Old world destroyed, we should build a new one

Expert: Russia should give up restraining the development of the consumer market in the country

Old world destroyed, we should build a new one
Photo: Maksim Platonov

The time of high revenues from the sale of hydrocarbons has passed — the welfare of Russia begins to depend on the level of innovative development based on the digital economy and biotechnologies, according to economist Rustem Shayakhmetov. In the column written for Realnoe Vremya, he reflects on how the coronavirus pandemic has affected the Russian economy and the balance of power on the planet and what the country needs to focus on in order not to be “on the margins of the world”.

Russia has suffered huge losses due to the fall in world oil prices. The coronavirus pandemic has caused global turmoil in the world economy. What does the future hold for us and what should we prepare for?

Global oil and gas consumption is going to decline

Russia has become more dependent on oil and gas exports over the past decade. And this year's sharp drop in oil prices, combined with the coronavirus pandemic, has intensified the crisis in the economy. This is largely due to the underestimation of the role of new sectors of the economy and the state's focus on the development of traditional industries. Because of this, Russia's role in the world economy is gradually decreasing. If in 1991 the share of the Russian Federation in world GDP was 3,4%, by 2018 it had fallen to 1,8%. Over the past 10 years, Russia's annual GDP growth has been 1,3%, while global GDP growth — 3,3%.

This year, due to the fall in oil prices, exports will be reduced to 50 billion USD, and this is mainly budget funds. Besides, this year, due to COVID-19, global oil and gas consumption is going to be reduced by 5-10%, which will also strengthen the crisis phenomena in our country's economy.‑ The monthly coronavirus holidays will naturally cause many companies to go bankrupt, so this year will be very difficult for many Russians and we need to prepare for a new situation right now.

The coronavirus has created new realities of life. We cannot say that the world economy has been destroyed. What is more, the impact on stable economic models will be short-term, i.e. there will be a significant decline, and then a rapid recovery in a year or two in countries with a diversified stable economy. The effects of the coronavirus will not be felt significantly for such countries.

“Coronavirus holidays” have undermined the viability of companies

A large-scale crisis is beginning in Russia. Our country was plunged into a recession even before the coronavirus, about 30% of commercial structures, according to Rosstat, were unprofitable, and most of them will not withstand new shocks, although the assets have not physically disappeared. Industrial enterprises, shopping complexes, fitness centres, restaurants and hotels have remained, but they are not generating income now. When the quarantine is lifted, most of them will resume their operation, but a significant portion will go broke. It is expected that up to 10-15% of commercial organizations will cease their activities. Naturally, someone will take their place, provided that this business will be able to generate profit, but this requires time and money.

The existing gold and foreign exchange reserves of Russia (about 550 billion USD), including the National Welfare Fund (123 billion USD), allow for an active state policy to mitigate the consequences of the crisis. However, the stated support programme is equivalent to 2% of GDP, which is clearly not enough for a rapid economic recovery. For comparison, the UK, Spain and France spend between 14% and 16% of GDP on stimulating the economy, while the US — 12%. Therefore, it is not necessary to expect a quick recovery of Russia from the crisis.

Photo: Ilya Repin
According to research conducted by the HSE in April 2020, due to the coronavirus epidemic and related restrictive measures, 24% of Russians lost their income completely, 32% lost it significantly, and only 22% remained at the same level

The fall in the ruble exchange rate, combined with the quarantine measures, predetermined the fall in real incomes of the population this year. According to research conducted by the HSE in April 2020, due to the coronavirus epidemic and related restrictive measures, 24% of Russians lost their income completely, 32% lost it significantly, and only 22% remained at the same level. The following circumstances negatively affecting the well-being of Russians should be also noted — an increase in food prices. Primarily for bakery products.

This is due to the fact that grain exports account for about 30% of its production, so due to the fall of the ruble, there is an increase in purchasing prices for grain. The rices for meat and milk are also going to increase, since the cost of compound fodder is more than half of the cost of these products, not to mention the significant dependence of agriculture on imports of equipment, livestock, and technologies.

The coronavirus holidays have undermined the viability of both retail companies, large shopping centres, organizations that provide services to the public, and industrial enterprises. As a result, we should expect the termination or reduction of the work of a significant part of business structures, as a result of which there is already a reduction in jobs, a reduction in wages for a significant part of employees. An accelerated business transition to digital formats that significantly reduce costs will also reduce jobs in the short term.

Uncertainty in future income and the depreciation of savings of citizens have significantly reduced the effective demand for real estate, cars, household appliances, and tourist services, which is the reason for the reduction in production of these goods. There was another loss of confidence in the ruble, which has become the basis for the flow of savings of citizens in dollars and euros. The situation was worsened by the statement on the introduction of a tax on income from deposits of the population.

The coronavirus holidays have undermined the viability of both retail companies, large shopping centres, organizations that provide services to the public, and industrial enterprises

Is the country ready for the development of digital technologies?

Now the improvement of the economic situation largely depends on the efficiency of the oil and gas sector. In the medium term, we should not expect a decline in global oil and gas consumption, but now it is time for low energy prices. In the next 10 years, oil and gas consumption will continue, but its growth rate will be 50-70% of global GDP growth. Of course, the failure to agree on the OPEC+ deal worsened the situation, but the determining factor was the emergence of new players in the market, and this is not just the US. But speaking about the future, we must assume that in the medium term Russia will not be able to receive high oil rents, so new priorities are needed in the development of the country's economy.

We should proceed from that exports cannot constantly act as the engine of the economy because the main factor of development is domestic consumption. For example, the share of US and EU exports in GDP is about 12%, which allows them to be less dependent on fluctuations in foreign markets and forms the stability of their economic development. In Russia, exports account for about 30% of the country's GDP. Our country should abandon the artificial control of development of its consumer market, moreover, it is necessary to take measures for its accelerated development. This requires a stable ruble, a diversified economy based on stable domestic markets and based on innovative industries.

Coronavirus has accelerated the development of digital technologies, but is Russia ready for changes? Although our country is a leader in the digitalization of public services, we are far behind in other areas. Russia's annual export of telecommunications, computer and information services is about 5 billion USD, which is about 0,9% of world exports. This clearly does not correspond to the country's existing potential. For comparison, the annual export of the above-mentioned services in India exceeds 50 billion, in Ireland — 100 billion.

The success of Ireland and India is predetermined by that these countries have formed an effective infrastructure aimed at exporting digital services. Russia has focused on the domestic market, which is insignificant today, and the level and quality of digitalization is lower than in developed countries, which forms our lag. Having a good level of education in the field of information technology, Russia has become a world leader — an exporter of IT specialists, not information technology. Given the accelerated growth of the digital services market, Russia, if it creates an effective infrastructure for promoting telecommunications, computer and information services on foreign markets, can increase their exports to 50 billion USD within 10-15 years, which is comparable to gas exports.

Coronavirus has accelerated the development of digital technologies, but is Russia ready for changes? Although our country is a leader in the digitalization of public services, we are far behind in other areas

Focusing on biotechnology

Biotechnologies are beginning to play a special role in the development of the world economy. According to preliminary estimates, the global biotechnology market will reach about $600 billion in 2020, with an annual growth rate of about 10%. Russia's share in the global biotechnology market is currently less than 0,1%. In the long term, the importance of biotechnologies will be comparable to the role of digital technologies. Out of the total spending on research and development, the share of spending on biotechnology companies in the US is 12,3%, in France — 9%, and in Russia — only 0,5%. The Chinese biotechnology industry is projected to grow to 4% of GDP this year.

The directions of biotechnologies implemented are diverse: from medicines to cloning of pets. The first samples of meat grown in laboratories have already appeared. In the medium term, we should expect the first positive results on the cultivation of artificial organs. According to forecasts of the Organization for Economic Cooperation and Development, in 2030, biotechnology will produce up to 35% of products in the chemical industry, 80% of medicines and half of agricultural products. Biotechnologies are a driver of the country's strategic development, so Russia's passivity in their development can become a long-term obstacle to economic growth.

But to be successful in the new economic world, it is necessary to make institutional changes, creating an effective infrastructure for innovative development. Now Russia in some ways follows the path of Argentina. At the beginning of the 20th century, it was one of the most prosperous and rich countries in the world, its level of economic development was comparable to France, Germany, and Canada. However, inefficient public administration and neglect of innovative sectors of the economy have led to that Argentina is now a developing country. Of course, the analogy is conditional, Russia is not Argentina, but we should learn from other people's mistakes. Otherwise, Russia may lose its place among global leaders, and then it will face the same global upheavals that Argentina is currently experiencing.

The old system of economic well-being in Russia has collapsed. What will happen in the future depends on how we overcome the current crisis and what priority areas of socio-economic development will be determined by the country's leadership.

By Rustem Shayakhmetov