Geopolitics

Russian Raw Materials Redux: Putin Economics Was Bound To Fail

The prices of oil, copper and aluminum are all on the rise, and on paper at least, that's great news for Russia. Leading economists, nevertheless, predict stagnation, and say Putin's system is to blame.

A woman passes a currency exchange office in Moscow, Russia
A woman passes a currency exchange office in Moscow, Russia
Eduard Steiner

-Analysis-

This should be the dawn of a golden decade for Russia. Prices for key commodities such as copper and palladium are at an all-time high. The price of aluminum is again close to the highs of 2008, and even oil is selling at more than $70 a barrel. Russia is a leading exporter of all these things, and 20 years ago, a similar scenario brought the country a rapid upswing.

And yet, this time around, the commodities boom is of little use to the country. Corruption, repression and political despotism are paralyzing the economy and preventing innovation. In the meantime, the regime is spending what money it does have on adventurous projects. Russian economists, as a result, are forecasting only meager growth for this and the years to come — despite bubbling sources of money.

President Vladimir Putin"s initial economic successes are one of the big reasons he's been able to hold on to power for 20 years now. Early on, everything ran smoothly, or at least better than it did during the era of his predecessor, Boris Yeltsin, in the 1990s. In fact, Putin likes to cite Yeltsin's period in office, which was marked by economic decline, as a counterpoint to make his era shine.

What Putin does not mention is that when Yeltsin took over the country after the Soviet collapse in 1991, the price of oil, Russia's most important export commodity, was just over $20 a barrel. Over the next decade, it even dropped even more — to just $10. Nor does he mention that his arrival at the helm came just as the biggest worldwide commodity boom of all time began.

The economic engine won't start humming again.

By the time it reached its historic all-all-time high in July 2008, the price of oil had climbed to $147. The evolution was similar for natural gas, Russia's second most important export product. The country was literally swimming in money, and its economic performance, boosted by an initially reform-minded Putin, exploded. The commodity state was back in the game.

Today, more than a decade later, with prices again on the rise, economists are reminded of that commodity boom and Russia is still one of the top producers of many raw materials. It is the world's second-largest oil exporter behind Saudi Arabia, and is Europe's top supplier of natural gas. When the oil price turned negative for a short time last year, it was a catastrophe for Russia. But at $70 and more, as is the case now, there is no need for financial despair.

Large parts of the world have a significantly higher demand for oil, especially now that the COVID situation is showing signs of improvement. The International Energy Agency (IEA) recently predicted this trend to continue in the medium term.

In the meantime, the agency is trying, together with environmental advocates, to persuade Western oil companies to turn away from investments in oil production, and that, says Eugen Weinberg, a commodities expert at Commerzbank, could push prices higher still in the years to come.

It would seem, in other words, that things could hardly be better for Putin and Russia. A commodities boom like the one that occurred 20 years ago promises, at least on paper, to boost the economy, and that in turn could dampen discontent among the Russian people put Putin in an even better position of power. Win win!

A golden opportunity

Unfortunately, though, things just aren't working out that way: The economic engine won't start humming again. The Ministry of Economic Affairs predicts that Russia's gross domestic product (GDP) will increase by about 3% this year and the next. This is after Russia got off relatively easily last year with a decrease of 3%, thanks in large part to the lifting of lockdowns. But the OECD estimates that the global economy will grow much faster — at twice the rate, in fact, of Russia's economy.

That alone would be a bitter disappointment for an emerging country that wants to catch up with the big players. Worse still is that things could actually deteriorate when the COVID recovery phase is over, at least according to the renowned Moscow School of Economics.

As early as mid-April, the school presented a study showing that the country is not only in danger of missing the boat when it comes to future technologies, but is also facing 10 to 15 years of stagnation. During this time, annual growth will be 1.4-1.8% at best. The reason for this is that the number of people capable of working is declining. In addition, productivity is down and investment in human capital is low compared to the West.

Putin meets with Minister of Economic Development Maxim Reshetnikov — Photo: Mikhail Klimentyev/Kremlin Pool/Planet Pix/ ZUMA

The Ministry of Economic Affairs does not want to know anything about this and continues to set the long-term forecast at 3%. The Central Bank, for its part, predicts 2.5% growth. But even that would be rather modest for an emerging market. In the years of the commodity boom before the financial crisis, the Russian economy grew by an average of 7% per year.

The experts at the business school are not alone in their forecast of stagnation. The Moscow Center for Macroeconomic Analyzes and Short-Term Forecasts (ZMAKP) recently predicted a growth of 1.5-2% for the next 10 years. Moreover, in January an entire series of leading economic experts — including Oleg Vjugin, chairman of the supervisory board of the Moscow Stock Exchange — caused a stir with a comprehensive analysis that also predicts a decade of stagnation for the country.

It's more of the same, in other words, for a country that has essentially fallen in a stagnation trap since 2009. Since then, growth has averaged just 1%. Contrary to Putin's expectations, the gap with the global economy has not shrunk but grown. And now the government has resigned itself to the fact that it is entering a second decade of stagnation, the analysis says.

"Russia has to prepare for hard times," says Sergei Guriev, co-author of the study and professor at the elite Sciences Po university in Paris. One of the main reasons is that the economic structure is still based entirely on raw materials and there is no change towards innovative industries.

Punishing the private sector

That's where politics come into play. "The bad investment climate is to blame," Guriev explains. "Capital is fleeing the country, and the state prefers to invest in state-owned companies, the secret service and the military instead of health and education."

In addition, there are constant attacks on private entrepreneurs, such as the recent attacks on private steel companies. Andrei Beloussov, first deputy prime minister, went after the companies because they had increased their profits in the crisis year of 2020. He demanded that they hand those profits — about 1.1 billion euros worth — over to the state.

The Putin-controlled state then uses such funds to bankroll geopolitical ventures, such as in Belarus, or dubious infrastructure projects, that then provide Putin's inner circle with favorable contracts. As one billionaire tycoon (who does not want to be named) told Die Welt: "If I dig a hole one day and fill it the next, that technically counts as economic growth."

In order to grow economically ... the country would have to become democratic.

Konstantin Sonin, who teaches at the University of Chicago and the Moscow School of Economics, believes that the biggest cause of stagnation is repression. "When media are branded as "foreign agents' and not allowed to expose corruption or other inefficiencies, a main mechanism for progress no longer works," he explained in a recent radio interview.

It is significant that in his State of the Nation address, at the end of April, Putin did not reveal any plan for growing the economy, Sergei Guriev says. Growth before 2008 was only driven by the price of oil and therefore politically harmless. "But to stimulate growth and investment now would require a determined fight against corruption, more competition in the market and independent courts," he explains. "And that would threaten Putin's system of power."

In order to grow economically, there would have to be a separation of powers as well as control of power in Russia. In short, the country would have to become democratic, and that, of course, completely contradicts Putin's ideas. The result, then, is that Russia instead risks another decade of stagnation.

At the same time, there are a lot of people in Russia, according to Guriev, who are acting responsibly and competently, including the Central Bank. The state budget is more or less balanced, furthermore, and international gold and currency reserves are high. This is helped by the fact that the Russian government introduced a budget rule in 2018 stipulating that only revenues from oil exports above a price of $42.40 per barrel may flow into the current budget. The rest must be added to the foreign exchange reserves.

These currently stand at $605.9 billion, which is $7.8 billion higher than during the peak of the commodity boom in 2008. Moreover, despite a slight increase during the COVID crisis, the total national debt is just 19% of the GDP. Putin has money. He just lacks the strength and will to use it in a way that benefits the economy as a whole and, by extension, the Russian people.

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Future

7 Ways The Pandemic May Change The Airline Industry For Good

Will flying be greener? More comfortable? Less frequent? As the world eyes a post-COVID reality, we look at ways the airline industry has been changing through a pandemic that has devastated air travel.

Ready for (a different kind of) takeoff?

Carl-Johan Karlsson

It's hard to overstate the damage the pandemic has had on the airline industry, with global revenues dropping by 40% in 2020 and dozens of airlines around the world filing for bankruptcy. One moment last year when the gravity became particularly apparent was when Asian carriers (in countries with low COVID-19 rates) began offering "flights to nowhere" — starting and ending at the same airport as a way to earn some cash from would-be travelers who missed the in-flight experience.

More than a year later today, experts believe that air traffic won't return to normal levels until 2024.


But beyond the financial woes, the unprecedented slowdown in air travel may bring some silver linings as key aspects of the industry are bound to change once back in full spin, with some longer-term effects on aviation already emerging. Here are some major transformations to expect in the coming years:

Cleaner aviation fuel

The U.S. administration of President Joe Biden and the airline industry recently agreed to the ambitious goal of replacing all jet fuel with sustainable alternatives by 2050. Already in a decade, the U.S. aims to produce three billion gallons of sustainable fuel — about one-tenth of current total use — from waste, plants and other organic matter.

While greening the world's road transport has long been at the top of the climate agenda, aviation is not even included under the Paris Agreement. But with air travel responsible for roughly 12% of all CO2 emissions from transport, and stricter international regulation on the horizon, the industry is increasingly seeking sustainable alternatives to petroleum-based fuel.

Fees imposed on the airline industry should be funneled into a climate fund.

In Germany, state broadcaster Deutsche Welle reports that the world's first factory producing CO2-neutral kerosene recently started operations in the town of Wertle, in Lower Saxony. The plant, for which Lufthansa is set to become the pilot customer, will produce CO2-neutral kerosene through a circular production cycle incorporating sustainable and green energy sources and raw materials. Energy is supplied through wind turbines from the surrounding area, while the fuel's main ingredients are water and waste-generated CO2 coming from a nearby biogas plant.

Farther north, Norwegian Air Shuttle has recently submitted a recommendation to the government that fees imposed on the airline industry should be funneled into a climate fund aimed at developing cleaner aviation fuel, according to Norwegian news site E24. The airline also suggested that the government significantly reduce the tax burden on the industry over a longer period to allow airlines to recover from the pandemic.

Black-and-white photo of an ariplane shot from below flying across the sky and leaving condensation trails

High-flying ambitions for the sector

Joel & Jasmin Førestbird

Hydrogen and electrification

Some airline manufacturers are betting on hydrogen, with research suggesting that the abundant resource has the potential to match the flight distances and payload of a current fossil-fuel aircraft. If derived from renewable resources like sun and wind power, hydrogen — with an energy-density almost three times that of gasoline or diesel — could work as a fully sustainable aviation fuel that emits only water.

One example comes out of California, where fuel-cell specialist HyPoint has entered a partnership with Pennsylvania-based Piasecki Aircraft Corporation to manufacture 650-kilowatt hydrogen fuel cell systems for aircrafts. According to HyPoint, the system — scheduled for commercial availability product by 2025 — will have four times the energy density of existing lithium-ion batteries and double the specific power of existing hydrogen fuel-cell systems.

Meanwhile, Rolls-Royce is looking to smash the speed record of electrical flights with a newly designed 23-foot-long model. Christened the Spirit of Innovation, the small plane took off for the first time earlier this month and successfully managed a 15-minute long test flight. However, the company has announced plans to fly the machine faster than 300 mph (480 km/h) before the year is out, and also to sell similar propulsion systems to companies developing electrical air taxis or small commuter planes.

New aircraft designs

Airlines are also upgrading aircraft design to become more eco-friendly. Air France just received its first upgrade of a single-aisle, medium-haul aircraft in 33 years. Fleet director Nicolas Bertrand told French daily Les Echos that the new A220 — that will replace the old A320 model — will reduce operating costs by 10%, fuel consumption and CO2 emissions by 20% and noise footprint by 34%.

International first class will be very nearly a thing of the past.

The pandemic has also ushered in a new era of consumer demand where privacy and personal space is put above luxury. The retirement of older aircraft caused by COVID-19 means that international first class — already in steady decline over the last decades — will be very nearly a thing of the past. Instead, airplane manufacturers around the world (including Delta, China Eastern, JetBlue, British Airways and Shanghai Airlines) are betting on a new generation of super-business minisuites where passengers have a privacy door. The idea, which was introduced by Qatar Airways in 2017, is to offer more personal space than in regular business class but without the lavishness of first class.

Aerial view of Rome's Fiumicino airport

Aerial view of Rome's Fiumicino airport

commons.wikimedia.org

Hygiene rankings  

Rome's Fiumicino Airport has become the first in the world to earn "the COVID-19 5-Star Airport Rating" from Skytrax, an international airline and airport review and ranking site, Italian daily La Repubblica reports. Skytrax, which publishes a yearly annual ranking of the world's best airports and issues the World Airport Awards, this year created a second list to specifically call out airports with the best health and hygiene standards.

Smoother check-in

​The pandemic has also accelerated the shift towards contactless traveling, with more airports harnessing the power of biometrics — such as facial recognition or fever screening — to reduce touchpoints and human contact. Similar technology can also be used to more efficiently scan physical objects, such as explosive detection. Ultimately, passengers will be able to "check-in" and go through a security screening anywhere at the airports, removing queues and bottlenecks.

Data privacy issues

​However, as pointed out in Canadian publication The Lawyer's Daily, increased use of AI and biometrics also means increased privacy concerns. For example, health and hygiene measures like digital vaccine passports also mean that airports can collect data on who has been vaccinated and the type of vaccine used.

Photo of planes at Auckland airport, New Zealand

Auckland Airport, New Zealand

Douglas Bagg

The billion-dollar question: Will we fly less?

At the end of the day, even with all these (mostly positive) changes that we've seen take shape over the past 18 months, the industry faces major uncertainty about whether air travel will ever return to the pre-COVID levels. Not only are people wary about being in crowded and closed airplanes, but the worth of long-distance business travel in particular is being questioned as many have seen that meetings can function remotely, via Zoom and other online apps.

Trying to forecast the future, experts point to the years following the 9/11 terrorist attacks as at least a partial blueprint for what a recovery might look like in the years ahead. Twenty years ago, as passenger enthusiasm for flying waned amid security fears following the attacks, airlines were forced to cancel flights and put planes into storage.

40% of Swedes intend to travel less

According to McKinsey, leisure trips and visits to family and friends rebounded faster than business flights, which took four years to return to pre-crisis levels in the UK. This time too, business travel is expected to lag, with the consulting firm estimating only 80% recovery of pre-pandemic levels by 2024.

But the COVID-19 crisis also came at a time when passengers were already rethinking their travel habits due to climate concerns, while worldwide lockdowns have ushered in a new era of remote working. In Sweden, a survey by the country's largest research company shows that 40% of the population intend to travel less even after the pandemic ends. Similarly in the UK, nearly 60% of adults said during the spring they intended to fly less after being vaccinated against COVID-19 — with climate change cited as a top reason for people wanting to reduce their number of flights, according to research by the University of Bristol.

At the same time, major companies are increasingly forced to face the music of the environmental movement, with several corporations rolling out climate targets over the last few years. Today, five of the 10 biggest buyers of corporate air travel in the US are technology companies: Amazon, IBM, Google, Apple and Microsoft, according to Taipei Times, all of which have set individual targets for environmental stewardship. As such, the era of flying across the Atlantic for a two-hour executive meeting is likely in its dying days.

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