Russian expert: Food crisis unlikely to affect Azerbaijan
Russian economist hosted by Caliber.Az

INTERVIEWS  06 July 2022 - 12:54

Caliber.Az presents an interview with a Russian economist, expert of the Institute of New Society Ivan Lizan.

- According to your estimates, will the Russian economy be able to adapt to Western sanctions?

- Russia has been able to adapt to Western sanctions even though they really work, no matter how paradoxical it may sound. Firstly, there was no massive collapse in industrial production and overall GDP. Yes, it has declined, but this is far from the catastrophe that even the Central Bank predicted.

Secondly, the economy continues to work, even including mechanical engineering. The only exceptions are the industries that were most integrated into the global economy, primarily the automotive industry, although air transportation also took a big hit. The export of hydrocarbons works all the more and brings a lot of money. Attempts to abandon Russian oil and gas and other energy carriers lead to an increase in their prices and, accordingly when exporting smaller volumes, it turns out to earn the same amount of money, and sometimes even more.

Along with the drop in imports (and it has sunk by about half), the Russian budget, on the contrary, now has additional revenues. The main problem now is the sometimes inept management of the economy in modern conditions by the financial and economic block of the government. For example, financiers have not yet decided whether to save the stock market or replenish the budget of enterprises. I'm talking about the history of refusal to pay dividends to Gazprom. The companies decided that they would not pay shareholders because there are big risks ahead due to the fact that they will have to pay off debts, so there are no dividends.

The second global problem is that the rouble is too strong. It needs to be weakened, and neither the government nor economists know how to do this. The rouble is strong due to the rise in energy prices, and a large influx of currency into the country went since most of the currency exports came to the Russian Federation from the United States and Europe. That is, the currency arrives, but no one needs it inside the country. Therefore, both the euro and the dollar have become liabilities in Russia and lie dead weight. Therefore, Russia is being devalued. So, as I said, the most global problem in Russia at the moment is the strong rouble. Accordingly, with such a rouble exchange rate, budget revenues suffer and exporters' incomes sink, because it's one thing to take out a barrel of oil for a hundred dollars and get 7,500 roubles for it, and another thing is to get 5,000 roubles for the same barrel. After all, expenses within the country are calculated in roubles. The same story applies to everything related to exports. From cars to milk powder, which goes to Asian countries.

The second problem is logistics and difficulties with restarting imports. Again, almost everything came from China through Europe, and now it is necessary to rebuild these logistics so that goods are imported from China directly, without a hook through Europe. And the capacity of the railway and the eastern polygon is insufficient. The landfill is being expanded, but so far this project is far from being implemented. To bring to Russia as many goods as were imported through Europe, but through Azerbaijan, Uzbekistan, and Kazakhstan is quite difficult, and not all goods can be transported like that. Therefore, in general, sanctions work but do not cause such damage that Russia is looking for urgent ways to reconcile with the West. Sanctions have not worked against Iran, or North Korea, so why should they work against Russia?

- That is, in your opinion, the West has harmed itself more with sanctions?

- Yes. Sanctions are working against the West itself. In fact, there is a competition of economic models for strength.

- In other words, the collapse of the economy did not happen, as Russia prepared in advance for sanctions?

- If these sanctions had been imposed on Russia by the West in 2014-15, the Russian economy would have collapsed, because there was a very large dependence on imports, especially in mechanical engineering. Then the imposition of sanctions would coincide with the collapse of energy prices, oil and gas would collapse, and this could then result in a very large federal budget deficit. By 2016, the financial hole was 3.6 trillion rubles.

On the other hand, psychologically, Russia's elites were not ready for Western sanctions. But since that time they got used to sanctions, learned how to manage the economy under sanctions and psychologically gave up the illusions that it is possible to get along with the West. And the West has aggravated its own problems in the energy sector.

- The West has already turned to Kazakhstan for the replacement of Russian energy resources. How does Moscow react to this?

Moscow is well aware of this fact, as it is concerned that global oil production does not increase. Only the monarchies of the Persian Gulf can raise it - they are satisfied with the current situation and high oil prices. Therefore, there will simply be another redistribution of the market, and there may be opportunities to mix Russian and Kazakh oil bypassing sanctions. Plus, oil from Kazakhstan will have to be delivered to Europe via Russia. To do this, it will be necessary to repair the terminals that have failed in Novorossiysk, which is why there is less Kazakh oil on the world market. Therefore, I do not think that this issue will be some kind of stumbling block in Russian-Kazakh relations.

- In this scenario, it is more than likely that the Russian Federation and Kazakhstan will agree on the issue of oil transit.

- I think that yes, they can agree among themselves and even get a mutual benefit. Europe has been buying inexpensive energy carriers from Russia for a long time, selling it goods with high added value - the same plastic, for example, refined oil products - which allowed it to ensure a stable trade balance. Europe has traditionally exported more goods than it imported. With the introduction of sanctions, the Europeans brought down their exports to Russia, but could not significantly reduce imports. As a result, Europe no longer has an external surplus, money is being washed out of it. Along with the unwinding of global inflation, there is also a temporary increase in the cost of credit. It is one thing when you issue a loan at zero per cent, and quite another when you have to issue it at 8 per cent or cannot issue it at 8 per cent, because you understand that the European central bank does not want to raise the interest rate and issuing a loan for you, as for the bank, will become a loss-making business. Because the real inflation is 8 per cent, and they give out a loan at zero. The European economy does not live without credit, and in general is on the verge of complex debt, energy, migration and overall structural crisis. And the catalyst for this crisis was the Russian special operation in Ukraine.

- Experts predict a global food crisis, and in the foreseeable future, including in Russia.

- There will be no food crisis in Russia, because the Russian Federation is breaking records in grain supply, dairy needs are also closed, and it is provided with fruits due to exports from the Caucasus and Asia. There are no problems with providing sunflower oil, etc. Russia faces another problem, particularly in the agricultural sector, with regard to packaging and containers, plastic, and baby food packaging.

- Which economies of the former Soviet Union are most vulnerable to the food crisis?

- The countries of the Eurasian Union are more insured in this regard. For example, Belarus is not in danger of a crisis at all, except, perhaps, for a rise in prices. I think it will not affect Azerbaijan either. In general, I do not see any particular threats against the post-Soviet countries. In case of force majeure, they can count on Russia's help. I think Ukraine may have big problems.

- There is no need to talk about the economy of Ukraine, the whole country is destroyed there, unfortunately. Please clarify one more point. You have not ruled out a high increase in inflation in Russia and in other countries of the former Soviet Union. Will this process be protracted?

Russia's inflation was out of control a few months ago; now, however, there is deflation. Despite the fact that the ruble is very strong, prices have not decreased because of logistical issues with the delivery of imported goods. Much will depend on the Russian government's steps and actions in resolving this issue. For several years, Russia has operated within the logic framework. Because the issue of ensuring the domestic market is a priority of state policy, I do not see any serious grounds for further price increases, even if inflation persists. I believe that difficult times are waiting for all of us, it is possible that it will be difficult for someone, and a little easier for someone. Nevertheless, if the state is able to provide itself with energy and food, basic goods and industrial medicines, life will be much easier.

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