about 5% of global oil reserves. Firms in these industries are either directly controlled by the Russian government or are subject to heavy government influence. The personal and political fortunes of Russian leaders are tied to the energy sector. In 2012, half of total Russian government revenue came from oil and natural gas taxes, according to President Putin (Congressional Research Service, March 2014).
• Russia comprises 8% of the world’s farmland, yet Russia’s main import is food (13% of total imports) and it accounts for 61% of all abandoned farmland worldwide (Tradingeconomics.com, 2014, European Commission 2013).
• World Bank’s annual report, Doing Business 2014, ranks Russia 92nd in terms of ease in setting up a business.
• Global Wealth Report by Swiss bank Crédit Suisse records that 22 years after the collapse of the Soviet Union, the gulf between the broad mass of the population and the super-rich in Russia is greater than in any other major country in the world. 35% of the country’s total wealth is in the hands of 0.00008% of the population, or 110 out of a total population of 143 million. 94% of the adult population own less than $10,000. The richest 1% of the population, or about 1.43 million people, controls 71% of all wealth. Even at the top of the wealth pyramid, Russian wealth is distributed very unequally. According to Crédit Suisse, 5.6% of the population possesses between $10,000 and $100,000, 0.6% between $100,000 and $1 million, and 0.1% more than $1 million. Even these monstrous figures underestimate the real situation. Credit Suisse based its calculations on the list of billionaires published annually by Forbes Magazine. These results are flawed for two reasons. First, a large proportion of the assets of the rich in Russia — especially real estate — remains undisclosed. The shadow economy in Russia amounts to about 50% of gross domestic product (World Socialist Web Site, October 2013).

Evaluation

Prior to analyzing the economic situation in Russia, it must be kept in mind that the Russia of today must not be confused with the USSR of yesteryears. Tensions between Russia and NATO countries have a historical reference, but the two sides are not engaged in cold war at the moment. The USSR was an ideological state; Putin’s Russia is a state attempting to replicate the Western state system with some Russian flavor. At the same time, Russian economy and its current strategic outlook today cannot be understood without taking into consideration its Soviet past.

The Russian economic power today cannot be underestimated; nevertheless, it should not be overestimated either. After the collapse of the Soviet Union and Moscow’s acceptance of the role allocated to it by Washington and its allies, Russia was granted a relatively free access to Western markets. This access gave Russia the opportunity to turn its financial, economic and natural resources into an integral part of the US dominated economic game. This allowed Russia to develop a strong presence within Western economies as it became one of their building blocks, mainly due to its vast natural resources. This presence, however, is not as grandiose as the corporate world is trying to portray today.

In the long-run Moscow is far more dependent on the West economically than the West is on Russia. For example, on March 21, when international payment system MasterCard stopped serving clients of seven Russian lenders, after the US imposed sanctions against it after the referendum in Crimea, only then the Russian leadership began discussing a possibility of developing its own payment system. It is clear that the development of such a system is not a one day task; it would take Russia at least a year to develop it and years to create a customer base for it to be widely used. Until this happens, if Visa and MasterCard are given an order by Washington to cancel their services in Russia immediately at some point in the near future, the latter would quickly descend into financial chaos. A proper state system which truly aspires to be a leading global power and be independent of the current global order would have developed an alternative to MasterCard and Visa years ago. Moscow did not bother doing so because it does not foresee a strategic clash with NATO interests.

Examining the above economic data on Russia shows that it has huge economic potential. It is the only country that can truly become the economic powerhouse of the world. It must, however, not be forgotten that the USSR had a greater economic potential than contemporary Russia, as the Soviet Union incorporated additionally rich territories over which Moscow lost control in 1990. Nevertheless, the USSR economy could not compete with Western economies and economic mismanagement and corruption in the Soviet Union was one of the main reasons for the collapse of USSR. The vast economic potential of Russia is not a new phenomenon, so it should not be exaggerated.

Also, the economic data outlined above and other information examined during the research phase for this report show that successful aspects of the Russian economy are directly linked to Moscow’s cooperation with NATO countries. Let us look at the widely discussed Russian energy leverage. In 2009, the author of this report highlighted that the only ambition Russia has in Western Europe is to make sure that Europe remains a secure market for Russian energy products and that Russia remains Europe’s only dominant supplier of energy resources. Therefore, it is unwise to assume that Russia would destroy or destabilize its most profitable and stable market for its energy products. Even though Russian society expresses nostalgic sentiments for the days of Soviet might, the people will never willingly swap full shelves of products for the grim days of the past. Russia is not in a different ideological camp because today’s Russia has no ideology of its own. As opposed to 1914, in 2014 nationalism cannot be regarded as an effective ideology.

The data presented in this report that highlights the vast inequality of wealth in Russia and the fact that Russia comprises 8% of the world’s farmland, yet Russia’s main import is food (13% of total imports) and 61% of all abandoned farmland worldwide belongs to Russia, shows that the country suffers from the same inefficiency and corruption patterns that led to the collapse of the USSR. The main advantage Russia has today over the decayed USSR is the fact that it has to a limited degree penetrated Western economies. By punishing Russia the West will naturally cause some damage to its own economy, an adventure it cannot at the moment afford due to continuing economic problems in the West.

It must be kept in mind that contemporary economic indicators that are used to evaluate economies of contemporary states are full of policy and statistical flaws. From the way unemployment and employment are evaluated to calculating GDPs, the modern economic system is loaded with loopholes. For example, prior to the overthrow of the Western backed Tunisian dictator, Zine el-Abidine Ben Ali, the corporate media never tired of publishing reports as to how “well” Tunisia was doing economically.

Examination of the Russian economy today using current methodologies exposes strategic weaknesses that Moscow will not be able to overcome easily. These problems combined with the fact of a rapidly declining population growth show that Russia’s economic potential cannot be fully exploited until it tackles its serious economic mismanagement issues. This of course will take time and require significant sacrifices from the Russian people. Historically, Russians have offered such sacrifices but its elitist leadership rarely did so or lived up to the benchmark it demanded of the masses. In such a situation and in the age of rapid information flow, it will not be difficult for Western regimes to turn the Russian population against its elite that owns 35% of the country’s total wealth.

For Russia to overcome its economic challenges and fulfill its true potential, it must address the issue of inequality of wealth, become completely self-sufficient in agriculture and increase the capacity of its manufacturing sector. Under present circumstances, it is highly unlikely that the Russian government would risk adopting a radical approach to redistribution of wealth, as this would turn the oligarchs against the government and create tensions that Western powers will certainly use to their advantage. On the other hand, without radical redistribution of wealth, all other economic reforms will prove inadequate. The economic challenges facing Russia are tough, but without implementing policies that would address these issues boldly, not only will Russia remain vulnerable to Western sanctions, but it will always remain a third tier economy.