Alexander Stadnik, Russian Trade Representative in the U.S., comments on the depreciation of the ruble, falling oil prices, and another “Black August” for the Russian economy.

Currency exchange rates on display at Moscow banks. Photo: RIA Novosti

For a very different take read: "August 2015 is just as ominous as August 1998"

In the popular view, the current economic situation in Russia is reminiscent of the crisis of August 1998. At that time, against the backdrop of falling raw materials prices and the Asian contagion that initiated a global financial crisis, Russia sustained a devaluation of the ruble and defaulted on its sovereign debt.

On the surface, both August 1998 and August 2015 exhibit similar features, including the decline in world energy prices, the depreciation of the ruble, and the collapse of global stock markets.

Direct analogies are hardly appropriate, though, primarily because the Russia of 2015 is strikingly different from the Russia of 1998.

Today’s Russia vs. yesterday’s Russia

In the mid- and late 1990s, Russia’s economy was going through hard times characterized by a huge foreign debt load, total dependence on external loans, a largely uncompetitive industrial sector inherited from the U.S.S.R., broken economic ties with the enterprises of the former Soviet republics, and inarticulate foreign economic as well as fiscal and monetary policies.

Such was the state in which Russia faced the Southeast Asia economic crisis of 1997 and the fall in oil prices that followed. Looking back at events now, the default was probably the only way the situation could have evolved.

Today, Russia is different. The causes of the economic crisis are also different. There is no consensus on that among the expert community, but some judgments can be partly accepted. We can accept the following as true:

·      The slowdown in economic growth that Russia has experienced since 2012 is due to a large extent to falling energy prices;

·      The structure of the Russian economy has also played a role, with expenses exceeding labor productivity;

·      Gains from the “fat years” of high global oil prices could have been put to better use; and

·      Western economic sanctions have served as a catalyst for the crisis.

Russian Economic Development Minister Alexey Ulyukayev put it more precisely than most experts by saying that the current crisis is the “result of an under-reformed economy.”

Certainly, many things are yet to be changed and improved. Structural reforms are not performed overnight. However, a lot has been done already. Since 2000, Russia has been following the path of the rehabilitation and modernization of its economy.

The results of this long, painstaking work make the country’s economy more stable towards external challenges. It can be argued that this is a guarantee that another coming of the “Black August of 1998” in Russia is unlikely.

 Also read: "Why Russia is having flashbacks to its nightmare 1998 default." 

Russia is adding new partners from both the West and the East

Of course, many analysts and economic skeptics point to certain symptoms that seem to suggest an unfavorable forecast for the health of the Russian economy.

Indeed, today we observe a significant outflow of Western investment from Russia. However, our American partners continue expanding their presence in the country.

For example, in January 2015, the company Russkiye Mashiny (Russian Machines) and the American AGCO Corporation started a joint venture in Moscow for the production of tractors and combines. In April, the Terex Corporation launched an enterprise in the Tver region to produce new generation excavators.

In June, in the Tatarstan special economic zone of Alabuga, a facility for the production of ceiling panels was opened by the Armstrong Company, and a manufacturing complex by the 3M Company is due to start operation in October.

Europeans are not falling behind, either. In late June 2015, a manufacturing plant was launched in Lipetsk region by the Swedish-Swiss power systems producer, ABB. The investment in that project amounted to $10 million.

Secondly, Russia’s Latin American, Middle Eastern, and Asian partners are stepping up their activity in the country. For instance, in July 2015, the Russian Direct Investment Fund and Saudi Arabia’s Public Investment Fund signed an agreement to invest about $10 billion in Russia’s economy, including the agriculture and infrastructure sectors.

It is true that General Motors has decided to discontinue its operations in Russia. But in the same special economic zone, Alabuga, the Chinese car producer Zotye is starting its production. The first sales are planned for as early as this September. Also, a Ford manufacturing plant continues its active operations there, now preparing for the production of new models in the segment that was previously occupied by Chevrolet.

As an old Russian proverb goes, “Sacred ground is never empty.” Russia’s partners should not forget that market positions that are lost are always difficult to win back.

Is today’s economic situation really that unfavorable?

Clearly, no economic crisis, or even political controversy, lasts forever. The Western states that have adopted a sanctions policy towards Russia inevitably make their Russian business less competitive, especially against the intensifying business contacts that Russia maintains with the countries of Asia, Latin America and the Middle East.

According to research data published by the Boston Consulting Group in July 2015, Russia stands higher in terms of the global rating of investment attractiveness than the U.S., China and some other world economic leaders. Bloomberg has published a similar report.

Recommended: "Will the freefalling Chinese market take Russia with it?"

Skeptics would comment that the rating takes into account the production expenses born by the exporter countries, and the factor of the weak ruble is clearly at play here. Partially, it’s true. But one must benefit from any situation, and even the Black August of 1998 had its silver lining.

The weak ruble gave export-oriented Russian enterprises some additional competitive edge in the international market. Some new opportunities also opened for companies aimed at the domestic market.

A similar effect can be observed in Russia today. Incidentally, the devaluation of the Chinese yuan could be a positive sign for Chinese exporters.

Russian exporters have a lot to offer their foreign partners. Recently, the “traditional” structure of the Russian export sector has expanded to include new, high-tech products.

For example, the Russian Starta Capital investment company is opening an office in New York this fall to promote high-tech startups from Russia in the American market.

Russian machine-builders are showing some growth, too. The Russian Association of Agricultural Machinery Manufacturers, Rosagromash, for instance, has reported peak export statistics.

Over the first half of 2015, Rosagromash supplied 2,300 items of machinery, for a total value of $70 million, to various countries in Europe, Asia, and North America, including Canada, Germany, France and Turkey.

In part, the success of Russian exporters should be attributed to the work of Russian trade representatives abroad. It is with their assistance that over 550 contracts of Russian companies with their foreign partners are underway, for a total sum of $20 billion.

Import substitution is building a base for future economic growth

An essential factor of economic stabilization and an important investment in Russia’s future is provided by the policy of import replacement, which is currently being followed by Russia.

On the one hand, it is a kind of “protective reaction” to the sanctions by the West, but on the other hand, as the experts unanimously admit, it is an urgent necessity and vital need for every modern sovereign state. That’s because a country cannot remain dependent on an external supply of industrial equipment and food products.

If it were not for the sanctions, Russia would steer an import replacement course anyway. New industrial companies — in power engineering, pharmaceuticals, machine building, and construction technologies — are launched in Russia every month.

In July 2015 alone, 18 new manufacturing plants were put into operation. As yet, their products are mostly designed for the domestic market, but this can be seen as a type of “insurance” against any new default.

Russia is increasingly integrated into the world economy

Russia is a significant participant of both regional and global economic cooperation. Quite recently, on August 6, Kyrgyzstan was officially added to the list of the member states of the Eurasian Economic Union (EEU). The EEU of today counts 5 states, 20 million square kilometers, and 182 million people, which makes it the largest economic union established in the former Soviet Union.

The brisk development of economic cooperation is evidenced by the BRICS (Brazil, Russia, India, China and South Africa), whose GDP totals $16.9 trillion.

Also read debates: "Does the Eurasian Economic Union have a future?"

Russia’s external debt is many times smaller than that of the U.S., Japan, Germany, China or other world leaders. Today’s Russia bears little resemblance to Russia of the 1990s.

In early July 2015, the Fitch rating agency published a credit rating for Russia, which was still rated as BBB- with a negative outlook. The agency acknowledged, though, that the country had partially restored its competitive capacity. Fitch’s colleagues from Moody’s also keep negative ratings for Russia and yet forecast a certain growth of its economy by the end of 2015.

So, the future of Russia is not all black. Today, crisis-like developments are not characteristic of Russia alone. The fall in oil prices impacted a good half of the world.

Drawing on a well-worn Soviet formula, certain signs of default are “haunting Europe” as well. For a number of years already, the situation in the global market has been seen as unstable, and the latest events on the New York and Shanghai stock exchanges — the “Black Monday” of August 24, 2015 — only attest to that.

Of course, the sanctions policy contributes to the destabilization of the world economy. It’s best to believe in pragmatic, balanced estimates. As a result, the events of another “Black August” [that took place in 1998] are hardly likely to appear again in the history of Russia.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.