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Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Russia - Economic Turmoil and PolicyOptions: Reorientation Away From the EU ?

Peter HavlikThe Vienna Institute for International Economic Studies (wiiw)

and

International Institute for Applied Systems Analysis (IIASA)

77th East Jour Fixe of the Oesterreichische Nationalbank, Friday,

May 29, 2015

wiiw

2

Topics covered

� Russian growth and reform dilemmas: a brief look back and forth

� It’s Energy – stupid !

� Trade reorientation: the scope and constraints

� Emerging role of China

� Additional reading

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Medium- and long-run challenges (as of early 2010)*

� Medvedev’s priorities from 2010 (The Four ‘I’s) still topical: Institutions, Innovations, Investments, Infrastructure

� Industrial Policy and Public-Private Partnerships to modernise and diversify the economy

� Labour shortages, migrant workers and the loss of competitiveness

� Re-integrating the CIS, a new (Strategic) agreement with the EU (more than energy), accession to WTO ?

� A “reset” of relations with the USA (followed by the EU).

*) See Havlik (2010).

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Facit and preliminary conclusions (from energy security study from 2010)

� Both the boom (2000-2008) and bust (2009) illustrated the vulnerability of excessive dependency on energy

� EU will remain the main market for Russian energy

� Russia has a huge potential for energy efficiency improvements, these may more than compensate falling production and free additional resources for exports

� European energy imports from (or via) Russia could thus be maintained and even increased

� EU-Russia integration is challenging: the contest for influence on the post-Soviet space (in energy Russia may prevail)

� Russia sees itself not just a neighbour, but a strategic and equal partner of the EU

� Re-integrating the CIS (Russia), new (Strategic) agreement with the EU (more than energy), Common Spaces of the EU and Russia ?

� Cooperative approaches would serve best to interests of both Russia, the EU and the countries in between – also with respect to energy security !

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Open issues (affecting energy security, as of 2010)

� The global crisis effects (lower demand and extraction, tight credit, prices)

� Obama’s “reset” of US-Russian relations- will the EU follow?- ICEUR’s “Vienna Process”, etc

� Presidential elections in the Ukraine- more balanced policies towards both Russia and the EU- joint operation of pipelines- prolonged instability ?

� Who will prevail in the struggle between “statists” (Putin, Sechin, etc.) and “modernizers” (Medvedev, Shuvalov, Yurgens, etc.)

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Russia ‘stuck in transition’ already before Ukraine crisis escalated� Energy exports revenues and growth sustainability

- Increased pressures on energy supply diversification (both in the EU and RU)

- Sectoral sanctions bite, no longer largely symbolic

- Investment climate suffers, imports and FDI down, capital flight up

� Diversification and modernisation of the economy under threat- Growing reform pressures owing to lower oil price and sanctions?

- Yet modernisation definitely more difficult without more FDI!

� Stability of the ruling elite threatened ?- Putin’s ratings grow, Russia’s ratings fall, rouble and MICEX fluctuate

- Yet this may change with more hardship …

� Integration on the post-Soviet space derailed/fails?- Crimea and Donbas not really helpful for Putin’s Eurasian integration project

- New design/reset of EU neighbourhood policies?

- Pivot to China ?

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7

Russian GDP developments,1995-2015

-8

-4

0

4

8

12

16

20

24

0

300

600

900

1200

1500

1800

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

GDP (EUR bn), lhs GDP real growth, in % GDP/capita at PPP, th EUR (rhs)

EUR 18.700

Source. wiiw Annual Database, national statistics, own estimates.

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External surpluses thanks to energy

0

20

40

60

80

100

120

0

50

100

150

200

250

300

350

400

450

500

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Exports, EUR bn Imports, EUR bn

Current account, % of GDP (rhs) Oil price, USD/bbl (rhs)

Source. wiiw Annual Database, national statistics, own estimates.

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9

External sector: deficit without energy

0

50

100

150

200

250

300

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

non-energy exports, EUR bn imports, EUR bn

Trade deficit without energy: EUR 100 bn(7% of GDP in 2014); „non-oil“ budgetdeficit: cca 10% of GDP

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GDP growth: original (pre-sanctions) scenariocontributions of main components to GDP growth, in pp

10

5.14.7

7.37.2

6.48.2

8.5

5.3

-7.8

4.54.3 3.4

1.3 1.62.3

3

-10

-5

0

5

10

15

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Private consumption State consumption Gross capital formation Net exports GDP growth, in % (rhs)

Source. wiiw Annual Database, national statistics, own estimates.

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11

10

5.14.7

7.37.2

6.48.2

8.5

5.3

-7.8

4.54.3 3.4

1.30.6

-3.9

1.9 2.0

-10

-5

0

5

10

15

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Private consumption State consumption Gross capital formation

Net exports GDP growth, in % (rhs)

Russian GDP growth: current (May 2015) scenario; contributions of components to GDP growth, in pp

Source: wiiw Annual Database, national statistics, own estimates.

Costs of the conflict: about 1% of GDP in 2014 (close to EUR 20 billion) and 6% of GDP in 2015 (EUR 110 billion) due to lower GDP growth, falling

investments compared to the pre-conflict scenario

Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Impact of sanctions on the Russian economy

Decrease of funding from EU and US financial markets

Less FDI from the EU

Embargo on trade of oil drilling technology

The reduction of production cooperation

Higher inflation

EUR 115-150 bn up to 50-70 mntons of oil lost by 2030 (up to

EUR 25 bn at 70$ per bbl)

EUR 20-40 bnEUR 4-5 bn EUR 10 bn

Embargo on trade with dual-use technologies

EUR 15-20 bn

In extreme case, the impact of sanctions could add up to 8-10% of Russian GDP according to estimates of Moscow’s Institute of Economic Forecasting(Alexander Shirov, IIASA Workshop, 20 Nov. 2014).

Russian economy

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13Source: wiiw Database incorporating national and Eurostat statistics.

Russian foreign trade (EUR mn): overall surplus yet rising deficit with China

23699 2937640028 38289

11676 10978

15205 14492

79333 71947

10105489183

4682341322

56505

51226

0

50000

100000

150000

200000

250000

2008 2010 2013 2014

USA China Ukraine EaEU EU-28 ROW

Imports

14406 15324 26818 28221

25552 2228329252 26109

182400160210

213352194730

7109474796

101186

103966

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

2008 2010 2013 2014

USA China Ukraine EaEU EU-28 ROW

Exports

14Source: wiiw Database incorporating national and Eurostat statistics.

23699 2937640028 38289

11676 1097815205 14492

79333 71947

10105489183

46823 41322

5650551226

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

2008 2010 2013 2014

USA China Ukraine EaEU EU-28 ROW

Imports

14406 15324 26818 28221

25552 2228329252 26109

182400160210

213352194730

7109474796

101186

103966

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

2008 2010 2013 2014

USA China Ukraine EaEU EU-28 ROW

Exports

Russian foreign trade by regions (EUR mn): overall surplus yet rising deficit with China

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15Source: wiiw Database incorporating national and Eurostat statistics.

Russian foreign trade by regions (% of total): diversification from the EU not easy

5.1 4.5 5.1 6.8 7.5

4.95.0 5.8 4.5 3.4

7.6 8.0 7.4 7.4 7

54.5 57.2 53.5 53.8 52.1

23.4 22.3 25.0 25.5 27.8

0

20

40

60

80

100

120

2000 2008 2010 2013 2014

USA China Ukraine EaEU EU-28 ROW

Exports

2.8 13.0 17.0 16.9 17.810.8 6.1

6.1 5.0 3.817.6

6.46.4 6.4 6.7

39.9

43.641.7 42.6 41.4

21.0 25.7 23.9 23.8 23.8

0

20

40

60

80

100

120

2000 2008 2010 2013 2014

USA China Ukraine EaEU EU-28 ROW

Imports

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Russia’s main trading partners in the EU, 2013 in % of total EU trade with Russia

Source: wiiw Annual Database, EU Comext.

PL6.3%

FI4.5%

FR6.5%

DE30.1%

IT9.0%

NL6.6%

UK3.9%

CZ3.7%

LT4.1%

AT3.6%

rest-EU21.2%

EU exports: EUR 119.8 billion (2.6% of total EU exports)

PL10.1%

FI5.1%

FR5.0%

DE18.5%

IT9.7%

NL14.0%HU

3.1%

BE4.8%

ES4.0%

LT3.8%

UK3.9%

AT1.5%

rest-EU17.7%

EU imports: EUR 206.6 billion (4.6% of total EU imports)

Memo: US imports: USD 30.1 bn

(1.3% of total, 2012)

Memo: US exports: USD 10.7 bn

(0.7% of total, 2012)

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CN16.7%

DE11.8%

UA5.0%

JP4.3%

US5.2%FR

4.1%IT

4.6%

BY4.3%

KZ2.8%

KR3.3%

RoW38.0%

RU imports (EUR 239.2 billion)

Russia’s main trading partners, 2013, in % of total

Source: wiiw Annual Database, national statistics.

NL13.3%

CN6.8%

DE7.0%

IT7.5%

TR4.8%

UA4.5%BY

3.8%PL

3.7%JP

3.7%

RoW44.8%

RU exports (EUR 396.3 billion)

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CN17.8%

DE11.5%

UA3.8%

JP3.8%

US6.5%FR

3.8%IT

4.4%

BY4.1%

KZ2.5%

KO3.2%

RoW38.6%

RU imports (EUR 215.2 billion)

Russia’s main trading partners, 2014, in % of total

Source: wiiw Annual Database, national statistics.

NL13.3%

CN7.5%

DE7.5%

IT7.2%

TR4.9%

UA3.4%BY

4.0%PL

3.2%

JP4.0%

KO3.7%

RoW40.9%

RU exports (EUR 373.9 billion)

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Russia’s main trading partners in the EU, 2014 in % of total EU trade with Russia

Source: wiiw Annual Database, ROSSTAT

.

PL6.3%

FI4.5%

FR6.7%

DE28.4%

IT9.2%

NL6.4%

UK4.0%

CZ4.0%

BE4.0%

AT3.9%

rest-EU22.1%

EU exports: EUR 103.3 billion (2.2% of total EU exports)

PL9.4%

FI4.7%

FR5.4%

DE20.0%

IT8.9%

NL13.8%

HU3.0%

BE5.8%

SK2.6%

LT3.2%

UK4.1%

SE3.5%

rest-EU15.6%

EU imports: EUR 181.8 billion (4.0% of total EU imports)

Memo: US imports: EUR 8 bn

(4.1% of total RU exports)

Memo: US exports: EUR 13.9 bn

(6.5% of total RU imports)

20

Austria2.5%

Bahamas6.4%

Bermudas6.2%

Virgin Islands5.3%

Germany3.9%

Cyprus39.0%

Luxembourg8.6%

Netherlands13.8%

Ireland5.9%

United Kingdom4.6%

China0.9%

USA3.7%

Sources: wiiw FDI Database incorporating national statistics (CBR); own estimates.

Russian inward FDI stocks: USD 566.5 billion, end-2013

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21Source: Hunya (wiiw FDI Database, 2015)

Share of main investing countries in the capital investment pledged in greenfield projects, %, 2014

22

Largest Chinese projects in Russian manufacturing announced in 2014

Investing Company Parent Company Administrative Region Industry Sector Capital

Investment

EUR million

Jobs Created

Hawtai Motor Group Hawtai Motor Group Not Specified Automotive OEM 962.30 3000

Dongfeng Motor Dongfeng Motor Tatarstan Republic Automotive OEM 437.41 2931

Dongfeng Motor Dongfeng Motor Saratov Oblast Automotive OEM 87.48 586

Solar Systems Harbin Electric Tatarstan Republic Electronic

Components

106.71 1180

China Triumph

International

Engineering

China National

Building Material

Group (CNBM)

Ulyanovsk Oblast Industrial Machinery,

Equipment & Tools

2624.46 3000

Lifan International

(Trading)

Chongqing Lifan

Industry

Lipetsk Oblast Automotive OEM 262.45 1500

BAIC International Beijing Automotive

Industry Holding

Not Specified Automotive OEM 200.60 1415

Great Wall Motors

(GWM)

Great Wall Motors

(GWM)

Tula Oblast Automotive OEM 454.91 2500

New Hope Group

(NHG)

New Hope Group

(NHG)

Tatarstan Republic Food & Tobacco 437.41 1267

Source: Hunya (wiiw FDI Database, 2015)

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wiiw

23

24Source : Keun-Wook Paik, IIASA Energy Workshop, 12 May 2015

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Sino-Russian Gas Cooperation (I)

� Implications of the Russian-China gas deals will be substantial.

� The historic Sino-Russian gas deal from May 21, 201 4 laid the ground for a large scale of pipeline gas supply from east Siberi a.

� The triggering point of the May 2014 gas deal was t he Ukraine crisis but China became the biggest beneficiary of this specia l deal.

� If the eastern route deal (38 bcm/y for 30 years) i s combined with Altai route deal (30 bcm/y), it will wipe out almost 50 mt/y of LNG market from China.

� The Altai route deal will make Russia as a Swing Su pplier between European and Asian markets, yet its impact towards the Europ ean market will be limited.

Source : Keun-Wook Paik, IIASA Energy Workshop, 12 May 2015

2626Source : Keun-Wook Paik, IIASA Energy Workshop, 12 May 2015

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� If the Altai MOU becomes legally binding in 2015, i t will have a big impact towards the LNG supplies from USA to China.

� Japan and Korea’s dreams to reduce the Asian LNG pr emium will be supported by fierce competition between imported pi peline gas and LNG in China.

� Reduced Asian premium will help the expansion of ga s use in China and the decline of coal share below 50% in China’s energy mix by 2030.

� It is a real irony that US/EU sanctions against Rus sia indirectly help Sino-Russian gas deals and will contribute to China ’s reduction of coal

dependence (and polution) .

Source : Keun-Wook Paik, IIASA Energy Workshop, 12 May 2015

Sino-Russian Gas Cooperation (II)

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� Astrov, V., Havlik, P. and Pindyuk, O. (2012), ‘Trade Integration in the CIS: Alternate Options, Economic Effects and Policy Implications for Belarus, Kazakhstan, Russia and Ukraine’. wiiw Research Report No. 381, September. Vienna: Vienna Institute for International Economic Studies, wiiw.

� Adarov, A., Astrov, V., Havlik, P., Hunya, G., Landesmann, M., and Podkaminer, L. (2015), ‘How to Stabilise the Economy of Ukraine’. wiiw and United Europe, April.

� Boss, H. and P. Havlik (1994), ‘Slavic (dis)union: consequences for Russia, Belarus and Ukraine’, Economics of Transition, Vol. 2, No. 2, Oxford University Press, pp. 233-254.

� Brzezinski, Z. (2014), ‘Russia needs a ‘Finland option’ for Ukraine’. Financial Times, 24 February.

� Cameiro, F.G. (2013), ‘What Promises Does the Eurasian Customs Union Hold for the Future?’ Economic Premise, The World Bank, No. 108, February.

� Freeland, Ch. (2014), ‘Russia has already lost the war’. International New York Times, 8-9 March.

� Dabrowski, M. (2013), ‘EU’s cooperation with non-member neighbouring countries: the principle of variable geometry’. RANEPA, Moscow and Warsaw, October.

� De Micco, P. (2015), ‘When choosing means losing. The Eastern partners, the EU and the Eurasian Economic Union’. European Parliament, DG EXPO/B/PolDep/Note/2015_108, March.

� Dreyer, I. (2012), ‘What economic benefits to expect from DCFTAs?’. Visegrad Group and Germany Policy Makers Seminar, Prague, November.

� Dyner, A.M. (2010) ‘Customs Union of Russia, Belarus and Kazakhstan’, Bulletin of the Polish Institute of International Affairs, 102(178), July.

Selected references (I)

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� ECORYS/CASE (2013): Trade Sustainability Impact Assessment in support of negotiations of a DCFTA between the EU and the Republic of Armenia. European Commission, Rotterdam, DG Trade, September.

� Efremenko , D.V., (2013): Life after Vilnius. A New Geopolitical Configuration for Ukraine, Russia in Global Affairs, No. 3, pp. 133-146.

� Eurasian Development Bank (2012), ‘Ukraine and the Customs Union’. Centre for Integration Studies, Report No. 1, St Petersburg.

� Euroasian Development Bank (2014), ‘Quantifying Economic Integration of the European Union and the Eurasian Economic Union: Methodological Approaches’. Centre for Integration Studies, Report No. 23, St Petersburg.

� Francois, J. and Manchin, M. (2009) , ‘Economic Impact of a Potential Free Trade Agreement (FTA) between the European Union and the Commonwealth of Independent States’, Institute for International and Development Economics Discussion Paper Nr. 200908-05, August.

� Francois et al. (2013), ‘Reducing Trans-Atlantic Barriers to Trade and Investment’. IIDE and CEPR, London, UK

� Füle , Š. (2013): EU-Ukraine: Dispelling the Myths About the Association Agreement. International Conference “The Way Ahead for the Eastern Partnership”, Kyiv, Ukraine, 11. October, Speech/13/808.

� Glazyev, S. (2013): Speech at the conference in Kharkov, November (www.gazeta.ru from 1 November 2013).

� Grinberg, R., Havlik, P. and Havrylyshyn, O. (eds) (2008) ‘Economic Restructuring and Integration in Eastern Europe. Experiences and Policy Implications.’ Baden Baden: Nomos.

Selected references (II)

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� Havlik, P., Stöllinger, R., Pindyuk, O., Hunya, G., Dachs, B., Lennon, C., Ribeiro, M.P., Ghosh, J., Urban, W., Astrov, V. and Christie, E. (2009), ‘EU and BRICs: Challenges and opportunities for European competitiveness and cooperation’, Industrial Policy and Economic Reform Papers No. 13.

� Havlik, P. (2010), ‘European Energy Security in View of Russian Economic and Integration Prospects’, wiiwResearch Report No. 362. Vienna: Vienna Institute for International Economic Studies, wiiw.

� Havlik, P. et al. (2012)‚ European Neighbourhood – Challenges and Opportunities for EU Competitiveness’. wiiw Research Report No. 382, September. Vienna: Vienna Institute for International Economic Studies, wiiw.

� Havlik, P. (2013), ‘Vilnius Eastern Partnership Summit: A Milestone in EU-Russia Relations – not just for Ukraine’. wiiw Policy Note, No. 11, Vienna, November.

� Havlik, P. (2014), ‘Some lesser known facts about Ukraine’s foreign trade’. wiiw Monthly Report 1/14.

� Hunya, G. (2015), ‘wiiw FDI Database’ (June)

� Institute for Economic Research and Policy Consulting (2011) ‘Ukraine’s Trade Policy Choice: Pros and cons of different regional integration options.’ Kiev: IERPC.

� Kotkin, S. (2015), ‘The Resistible Rise of Vladimir Putin’. Foreign Affairs, March/April.

� Krastev, I., Leonard, M. (2015), ‘Europe’s Shattered Dream of Order’. Foreign Affairs, May/June.

� Kudrin, A., Gurvich, E. (2015), ‘A new growth model for the Russian economy’. BOFIT Policy Brief, No.1

� Lukyanov, F. (2013): What Customs Union Can Be Without Ukraine (www.gazeta.ru, 1 November 2013).

Selected references (III)

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� McFaul, M.A. (2014), ‘Confronting Putin’s Russia’. International New York Times, 24 March, p. 9.

� Myers, S.L. (2014), ‘Sense of betrayal drove Putin’s actions in Ukraine’. International New York Times, 7 March.

� Paik, Keun-Wook (2015), ‘Sino-Russian Gas and Oil Cooperation’. Oxford Institute for Energy Studies, WPM 59, April.

� Techau, J. (2014), ‘Europe’s Five Deadly Sins on Ukraine’. Carnegie Europe. 4 March.

� Tochitskaya, I. (2010), ‘The Customs Union between Belarus, Kazakhstan and Russia: an overview of economic implications for Belarus’, CASE Network Studies & Analyses No. 405. Warsaw: CASE.

� Trenin, D. (2014), ‘A War of Escalation’. Carnegie Moscow Center, OP-ED Foreign Policy, 19 March.

� Samson, I. (2002), ‘The Common European Economic Space Between Russia and the EU: An Institutional Anchor for Accelerating Russian Reform’. Russian Economic Trends, Vol. 11, No. 3.

� Snyder, T. (2014), ‘Fascism, Russia and Ukraine’. The New York Review of Books, March 20.

� Summers, L. (2014), ‘Potemkin money’ is the wrong way to help Ukraine. Financial Times, 10 March, p. 7.

� Vavilov, A. and O. Vyugin (1993), ‘Trade Patterns After Integration into the World Economy’. In: J. Williamson (ed.), Economic Consequences of Soviet Disintegration, Institute for International Economics, Washington DC.

� Williamson, J. (ed.) (1993), ‘Economic Consequences of Soviet Disintegration’, Institute for International Economics, Washington DC.

� World Bank (2012), ‘Assessment of Costs and Benefits of the Customs Union for Kazakhstan’, Report No. 65977-KZ, November.

Selected references (IV)