As a country that has experienced a number of harsh economic shocks throughout its history, Russia constantly lives in anticipation of a new crisis. Recently, however, economists and investors around the world have been actively discussing the possibility of a crisis as a fairly likely scenario in the near future. Are there any real grounds for these discussions? And what might the consequences for Russia be?
Objective and Subjective Problems of Global Economy
The three main global economic powerhouses – the United States, the European Union and China – are all currently facing serious (albeit different) problems.
At first glance, it would appear that the U.S. economy is in excellent shape: GDP has been growing faster than the average for developed countries over the past several years, unemployment is low and continues to decline, and the stock market keeps setting new records. However, everybody agrees that this positive phase of the business cycle has lasted for too long and should end soon for objective reasons. A similar situation was observed in the United States in the mid-2000s, which gave rise to a popular optimistic belief in the omnipotence of macroeconomic policies that make it possible to overcome the cyclic nature of economic dynamics. These illusions were dispelled by the “Great Recession,” the most significant global financial crisis since the Great Depression of the 1930s. Nowadays, most economists believe that the current steady growth has been stimulated by measures (from the milder monetary policy to efforts aimed at bringing jobs back to the country) whose flipside is sure to manifest itself soon.
The EU economy has yet not fully recovered from the aftermath of the Great Recession. One unpleasant development that Europe has faced in 2019 has been the evident slowdown in the GDP growth of Germany, which has been pulling the European economy forward for several years.
China’s economy has been slowing down for many years now, even though its growth rate remains relatively high at over 6 percent annually. A number of serious problems are worsening against this background, such as excessive corporate debts (of at least 260 per cent of GDP); the spread of “zombie companies” which are effectively non-competitive but are artificially kept afloat for the sake of the jobs they provide and their formal contribution to manufacturing; and signs of a cyclical slowdown. In addition, some experts believe that if the United States keeps true to its threat to introduce import duties on Chinese commodities, China stands to lose a hefty sum of between 0.5 percent and 1.0 percent of its GDP.
Given that the three economic powerhouses account for over one half of global production and play a defining role in the financial markets, the aforementioned problems alone are cause enough to be concerned about the stability of the global economy. Under current conditions, the danger is aggravated by the fact that problems experienced by each of the three giant economies instantaneously spread across the world and hit everyone including even the most remote countries. In better times, this globalization trend may be positive, as each individual economy’s growth generates a demand for the products of other countries, thus stimulating global production. However, in anticipation of an economic recession, the situation resembles a ship with all its bulkheads removed, so a breach in any of its compartments may sink the entire ship.
In addition to the abovementioned objective challenges, there are also artificial problems that arise from discord between the economic giants. The global leaders have recently been actively exchanging threats and blows. This process is mostly down to the behavior of the United States, which is trying to reinstate what it views as fair rules of the game in the world economy. The list of Washington’s demands, primarily of China, is long: dismantling unjustified barriers to U.S. commodities, observing intellectual property rights, switching to a market-based exchange rate of the yuan, and so on. The resultant trade and currency wars hamper mutually beneficial trade while also (and more importantly) making the economic situation less predictable and therefore very risky. This, in turn, leads to a decline in trade, investment, and production.
The main instrument that central banks use to mitigate the negative effects of fundamental factors and “economic wars” is to ease monetary policies. However, in the current situation, this brings only limited results: history tells us that an economy may react positively to switching from restrictive to stimulating measures, but its reaction to a further easing of an already mild policy is very insignificant. In addition, carrying on with excessively mild monetary policies for any protracted period of time robs central banks of their last available ways to kick-start the economy should it grind to a halt.
It is difficult to predict exactly when the current relatively favorable situation in the global economy will worsen dramatically. A year ago, many economists confidently stated that a new crisis would break out in the first half of 2019. The date was later moved back to the second half of this year, and now experts are talking about 2020. This does not mean that the forecasters are not competent enough to make such predictions, rather than the issue is objectively complex.
First, investor behavior is subject to changing moods and “herd behavior.” So-called “self-fulfilling prophecies” play a key role in crisis mechanisms, when crises develop more as a result of the expectations of market players than due to real circumstances. In the face of danger, investors become particularly wary of any early signals in order to switch to safe assets before share prices fall. In general, we may assume that a new crisis could emerge very swiftly, suddenly, and come from an unpredictable direction.
Second, and no less importantly, economic leaders are guided by a range of diverse motives, which makes their behavior difficult to predict. It appears that in its trade disputes the United States is not only protecting its immediate economic interests but also fighting to secure its role as the leader of the global economy in a situation when China has already overtaken it in terms of GDP incomparable prices (in terms of purchasing power parity). On the other hand, President of the United States Donald Trump has to take the upcoming presidential election into account: he cannot afford to see the stock market plummet ahead of the polls.
Given the existing conditions, we may assume that the current relatively tranquil and favorable state of the global economy will most likely worsen considerably in the next 18 months to two years. In fact, this could happen much earlier, but the probability of such a scenario is considerably lower. Let me put it this way: in my opinion, the chances of the “bad times” happening within the next six months do not exceed one to five, even though such a development cannot be absolutely ruled out.
The next question is what form these “bad times” will take: that of a relatively benign “soft landing” or of a “hard-landing.” In the former case, we should expect a slowdown of the global economy and trade, a drop in stock markets, and capital flight to the most stable or trusted countries. In the latter case, the consequences may prove much more serious, including a global GDP slowdown, a series of defaults and bankruptcies and skydiving prices of raw materials.
As things stand, the “soft-landing” scenario appears more probable, at 60/40.
Consequences for the Russian Economy
Formally, the Russian economy appears to be prepared for a crisis. Russia has a relatively low public debt, significant gold and foreign currency reserves, and a budgetary “safety cushion” in the form of the National Wealth Fund. Coupled with a significant double surplus (a positive external balance plus a surplus budget), this gives the country a safe margin of macroeconomic safety. However, practice indicates that such a margin may mitigate the consequences of economic shocks, but does not eliminate them entirely.
Russia was able to use its reserves during the 2008–2009 and 2014–2015 crises, which helped to considerably mitigate the social consequences of the recessions. This is in stark contrast to the 1998 crisis when such reserves were virtually unavailable to the state. In 1998–1999, real average wages in the economy shrank by nearly a third and pensions dwindled by over 40 percent. This contrasts with 2009 when income losses proved much smaller and the level of pensions even grew. At the same time, despite Russia’s available macroeconomic reserves, production volumes noticeably declined in the course of the latest two crises. This can be explained by insufficient levels of confidence among the business community: in crisis situations, business relies on itself and, until the situation becomes clear, lowers investments and reduces discretionary expenses on materials and components.
On the whole, given that external turbulence affects the Russian economy through two main channels (through trade, which is affected by declining prices of oil, gas and metals and by shrinking demand for all exports; and through finance, which is affected by an increase in net capital flight), we may predict that a global economic recession or crisis will result in a slowdown of Russia’s GDP, a slump in the rouble exchange rate, a hike in inflation and a reduction in real incomes. Employment will suffer to a lesser extent: the Russian labor market is rather flexible, which allows for minimal layoffs and subsequent fast recovery of employee numbers. Unlike Greece and Spain, where unemployment hit 27 percent and 26 percent, respectively, after the Great Recession and currently stands at 19 percent and 15 percent, respectively, unemployment in Russia during the same period only grew to 8 percent and declined to below the pre-crisis level by 2012.
The consequences of external shocks grow ever weaker for the Russian economy over time, as the country is improving the quality of its macroeconomic policy (including thanks to the 2014 transition to a floating exchange rate). That said, much still needs to be done if the Russian economy is to become even less dependent on external factors:
- Diversify industrial production by reducing the share of raw materials in exports.
- Improve the real ability of the real sector to react to market pricing signals in order to take full advantage of the lower exchange rate;
- Increase the confidence of businesses in the current economic policy.
Of course, these targets can only be achieved in the long term.
From our partner RIAC
St. Petersburg Forum Offers Unlimited Business Opportunities
The 24th St. Petersburg International Economic Forum (SPIEF’21), unique business forum that is highly expected to bring together politicians, corporate business directors and investors from different parts of the world, is set to take place June 2-5 as the epidemiological situation begins to stabilize in Russia.
That however, the Russian Federal Service for the Oversight of Consumer Protection and Welfare (Rospotrebnadzor) with organizers promise everything in its power to ensure that the event is held with all the necessary measures in place to prevent the spread of coronavirus, and strictly in compliance with the recommendations given by the World Health Organization (WHO).
Roscongress Foundation, the organizer, says on its website that it has decided to create new infrastructure for comfort and safety of participants in view of the coronavirus pandemic. For instance, PCR test conducted at access to the venues, catering, sanitizing the premises, and providing participants and staff with personal protective equipment.
Thermal imaging control will be provided. Medical stations at the venue provided with the necessary equipment and medicines. There will be ambulances and resuscitation vehicles, including teams of English-speaking doctors. All spaces of the site equipped with air recirculation units and decontamination devices, among other measures for all participants visiting the events in St. Petersburg city.
Hans Kluge, Director of the World Health Organization (WHO) Regional Office for Europe, together with Anna Popova, Head of Federal Service for the Oversight of Consumer Protection and Welfare (Rospotrebnadzor), will hold a special briefing for participants on pandemic situation and its control in Russia and around the world.
Kremlin Spokesman Dmitry Peskov told the Russian local media that President Vladimir Putin plans to take part in the plenary session of the St. Petersburg International Economic Forum (SPIEF). “But Putin will be there in person,” Peskov reaffirmed his earlier statement, and further informed that in-person forum will be held in strict accordance with health and safety measures, the president received the first vaccination shot on March 23 and the second on April 14.
Over the years, this forum has strengthened multifaceted business ties, facilitated broadening relations and the development of cultural dialogue between Russia and many foreign countries. According to Roscongress Foundation, a number of foreign countries, keen on making solid business presentations and equally seek partnership opportunities for mutually beneficial cooperation, have already registered their participation.
Traditional inter-country business dialogues are planned as part of SPIEF featuring representatives of business communities of Italy, Germany, France, the United States, India, Africa, Finland, Japan, Latin America, Middle East, as well as the EAEU-ASEAN business dialogue. Under the umbrella of SPIEF, international meetings in business room format will be held with the participation of representatives of Roscongress Foundation’s international partners and businesses in the corresponding world regions.
Apart from the main business programme, SPIEF will also host the SME Forum, Youth Economic Forum, SCO, BRICS and ASEAN events, B20 Regional Consultation Forum, Creative Business Forum and Drug Safety and Security Forum, as well as events on Arctic and African agenda.
The central theme of the Forum is A Collective Reckoning of the New Global Economic Reality. The business programme includes more than a hundred events divided into four tracks touching upon the issues of global and Russian economy, as well as social and technological agenda.
Joining Forces to Advance Development is the key track of the business programme. It includes sessions on economic recovery and international cooperation, discussions on Eurasian integration, transformation of global trade, effectiveness of business during the pandemic, global energy market, recovery of food market, and sustainability of national healthcare systems.
The second theme block of the business programme focuses on national development targets, the anti-crisis agenda for strengthening long-term potential of the economy, investment climate in Russian regions, shaping of Russian research and technology space, development of the financial market, creation of circular economy, and functioning of strategically important industries.
Discussions under the New Technology Frontiers track will feature the topics of international cooperation in science, digital sovereignty and information security, healthcare digitalization, tech ethics and others.
The Human Factor in Responding to Global Challenges theme block will talk about cultural codes of the new reality, collaboration in international education projects, and new skills and employment models in a post-COVID world. Moreover, there are sessions on the development of creative industries, sport and education.
The Russian Small and Medium-sized Business Forum is an annual event held as part of SPIEF to discuss the current state of small and medium-sized businesses and measures to enhance their role in the Russian economy. It is, however planned that the focused sessions encompass the key aspects of support and development for small and medium-sized enterprises.
“Small and medium-sized business is the foundation of the economy and a key indicator of the current status of socioeconomic development. As we are looking towards the future, it is essential to develop and implement long-term programmes that will give a new impetus to the development of SMEs,” said Anton Kobyakov, Adviser to the Russian President and Executive Secretary of the SPIEF Organizing Committee.
“We plan to discuss all the proposals in details at the SME Forum because they determine how small and medium-sized businesses will thrive in the future. Small and medium business is the largest employer and a guarantor of socioeconomic stability and the dynamic development of society. The development of entrepreneurial education, cooperation among small and big businesses, and the development of youth entrepreneurship, among other issues,” he said.
With a similar view and position, SME Corporation CEO Alexander Isayevich said “Entrepreneurs need to understand how to work in the new economic realities and what support measures the state will continue to provide. In addition, it is crucial for entrepreneurs to have high-quality non-financial services. The sessions, attended by a wide range of experts, will help to find optimal solutions not only for the SME sector, but also for the entire economy. We always advocate an open dialogue with business, as this is the principle that underlies our new development strategy.”
As part of Youth Day programme, the most promising undergraduate and postgraduate students, as well as young scientists from Russia’s leading universities and scientific organizations will participate in the St. Petersburg Forum.
“It has become a good tradition for talented young scientists and students to take part in SPIEF, it is a leading business event that brings together unique experts from all areas of the economy. Participation opens up limitless opportunities for young people to exchange experience and gain new knowledge,” said Andrey Fursenko, Aide to the President of the Russian Federation.
There will also be large-scale different cultural events. For instance, Qatar plans an exhibition – “Qatar between Land and Sea, Art and Legacy” – this exhibition is a great opportunity for people from around the world to explore the very precious elements of the Qatari and Middle Eastern tradition and lifestyle, such as handmade carpets and artifacts, pearls, and antique jewelry, which makes it a magical journey through history.
St. Petersburg forum is highly-considered as an important step forward in developing and strengthening investment‑related collaboration. As one of the biggest economic forums in Russia, it yearly gathers several thousands of participants, including representatives of ministries and government bodies, financial and investment organizations, startups, and tech and innovation companies, and representatives of the media.
Despite the adjustments made due to the pandemic, there are for all participants interesting and useful initiatives for comprehensive interaction as the key objective is to create opportunities and friendly conditions to consolidate links between Russia and the world.
About the SPIEF’21 Organizer: Roscongress Foundation is a socially oriented non-financial development institution and a major organizer of international conventions and exhibitions; and business, public, sporting, and cultural events. It was established in pursuance of a decision by the President of the Russian Federation.
On the Role of Sovereign Wealth Funds (SWFs) in Supporting a Green Recovery
Perhaps one of the few areas where a consensus is crystallizing across the major powers of the global economy is on the urgency of advancing the green environmental agendas and reducing the carbon emissions. Global institutions such as the IMF are emphasizing the need for a green recovery to take hold in the world economy as the global community emerges from one of the starkest crises in the past century. The world’s sovereign wealth funds as a powerful force in international financial markets could play a vital role in advancing green projects as well as green finance. This is particularly relevant for Russia, where the National Wellbeing Fund could be partly invested into green financial instruments.
At this stage there is a number of global networks and initiatives that bring together the world’s largest institutional investors, including sovereign wealth funds, to drive the green investment agenda. These include European Long Term Investors, the Institutional Group on Climate Change and the Network on Climate Risk. Some of the wealth funds from the Middle East, including the Abu Dhabi Investment Authority, the Kuwait Investment Authority, the Qatar Investment Authority and the Public Investment Fund of Saudi Arabia, are signatories to the One Planet SWF Framework. The meeting held by the International Forum of Sovereign Wealth Funds in 2016 “participants highlighted that SWFs are particularly well-positioned to become trailblazers in green investment”.
Recent data and surveys reveal a growing integration of the green agenda into the decision-making and strategies of the world’s sovereign wealth funds. These were the findings of an inaugural survey of 34 sovereign wealth funds, representing 43% of the world’s sovereign funds, conducted in September by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Funds .
The survey reveals that climate-related strategies represent more than 10% of portfolios for 30% of responding wealth funds. The survey also found that these funds made 18 investments in agriculture technology, forestry and renewables opportunities in 2020 at a total value of $2 billion, up from eight investments valued at $324 million in 2015. Overall, according to the survey “sovereign wealth funds have invested more than $5 billion in agritech, forestry and renewables opportunities over the past five years as part of an increased push toward climate change-aware investing”.
Just over a third of responding funds (36%) have a formal climate-change strategy in place, with 55% of these funds adopting the policies since 2015 and 30% since 2018.
The survey came up with the following recommendations to wealth funds based on the survey findings:
· to adopt and implement climate-related strategies;
· to seek appropriate talent and expertise;
· to explore board member and executive education;
· to use metrics to show not only climate impact but also comparable returns and risk reduction;
· to communicate to all stakeholders the strategic importance of climate change;
· to partner with peers and international initiatives to share experience and generate greater leadership from within the wealth fund network.
The latter recommendation dovetails the recent Valdai Club initiative to enhance cooperation among the largest sovereign wealth funds against the backdrop of the Covid pandemic. In particular, in 2020 the Valdai Club together with Shafi Aldamer and Curran Flynn from King Fahd University of Oil and Minerals advanced the proposal to create a platform for the sovereign wealth funds (SWFs) of G20 countries to boost long-term cooperation, direct investments, and the formation of bilateral/trilateral/multilateral investment accords. The findings of this policy brief were included in the T20 communiqué, which encourages the G20 to promote “the creation of a platform that would bring together the sovereign wealth funds of its members, possibly in coordination with the International Forum of Sovereign Wealth Funds.”
Such a platform would encourage the G20 states to strengthen their economic cooperation, bolster mutual interests, improve multilateralism, and develop opportunities for their SWFs. Additionally, it would act as an emergency tool in easing the impact of a global crisis, such as the current COVID-19 pandemic, as it can be employed as an anti-crisis measure via the investments of the G20 states’ SWFs. One important venue of cooperation for such a platform for sovereign wealth funds could be the elaboration of green investing principles and benchmarks for the major sovereign wealth funds, which in turn would support the advancement of a green recovery in the global economy in the aftermath of the Covid pandemic.
As regards Russia’s sovereign wealth funds, most notably the National Wellbeing Fund (NWF), which by Q1 2021 has accumulated more than USD 180 bn in overall resources there may be a case for investing part of the liquid reserve into green instruments, including sovereign green bonds. In particular, the investment guidelines for the NWF may involve a formal target on the share of green assets in the Fund’s portfolio. These in turn may include corporate and sovereign green bonds from advanced economies as well as an allocation reserved for Russia’s corporate and sovereign green bonds. The latter would potentially deliver a significant boost to the development of Russia’s green bond market. Currently green bonds account for just 1.5% of total corporate bonds outstanding in Russia and the emergence of sizeable demand from Russia’s sovereign wealth fund would raise the potential growth for this very important market segment.
From our partner RIAC
5 things you should know about the state of the global economy
Is this the year we overcome the global economic crisis caused by the pandemic? Are our jobs in danger? Who has lost the most in the crisis and what can be done to recover? As the UN Department of Social and Economic Affairs (DESA) prepares to launch the mid-year update of the 2021 World Economic Situation and Prospects (WESP) report, here are five things you need to know about the state of the global economy.
1) US and China bounce back, but a slow recovery for developing countries
While economic output in the United States and China is expected to grow robustly and lift global growth, many developing economies are not expected to return to pre-pandemic output levels anytime soon. The pandemic is far from over for most developing countries where vaccination is advancing slowly, and fiscal pressures have intensified.
2) The situation of the most vulnerable has become even more precarious
Lockdowns and social distancing measures resulted in large job losses in contact-intensive and labour-intensive service sectors, which predominantly employ women. The pandemic has also exposed the vulnerability of informal employment, which is the main source of jobs in many countries and which offers less job security, social protection and access to healthcare.
3) Global trade recovery is strong, particularly in Asia
Merchandise trade has already surpassed pre-pandemic levels, buoyed by strong demand for electrical and electronic equipment, personal protective equipment (PPE) and other manufactured goods. Trade in services remains constrained by restrictions on international travel. While exports from Asian economies have soared, exports from Africa, Western Asia, and the Commonwealth of Independent States has stalled.
4) The COVID-19 crisis has inflicted more harm on women and girls
This crisis disproportionately affected women, who suffered significant job and income losses, contributing to the worsening of gender poverty gaps. Burdened by increased home care duties, many girls and women gave up on schools, and the workforce altogether. Returning to school and work might take longer or may not happen at all for many of them, further widening gender gaps in education, income and wealth.
5) Countries need to do more to address the uneven impact of the COVID-19 crisis
There is an urgent need for countries to formulate better targeted and gender-sensitive policies to drive a more resilient and inclusive recovery from the crisis. Though on the frontlines of the pandemic, women have been under-represented in pandemic related decision-making and economic policy responses. The severe and disproportionate impact of the pandemic on women and girls call for more targeted policy and support measures for women and girls, not only to accelerate the recovery but also to ensure that the recovery is inclusive and resilient.
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