Concluding Remarks: The Limits of Russia’s Economic Power

Usually, the essence of economic policy is modernization of the economy, increase of national wealth and the well-being of citizens through the growth of productivity, investments, and a new quality of human capital, and of course, keeping and expanding markets. One of the key features of current development in Russia is economic slowdown. The ruble has depreciated to record lows, as oil prices declined. The Cassandra in the state-controlled Sberbank, the Russian the country’s largest financial institution, German Gref, said at the Gaidar Economic Forum in Moscow on January 15, 2016, ‘We find ourselves among the countries that are losing, the downshifting countries’ (cited in Matlack 2016).

The government, which gets nearly a half of its revenue from oil and gas, is scrambling to plug a 1.5 trillion rubles ($19.2 billion) hole in its budget. The IMF forecasts the economy will shrink 1 percent in 2016, after contracting 3.7 percent in 2015. Finance Minister Anton Siluanov predicts a 15-year period of stagnation and declining competitiveness as the situation has created ‘an atmosphere of extreme nervousness’, as Economy Minister Alexei Ulyukaev told President Vladimir Putin on Jan 26, 2016 (cited in Matlack 2016). In order to stabilize oil prices, Russia has made an unprecedented move towards cooperation with OPEC and revealed its readiness to freeze oil production at the current level, although in the past Moscow not only rejected an offer to join the cartel but also was reluctant to negotiate anything related to production of oil.22

A second limitation is the fact that Russia is not the only economic actor in the region. This means that one has to assess Russia’s relative economic power in comparison with other major actors such the EU, the USA and China which is trying to project its economic power in the region, especially in Central Asia. But there are, at least, several spheres in the economic domain where Russia still dominates in its relations with other post-Soviet states: energy supplies (or energy subsidies), market access, migration regime and transit. The USA and EU often use sanction regimes against post-Soviet states for various infringements of law and oppression of the opposition. Contrary to the West, Russia and China do not restrict their activity in post-Soviet states and elsewhere for lack of democracy.

Though Russia-Ukraine trade contracted threefold in 2015, Ukraine- EU trade did not grow as a result of the Association agreement, but declined by about 30 percent (see World Bank 2016a). This means that the EU has not yet become a real alternative to the Russian market for Ukrainian goods (see the graph on investments, migration, joint ventures, etc.)23 Thus, there are serious limits of Russia’s economic power, but it is still enough to resist foreign pressure and to dominate post-Soviet space.

One of the main lessons that Russia has learned from the ongoing crisis over Ukraine and still limited sanctions war with the West is that the common neighbourhood of the EU and Russia - that is, post-Soviet space - is and will remain an arena of contestation, unless the idea of a ‘big Europe’ from Lisbon to Vladivostok receives its second life.

Since it is closely integrated into world economy, Russia has paid substantial price since 2014 for overdependence ofits financial and energy sectors on the West. Sanctions hit Russia’s economy hard - direct losses reached more than $80 billion, while overall costs can be substantially higher. Together with huge structural problems and low prices on major export goods, sanctions put Russia into a deep recession which has almost emptied the national reserves. Still, Russia remains the biggest economy in post-Soviet space with practically the same economic instruments in its toolbox, thereby allowing to retain the status quo. Russia is capable of using effectively economic sticks (deportation of ‘illegal’ migrants or to put ban on import of particular goods - fruits, wine and dairy products - for alleged violations of sanitary norms) using primarily highly centralized economic institutions and national champions which occupy ‘commanding heights’ in the Russian economy. Thus, the ability to reward or to punish by using economic means has become one of centrepieces of Russia’s contemporary foreign policy.

Russia’s liberal migration regime and easy access to the Russian labour market will remain one of the main trump cards in the Kremlin’s game for dominance in Central Asia, where social and political stability depends heavily on remittances from Russia. This factor will be important in the near future, although remittances from Russia to the Commonwealth of Independent States declined as a result of the economic slowdown in Russia and the depreciation of the ruble. As for the EU, its adjusted strategy towards the region still puts forward liberalization and democratization reforms that can hardly be welcome by authoritarian elites. In other words, while Russia plays the game of pragmatism, the EU has become one of the most ideological actors in global politics.

In order to dominate by economic means in certain regions, it is not necessary to be the biggest global economy. As structural realists have pointed out, in politics what matters is first and foremost relative power of states. Thus, well-tailored economic policies to every particular actor might be enough to achieve the expected outcome be it just one tool (access to the labour market) or a set of tools (general access to the market, subsidies, loans and credits).

With a complicated demography and the need for millions of workers, Russia will enjoy the privilege of having a point of leverage with many states of Central Asia. The same is true with Belarus for milk products and energy subsidies, and with Georgia and Moldova for export of their wine and fruits. Ukraine is a much more complicated case. Although it seems that Moscow has already almost exhausted its arsenal of economic means in order to make Kiev change its policy, one thing is clear; Ukraine’s overall losses as a result of the new geopolitics are the biggest, if not in absolute terms, then surely in terms of per capita. If one can expect change in policy in all affected actors, it will occur in Ukraine. Association with the EU cannot bring this state tangible benefits overnight, and ongoing economic crisis can evolve into a political one. Kiev can hardly expect any concrete concessions from Russia.

Certainly, today Russian Minister of Foreign Affairs Sergei Lavrov would agree with Edward Luttwak, who suggested in 1990 that the then coming geo-economic age would be an age of continued state rivalry where ‘the logic of conflict’ will be expressed in ‘the grammar of commerce’ (Luttwak 1990). In Lavrov’s view, in its Russian policy, the West is driven by the same realist goal - to dominate or contain Russia - by other, namely economic, means and advance its geopolitical space closer to the Russian border. ‘This is the essence of the systemic problems that have soured Russia’s relations with the United States and the European Union’ (Lavrov 2016).

 
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