Dmitry Kuvalin: ‘The response of the world economy in 2020 to the next virus is inappropriate’
The coronavirus epidemic continues expanding its sad geographical footprint: messages about new cases of infection in Italy, Iran and some other European and Asian countries are received every day. The world economy has a fever too: oil prices have dropped by 14% in a week for the first time since 2011 and achieved the bar below $50 per Brent. In an interview with Realnoe Vremya, Doctor of Economic Sciences from the Institute of Forecast of the Russian Academy of Sciences Dmitry Kuvalin talks about how long and painful the crisis caused by the breakout of the virus will turn out and how Russia should react to such challenges.
“On the one hand, the response to the coronavirus is inappropriate”
Mr Kuvalin, markets are shivering from the new epidemic, has there been anything similar in the world economy or is it a completely new occurrence?
Not exactly new — we remember avian influenza, atypical pneumonia, Ebola fever, some other viruses, and then the bogeyman stories looked very similar to today’s coronavirus. However, it became clear soon that it wasn’t so scary — the epidemics were fought quite rapidly and their scale wasn’t big. Generally speaking, from a medical perspective, we can hope that the current epidemic will have quite a limited scope and it will be quite successfully fought gradually by sanitary methods or developing an effective vaccine and it will quickly go down without serious influence on the death rate and health of our planet’s population.
But the response of the world economy this time, in 2020, to the next virus is more significant. On the one hand, it is inappropriate, of course, if we think about it: borders are closed, a big number of people from law enforcement agencies are busy with patrolling, blocking, not allowing, transport and tourist traffic is stopped as well as supplies of feedstock and different materials. Why is the response inappropriate? It seems to me that a tenth, if not a hundredth part of the money spent on these measures, would have been enough to create an effective vaccine against this disease — a part of the money spent on quarantine-related measures should have been redistributed, and better medicine and pharmaceuticals should have been financed. Then the effect would have been much higher, and the disease would have been stopped much faster, but a fact is a fact: we can do nothing, while decision-makers can’t redistribute money flows properly — moreover, it is people from different countries, different structures, and everybody spends money as they want, while it seems that there is no desire to spend money on science to combat the threats. Due to this approach, the world economy and some specific countries’ economy are starting to suffer like never before.
It seems to me that a tenth, if not a hundredth part of the money spent on these measures, would have been enough to create an effective vaccine against this disease
Unfortunately, it seems that Russia in this situation can’t stay on the sidelines, and there is some lack of logic here too: Russia seems to be well prepared for such occurrences in the world economy, but our economy, as practice shows, is very vulnerable due to crisis occurrences in the world market. Consequently, when world prices for feedstock go down, and they have already gone down, and this tendency will probably stay, Russian exports begin to suffer, their revenue, while foreign investors in our markets who we also let in without almost any limits will usually escape from Russia with their money, begin pumping indexes of our stock markets, the ruble rate and so on, and this can also can have a bad impact on our economy. And the experience of recent years shows that Russia has suffered from waves of the global crisis more than, for instance, an average country of the world. This is why here in Russia we should be cautious and get ready, try to create measures that can soften these crisis occurrences.
“If the situation with feedstock prices is negative, it will have a big impact on incomes of the federal budget”
Manturov said that the government needs to think of how to solve the problem of substitution of supplies of car components from China and feedstock for Russian medication — its share reaches 80% of the whole volume. Is it big losses for the economy?
Feedstock for the car industry and pharmaceuticals is a serious problem, but mainly it is a potential problem at the moment. As I understand, the supplies of commodities keep in both directions, and if we consider that their volume has reduced, supplies haven’t stopped and it isn’t planned to stop them at all. It seems that the minister meant future risks and threats and probably formulated a thought correctly that it is necessary to get ready for it. But the domestic market of China is a more serious problem linked with China — coal, oil, gas and oil products, and Russia supplies a lot of such goods directly, moreover, the situation in the Chinese market has a very big influence on world feedstock prices. Let’s imagine that we can supply coal not to China, but, for instance, if coal prices decreased due to the Chinese events, we will suffer as exporters. As you understand, the problem is more serious than undersupply of components for our processing factories from China. And if the situation with feedstock prices is negative, it will have a big impact on incomes of the federal budget, while our social programmes, national projects depend on the federal budget. The federal budget is a state investor inside Russia, and a fall in exports to China will be a bad occurrence not only in the short but also in the long term.
Does it mean it is early to get concerned?
Panic and an inadequate reaction of authorities of different countries to the new virus is dominating at the moment, which speculators are trying to take advantage of — they deliberately rock the volatility in world markets to earn their speculative money on these prices’ ups and downs. And the Chinese economy hasn’t sunken so much to make prices for feedstock and air transportation start falling. So today’s oil prices are mainly artificial, but this can be fought.
The Chinese economy hasn’t sunken so much to make prices for feedstock and air transportation start falling. So today’s oil prices are mainly artificial
How can it be fought?
For instance, with international OPEC agreements. For example, to come to an agreement on guarantees of supplies of different resources — both energy resources and manufacturing industries’ products. All this will calm markets down and soften breakdowns in the aviation engineering industry, tourism, supplies and transit supplies.
It has already been announced that the meeting of OPEC member states and Russia will be on 5-6 March. Will there be an agreement on production cut?
The experience of last years shows that oil-producing countries, oil exporters have recently begun to easily come to an agreement, and the chances new agreements will be made is quite high.
“If these artificial barriers aimed to limit the disease are lifted, the world economy will recover quickly”
How can the world economy be recovering after the epidemic?
It is hard to say, everything turns on the duration of this crisis. In general, if we consider that the crisis linked with the coronavirus is artificial and doesn’t influence deep processes in the world economy (collapses of the financial system like in 2008 aren’t taking place, and everything is in its proper place and can function fine). And if the crisis occurrences don’t start undermining some basic foundations of the world economy, the recovery will be quick, of course. Why? Because the world financial system is fine at the moment, production capacities are ready for issue, and consumers are solvent. And if these artificial barriers aimed to limit the disease are lifted, everything will spin like before. It seems to me that if in this specific case some other factors are added up, the world economy will recover quickly.
Is the stability of the US economy evidence to it?
It is a very important factor for both the global and Chinese economies, including for ours.
How should we assess the cases of coronavirus spread in Europe, Iran, South Korea and restrictions imposed there for the world economy?
It is a threat with a limited scale. Yes, such a situation should be taken into consideration, and measures to fight possible aggravations should be prepared — this must be done in any case, but the scale of the threat for the economy is small.
Our obviously weak link here is an absence of domestic production of some very important goods and services, first of all, machine tools, elements for electronics, the same turbines for power plants because we know how to make one type of turbines, while there is no other type, hence the story of Siemens turbines in Crimea
Let’s discuss the measures that will allow Russia to feel confident during any crisis, even in the conditions of panic. Do you agree that we should create a serious import substitution programme?
Without doubt. Precisely import substitution is a key to national economic security in such cases as the coronavirus. Those international sanctions imposed on Russia — especially technology-related sanctions — are a bigger problem than consequences of the coronavirus. The epidemic will be forgotten, while sanctions are a lasting thing, and our obviously weak link here is an absence of domestic production of some very important goods and services, first of all, machine tools, elements for electronics, the same turbines for power plants because we know how to make one type of turbines, while there is no other type, hence the story of Siemens turbines in Crimea. It is a problem to get turbines, and it is a technical threat, if they already exist, you won’t launch these turbines manually — the suppliers are foreign and they are ill-disposed and are under pressure because of the sanctions. This is why not to get in such situations, we should learn how to make many types of key equipment ourselves — this expands volumes of domestic production and demand. We should deal with import substitution, and this must be the key priority of our economic and investment policy.
“Russia isn’t sold things that are very economically sensitive even for huge money”
Does it mean that mechanical engineering, electronics are the priority of import substitution in the future, while the automotive industry and the same mentioned pharmaceuticals are already the next areas or do they also must be priorities?
There must be greater import substitution in the automotive industry too, while pharmaceuticals in general must be based on domestic production. While our pharmaceuticals are mainly dependent on imported substances despite quite a good development pace and quite real successes. Of course, international labour division is fine, but we shouldn’t be critically dependent: if we bring 20% of manufactured substances and import the same percentage, we can always agree on exchange. And when, for instance, we export 70% of substances and import only 3%, we will never agree with anybody or we will agree only when the second side has mercy and gives us what we need. But the last 20 years have shown that Russia hasn’t been sold things that are very economically sensitive even for huge money — the same technology equipment.
How much time does Russia have for that much-needed import substitution so that it will have a good effect on the economy in the short term?
It is a dialectic issue. Of course, on the one hand, some countries impose sanctions on us, on the other hand, some countries impose sanctions on Russia less severely and even try to pass them by by all means, also, some countries ignore these sanctions. Consequently, when we don’t receive necessary and valuable equipment from a country, we can try to get it in another country. We know from the Soviet era that our special services help to find very necessary technologies where it wasn’t possible to find them legally or for money. And you understand that such methods are possible even now. This is why it is hard to say how much we have for successful import substitution, but it is important to start as soon as possible: do it despite the fear. It is clear that import substitution and the creation of important elements will have a small scale, but in the end, this can turn into clusters. Moreover, we can reanimate the same machine tool manufacturing. Why can we? There were examples in the noughties — energy mechanical engineering, railway engineering (our wagons now are Russian-made only) were upgraded, we should do the same in other sectors too.
I would say — don’t get into a panic. A good manager always gets ready for crisis occurrences and thinks over preventive measures, and the Russian government must deal with it too. I hope our updated government will do this task
Can the coronavirus and all this panic influence the key rate of the Central Bank that has often decreased in the last years? Won’t a reverse process begin here at least for some time?
Anything can happen — our Central Bank understands the key rate with pleasure if it sees some risks and their reaction is like that of Pavlov’s dogs: a notable threat is looming, and the rate has gone up.
A lot will turn on the actions of the authorities, the new government now. What economic advice would you give to Mishustin’s government during the coronavirus so to speak?
I would say — don’t get into a panic. A good manager always gets ready for crisis occurrences and thinks over preventive measures, and the Russian government must deal with it too. I hope our updated government will do this task — in any case, at first sight, it looks more capable than the previous one: they don’t shoot from the hip, but, on the other hand, they don’t allow doubtful ideas and decisions and don’t get into a panic. Personally, I am pinning all my hopes on the new composition of the government.