“In 2020, Russian economy is managed as 10 and 15 years ago — that is, poorly”
Dmitry Travin about economic sovereignty and harm from forced import substitution
The Declaration of State Sovereignty adopted on June 12, 1990 by the Congress of People's Deputies of the RSFSR implied that Russia was independent of the union center in making decisions, including economic ones. Dmitry Travin, a well-known economist, discusses whether an independent Russia has real economic sovereignty 30 years later.
“We have economic sovereignty but we do not manage the economy well”
Dmitry Yakovlevich, 30 years ago, with the Declaration of Sovereignty, Russia sought economic sovereignty in many respects from the Soviet Union. After 30 years, when the Union has long been gone, do we have real sovereignty — given the considerable dependence on energy exports and a large volume of imports of higher-grade goods?
If by sovereignty we mean what economists usually call autarky — that is, when a state has neither exports nor imports, then the most independent countries are economically undeveloped, such as North Korea. The states that have real sovereignty make their own decisions about how to manage the economy, and if the economy develops, they carry out a lot of foreign economic relations — both trade ones and ones concerning capital movements. And here Russia undoubtedly has sovereignty: we make all the key decisions on the economy ourselves.
But the layperson would object to you: the same equipment for business and for the operation of enterprises comes mainly from abroad, right?
This has nothing to do with the issue of sovereignty. This means that we have sovereignty, but we simply do not manage our economy well. No one imposes imports on us, but we have problems with resolving this issue. Yes, we sell a lot of oil and gas, but over the past thirty years we have not been able to create an efficient economy that would produce many competitive products of industrial processing. Yes, there are some goods other than oil and gas that we can successfully sell abroad, but there are very few of them.
Let's go back to imports — just because we buy a lot of things doesn't mean that we can't produce some goods. For example, most developed countries produce passenger cars, but this does not mean that they do not buy them abroad.
If we go to Germany, we will find that people there drive not only Volkswagen and Mercedes but also Peugeot and Citroen, and this does not mean that the Germans are unable to produce cars but that because of competition people buy different products for different reasons. Yes, partly imports in Russia is that something we in our country can not produce, but to a large extent the share of imports in some segments is due to the fact that foreign countries produce either qualitative or cheap products, so our customers prefer these products.
And this is very clearly seen in food products, which were banned in 2014. Can't Russia produce cheese? It can, but this cheese immediately after the import ban, in the absence of competition, became sharply more expensive. Our producers simply inflated the price of it, and I buy our cheese at a much higher price than a Chilean or Uruguayan one. Cheese is imported from Chile, and it costs less than domestic one! Yes, there are some good Russian cheeses, but we don't have any that are produced in Italy or France. Therefore, we would import more than we do now if it weren't for the ban.
The developed countries are used to importing a lot of goods, this is a sign of development. You don't need to be afraid of imports if you make good money exporting complex technological and high-quality goods.
You need to worry if a business is ready to produce goods no worse than abroad, but in the end it turns out that it is not allowed to do so by its own authorities. If Russia had a well-managed economy, that is, business would not suffer from poor management, then our imports would not have decreased so much as non-oil and gas exports would have grown. If we made good money, we could buy more imports, but exports would also grow, and this would be a normal situation.
“If China becomes a monopoly consumer of Russian gas, the price will be what it wants to pay”
In one of your books written in 2015, you say that Russia may lose energy exports to Europe, and the only serious market for it will be China, which will thus become the monopoly in the purchase of gas and oil. And then Russia, in fact, will lose its economic sovereignty. Has this point become more relevant over the past five years?
You can see that over the years, the relations between China and the United States have worsened — this happened in connection with the Trump presidency, which wants to restrict imports of Chinese goods and make American enterprises produce more of their products. Thus, the world has become more tense.
I do not want to say that there may be a war between America and China in the coming years (although I write in my book that this may happen at some point), but there is a trade war going on, and this may lead to an aggravation of political and military relations.
In this situation, Russia still relies on China. The economic relations with the West have not warmed, and we are still under sanctions, which has limited Russia's economic development opportunities over the past five years. Look, before the epidemic, the Russian economy was in a state of stagnation, and in 2020 there has been already a huge drop, although it has been in many countries. And the focus on China, which I spoke about in 2015, is only being confirmed. So depending on it can happen. I can't predict when exactly, but if the confrontation between the US and China increases, and Russia relies on dependence on China, then our ties with Europe as a partner and ally of the US will be reduced. But relations only with China are not the best option because there is still a possibility of new sanctions.
Europe continues to buy energy from Russia, but according to recent data, the share of our gas in its purchases is no longer half but less than 35 per cent. What does it indicate?
The situation is getting worse, though not much. What else do I mean? In 2014, there was still hope that the sanctions would be lifted quickly, but they were not lifted, and if they are, it will not be soon. Yes, Russia was not imposed new and heavy sanctions, mostly the old ones remained, but there are no hopes for improving relations.
Another point is that the West is undergoing technological transformations that will allow it to trade less with Russia. For example, Germany, which buys most of our gas from European countries, puts into operation a large number of wind generators and solar panels every year. There you can often see fields filled with wind turbines, and at some point it will turn out that our gas is not needed in Germany, or it is needed, but in a small amount. And whom we will sell this amount of gas to? There are many examples of switching to alternative energy sources, almost all European countries will eventually be able to reduce their purchases of oil and gas. You can, of course, sell it to China, but if it becomes the monopoly consumer of Russian gas, the price will be what China wants to pay. And then Russia will lose some of its sovereignty.
Now China receives gas from various sources and can choose whether to buy Russian gas or not, and if Russia loses the gas market in the West, we will have no choice.
Besides, the idea that Russia will ever sell its energy resources to, for example, United States is futile, since the United States has made great progress in the development of shale oil over the years, and the Americans themselves are becoming a serious energy exporter.
“It is an illusion that we have the National Welfare Fund that can be indefinitely spent”
As I understand it, you do not think that the top circles are thinking much about replacing the loss of income from oil and gas?
In 2020, Russian economy is managed as 10 and 15 years ago — that is, poorly. There are few opportunities for business development here, so it is not surprising that quite a large amount of capital goes abroad, and our businessmen either open some business abroad or simply invest money in banks and securities there and live on the income from them. This makes competition less, and taxes are paid less…
Recently, we have discussed the question: “How to help people in the epidemic?". People wondered why Putin did so little to help ordinary people and businesses. Well, how to help if the state has little money? Why aren't there enough of them? Because the economy is poorly managed and there are few tax collections.
It is an illusion that we have the National Welfare Fund that can be indefinitely spent! The fund is there, but it can be spent very quickly, and if oil prices do not rise to a high level, the money will run out.
By the way, why have we almost stopped talking about import substitution?
Forced import substitution is a terrible thing. We do not need any import substitution from the state. If producers in Russia can work more efficiently and competitively than Western ones, they will replace imports themselves. There is a great example here — in 1998, when the ruble collapsed, no one banned imports but our producers sharply increased their production because the production of many products in our country was cheaper than imports. But since then, we have not had any success in import substitution!
Success in import substitution will be when the business decides what to do, without forcing the state, and the state will protect it from being hit by security forces, bandits, and bribery of officials.
There have been no such decisions in five years — the government is not moving in this direction, and I am concerned about the state of our economy. Because many businessmen every day more and more want to withdraw capital from Russia because it is not profitable for them to work here.