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The view from Japan: Can Russia overcome economic slump?

28 November 2016 , 11:35Kensuke NakazawaNeftegaz.RU854

Russia’s economy is being pummeled by a double whammy of economic sanctions from the United States and Europe (see below) and cheap oil prices. To drag the economy out of its slump, Moscow aims to strengthen relations with China and Japan and has high expectations for U.S. President-elect Donald Trump, who has adopted a friendly stance toward Russia.


Trump welcomed

Alarm over Trump’s incoming administration caused the Nikkei stock average to fall sharply by more than 900 points.

However, Russia’s RTS, the country’s major stock index, climbed 1.8 percent on November 9, 2016.


Trump has praised Russian President Vladimir Putin as a capable leader and is seeking to mend U.S.- Russia relations, which deteriorated under the administration of President Barack Obama.

In Russia, expectations are high that this will lead to the lifting of economic sanctions.

Russian consumer prices rose 15.5 percent on average last year.

The country’s real economic growth rate stood at minus 3.7 percent, and the ruble fell as much as 37.4 percent against the dollar. Prices of imported items rose, pushing up consumer prices.

People’s real wages declined 9.5 percent year-on-year, and consumer spending fell as much as 9.6 percent, marking the biggest drop since the collapse of Lehman Brothers in 2008.


Meanwhile, business restructuring is accelerating. According to a survey by a local research company, 39 percent of Russian companies cut their workforce in 2015, a sharp increase from 8 percent the previous year.

These firms were mainly in the consumer electronics, construction, automobile and oil industries.

As Russia’s economy will likely see a negative growth this year, more and more companies are expected to hold off paying salaries to their employees.


Double-edged sword

In the 2000s, Russia’s economy recorded high growth — rising from about 5 percent to 10 percent.

It seemed the country would lead the global economy along with the other BRICS countries — Brazil, India, China and South Africa.

But Russia is nothing like it used to be. The predicament is caused by its economic structure.

Natural resources account for 70 percent of its exports, and about 40 percent of national revenue comes from taxes related to oil and natural gas.

Dependence on natural resources is a double-edged sword. Russia was enjoying a brisk economy when crude oil prices were rising in the 2000s, but efforts to bolster its true economic strength were neglected.

Since 2014, oil prices have dropped sharply, causing economic conditions to deteriorate.


When oil prices exceed $80 per barrel, revenues rise and Russia’s fiscal balance reportedly is in the black.

Current oil prices have recovered to nearly $50 per barrel after plummeting to the $20 level in February this year. However, $80 per barrel is a remote dream because of the expansion of shale oil production in the United States.

The economic sanctions significantly restrict development of resources in Russia by major resource companies.

If the country does not develop resources now, production will not increase in the future. If sanctions remain in place for a prolonged period, damage to the vital resource sector will be sustained.


Inefficiency persists

Although the country converted its economic system from the planned economy of the centralized former Soviet Union to a market economy, the central government is still deeply involved, allowing economic inefficiency to persist.

Toru Nishihama of Dai-ichi Life Research Institute said: «The Russian economy cannot avoid experiencing continued poor momentum for the time being. Without converting from a resource-dependent economy, it cannot expect a return to high growth.»


Putin eyes Asia

To revitalize its economy, Russia is turning its eyes to Asia, a region where economic growth is expected.

A group led by Rosneft, Russia’s state-controlled oil giant, announced in October that it would purchase India’s major oil refining and sales company Essar Oil for about $13 billion with the aim of boosting oil exports to India.


Russia is also approaching China. In a meeting between Putin and Xi in Beijing in 2014, the two leaders agreed that Russia would receive financial cooperation from China in return for Moscow permitting Chinese entry into resource development. China is currently Russia’s largest trade partner.

While creating the Eurasian Economic Union, a free trade group with such nation as Kazakhstan and Belarus, Russia had a free trade agreement signed between the EEU and Vietnam, enabling Russia to deepen ties with that country and allow Moscow to construct nuclear power plants and provide weapons technology. It also launched the Eastern Economic Forum in Vladivostok, which drew foreign businesses.


Japan Prime Minister Shinzo Abe, who met with Putin on November 19, will hold talks again with the Russian president on December 15. They are expected to discuss eight areas of economic cooperation proposed by Abe.

In his recently published book, «Mondai wa Eikoku dewa nai, EU nanoda» (The problem is not Britain, but the EU), French historian and demographer Emmanuel Todd said appropriate partners for Japan are the United States and Russia.

For Japan, strengthening relations with Russia serves to check neighboring China. The many highly educated immigrants from Ukraine, which faces worsening social unrest, who are flowing into Russia may help its economy in the future.


Trump has indicated that the United States will stop being the world’s policeman.

It also is likely the Japanese government will be able to improve economic cooperation with Russia, which it wants to use as a pump-priming overture for negotiations over the northern territories, without deferring to any misgivings expressed by the United States.

Rissho University Professor Yu Hasumi said: «Japan, which is technologically very strong, is becoming increasingly important» for Russia, which has to reform its economic structure.


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