Page 51 - bne_Magazine_September_2017

Opinion 51
bne September 2017
equivalent today would be the freezing of Russia’s foreign currency-denominated reserves deposited in the US.
At that point, Soviet financiers managed to solve this difficult situation partly by flirting with other developed countries that were trying to tame the aggressive geopolitics by more active development of economic ties between the West and the East.
This time, American sanctions do not freeze Russian accounts
in the US financial system (Russia owns some $100bn in US T-bills), yet they create a threat for Russia’s sovereign debt and its derivative products on the domestic and international markets.
In my view, a stricter sanction regime would combine a freeze on sovereign accounts and banning transactions with Russia’s government debt.
It is possible that a new wave of sanctions will be viewed by the Russians as an incentive to turn to financial innovations through Asian financial centres, strengthening cooperation with China.
Early political impact
Realistically, the sanctions, old and new, play in the hands of Russia’s political leadership both in short- and long-term perspective.
In the short run, they encourage further consolidation of the majority of people around the Russian leader in the run-up
“The mere act of placing sovereign bonds with American investors is presented as a sign of the weakness of the sanction regime”
to the presidential election. In the long run, they give Russia an opportunity to blame the West for all the problems faced by the Russian citizens as their country’s economy inevitably worsens.
The presidential election campaign has effectively kicked off in Russia already. There is no doubt about who will enter the presidential office for the next term. However, the Kremlin’s task is to turn the process into a show aimed at legitimizing the newly elected president through higher voter turnout
and a high share of votes in support of the leader. The Russian media have been talking about the “70/70 strategy” implemented by the Russian presidential administration since last year. It aims at getting a 70% turnout and for Putin to
win 70% of the votes. The election rhetoric about the west which is “acting with special cynicism” will work to prop up this strategy.
A new model for Russia’s economy
It is for this reason that the efficiency of sanctions should only be viewed in the context of their mid-term prospect. What can they deliver?
Russia’s economy is currently in an unsatisfactory state
both in the eyes of the citizens, as poverty rises, and in the eyes of the country’s leadership. Yet, even in this situation, Russia’s government has long (and fervently) adhered to
the orthodox economic formulas of the IMF and the World Bank. For instance, the Russian government essentially uses the language of the IMF when it designs and fulfils the state budget, aiming at a rapid shrinking of deficit. The same trend can be seen in monetary policy, with the floating exchange rate and inflation targeting, which accomplished its goal of reducing consumer price inflation to 4% this year.
The key advantage the Russian economy enjoys today is its ability to quickly establish price controls, which is a sign of stability in the eyes of average Russians. However, it has its flaws. Today’s Russian economy model overlooked the global financial crisis of 2008, which worsened the problem of inequality. Moreover, it led to an internal economic problem in Russia in 2012-2013. The leadership decided to mend it with the hasty solution of a complex geopolitical game under the 'Crimea Is Ours' and 'the Ukraine Crisis' slogans.
Western analysts and Alexei Kudrin, former finance minister and co-head of the presidential council, say that sanctions will continue to prevent investment from going into Russia’s economy. In their words, this will prevent the economy from growing at the desired 4%. In my opinion, this approach has certain flaws. The Russian economy was working under Kudrin’s doctrine until 2014 when he was finance minister. Yet it found itself in a state of crisis long before sanctions were put in place.
Therefore, Russia’s economy will try to diversify from oil and dependence on foreign money as much as possible within the next six years. If it succeeds, Western sanctions will no longer be a crucial factor affecting Russia’s economy. If it doesn’t, the sanctions will have served their purpose.
The sanction story leads to two key conclusions. One is that they can hamper technological development of Russia’s economy and its key industries, while also allowing the current government to implement changes in the economy from a more comfortable position as it exploits these sanctions to its benefit (at least, in the short-term). The success of the sanctions will therefore depend on whether Russia succeeds in transforming its economy.
Aleksandr Valchyshen is Head of Research at ICU, a Kyiv-based financial-services group co-founded by Valeriya Gontareva that provides investment banking, securities trading and asset man- agement for private and institutional investors. He was formerly head of Macro/Fixed Income Research for ING in Ukraine. Follow him on Twitter at @AlexValchyshen
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