ArmInfo’s interview with Hrant Bagratyan, well-known economist, liberal-reformist, former prime minister of Armenia
by Emmanuil Mkrtchyan
Mr. Bargatyan, how much will the West’s sectoral sanctions affect the economy of Russia, a country having close economic ties and strategic partnership with Armenia?
Well, the economic growth in Russia in Q1 of the current year was 0.9%, while in May, there was no growth at all. GDP for the second quarter was not published. Actually, the Russian economy is shrinking. Speaking of the direct impact of the sectoral sanctions of the U.S. and Europe on the GDP, by different assessments it starts from a 0.2% growth up to tangible decline. At the same time, share index may decline by up to 25%. Although oil prices are so far stable and make up some $100 dollars per barrel, a budget deficit is quite probable. In this light, both the president and the government are reluctant to use the National Prosperity Fund. And the worst thing in this situation is the predicted capital flight that may reach 150-200 billion US dollars by the end of the year. These are mainly the funds of foreign investors that will be taken off the Russian assets. Foreign investor will be getting rid of the shares of the Russian companies that are affected by the Western sanctions. As sanctions pile up, the Russian economy loses sources of financing and technical development.
I am sure that Russia gave the West a handle to affect and even destroy the Russian economy. Russia fell short thinking that it depends on the West as much as the West depends on it. The West went on more measures even against its own companies operating in Russia. I’d like to reiterate that the major problem for Russia would be the capital flight and restricted access to technologies.
Some Russian analysts have other arguments. They say every dark cloud has a silver lining, and the sanctions will stimulate Russia towards import substitution. They often bring the example of Iran’s economic improvement.
As a professional economist and a man that occupied the post of the prime minister for several years, I’d say that any talks about import substitution are pure and unadulterated speculations and even nonsense. We live in the world where there is cooperation and division of labor. If you are involved in these processes, you will keep developing. If you are not involved, you will develop on the model of the USSR, and everything will collapse one day. Iran, of course, showed rather good economic growth from time to time, but its economy failed to sustain the global competition and began shattering. Believe me, economy must be reproduced in a bigger area. For instance, economy of such big state as Russia ought to be reproduced in the global economy to either prove its efficiency or not. If the economy develops locally, like it was in the Soviet Union, it will inevitably lead to empty stores and deficit, despite the economic growth. Sure, import substitution may have a short-term effect, but it will be a very much expensive reproduction. In the Soviet Union construction of a square meter of housing ate up more resources than in the West, because no one even thought of introducing more effective construction technologies that existed at that moment.
Well, but there is another argument that Russian experts bring calling not to be afraid of the sanctions. I mean the oil and gas incomes of the country. Isolation of Russia’s energy facilities will lead to price hikes in the market of energy resources. Russia as a supplier of energy resources to the world markets will manage to recompense its losses from the sanctions.
Over half of Russia’s budget revenues are from the oil and gas sector. However, there is not so much oil in Russia. There have been many talks lately about the need to develop new deposits. In the West they are well aware of that and it was for a reason that the sanctions applied to the technological field i.e. the supply of equipment for development of deposits and for the processing industry has been restricted. Generally, Russia’s share in the global oil production is significant, but not major. A significant part of it is used to produce fuel oil and aviation kerosene. In the given segment Russia’s place is also modest enough. As regards the gas field, the situation may be even worse there. Shale gas recovery has been intensified both in Europe and the USA. Moreover, western countries began actively using alternative sources of energy. By 2020 over 20% of energy in Europe will be based on alternative sources.
In addition, the Trans-Anatolian gas pipeline (TANAP) construction will be launched intensively. The pipeline will cover over 1/4 of Europe’s demand for gas…
You are quite right, new projects of energy pipelines passing by Russia are being developed. Some big European countries that very much depend on the Russian gas, for instance Germany and Italy, may demand a guaranteed access to certain energy resources from the U.S. There are enough possibilities for their replacement i.e. Qatar, Norway, Scotland, Northern Sea. I am sure that the trend towards rapprochement with Iran pursues the same goal.
One more argument: if the West turns back on us, we will go to the East. What do you think of the idea to get closer with China and form a huge common market with it - something like a global power center?
It is impossible. China will always be limiting its relations with Russia. China is a country that built the Chinese Wall, don’t forget about that. Moreover, Russia is wary of China. These countries have very different demographic situations. Russia will not open its borders to China and will not increase the share of the Chinese ethnos in the Far East, for the known reasons. Hypothetically, I have thought of a triumvirate China-Japan-Russia that could dominate in the global economy, but I realize that such triumvirate is impossible. The Chinese will never have good relations with the Japanese. The relations with the Russians will never be good enough either.
In addition, a ‘blow’ on Russia is in favor of China. But for the situation with Ukraine, the West would have to make blows on China, as the latter has almost achieved as high level of development as Europe. Furthermore, in such situation, if China gets closer with Russia, the West, and the U.S. first of all, will impose sanctions on China. Taking a deeper look, there are many fields where China and Russia compete. For instance, China seeks to flood the world with its technologies, solar stations, but Russia with its traditional energy is an obstacle on that way. A closer cooperation and partnership is possible, of course, in some fields, but no more. Therefore, it is not within the interests of China to make Russia stronger and act against the West. China is more than the U.S. interested in weakening Russia’s economy. China has 4 trillion dollars currency reserves in the USA. A weaker economy in the U.S. and Europe is not in favor of China. These countries are the main sales markets of the Chinese products. That is why it is obvious that China will be waging a very cautious policy. No Russian-Chinese tandem is possible. It is senseless.
How much will the sanctions against Russia affect the Customs Union? Don’t you think that the U.S. seeks to kill two birds with one stone? They seek to weaken Russia, on the one hand, and create a mess in the CU and prevent formation of the EAEU, on the other hand. May Russia’s allies in the EAEU face any informal sanctions by the West?
I think the West does not plan to hit the Customs Union. The U.S. will not affect the economy of Kazakhstan. They need that country as an energy partner. However, they may make Belarus suffer with Russia. As for Armenia, I am sure they don’t care for us. However, if it turns out that Armenia uses Russian companies to get out off the blockade, Armenia will sure get a serious warning.
In the same way as the U.S. regularly closed our possibilities of cooperation with Iran in some fields. At least, remember the situation with re-export of the so-call double purpose equipment.
Sure. I mean 17% of Armenia’s economy is in the hands of Russian companies. Some of them have already been affected by the sanctions. It is very bad. I am sure that the leaderships of those Russian companies have already demanded their subsidiaries, including the Armenian ones, to reduce capital expenses. I would do the same, if I headed one of those companies.
Do you suppose that sanctions will affect also our economy?
These sanctions will affect us, whether we want it or not. As for the Customs Union, it is not favorable for Russia to see Armenia as its member at present. Figuratively speaking, if I were in the Kremlin, I would not do that. Armenia is a chance for Russia to open a small window to the world in conditions of the sanctions. Armenia must not hurry to the CU either. Our country with its liberal regime of WTO membership may still be useful, at least, for the relations with Iran. The U.S. will not punish Armenia. Don’t forget about the strong Armenian lobby in the USA that will stand up for Armenia. After all, why should they punish us? What is our guilt? I think Armenia must not join any union now, even if there were no crisis in Ukraine. Another matter that they in Russia may not understand that. It seems to me sometimes that the Kremlin governs very crudely, without any constructive and impartial analysis of the situation. They do not think of the consequences of their steps.
What consequences it will have for our economy? I think, first of all, transfers will decrease. This may affect macro-stability.
Consequences of the sanction will affect Armenia much. As for the transfers, I think they will not decrease, as on the one hand, they should decrease because of falling of the Russian economy and incomes of the population, but on the other hand, it is necessary to take into consideration the growth of the migration flow to Russia. The number of the Armenians which transfer money from Russia to Armenia have been growing every year. This may compensate losses, and everything depends on the falling rate of the Russian economy. About 50 thsd people that left Armenia last year, are not yet able to transfer money, buy in a year or two, they will start transferring money to their native land. However, we are not aware about the specific situation in this sphere, as we have no serious analysis of the situation by Central Bank. Nevertheless, I should say that we shall not have the expected further growth of transfers. I see risks in the energy sector, the great majority of the assets of which belong to Russian companies. There will be no new investments and development. The contracts between Armenia and Russia on energy resources delivery do not let us develop alternative sources. And it is not ruled out that Russian energy companies may again apply for raising of tariffs for consumers. There are certain risks in the financial sphere too, especially in the context of limitation of sources of the Armenian business crediting. There are also risks in the context of narrowing of the export potential of Armenia at the Russian market because of decrease of the consumer demand there. We should not wait for the Russian aid to Armenia in the form of stabilizing credits either, like in 2009. The sanctions may also affect the needed level of preferences when Armenia joins the Customs Union. And finally, if US’s approach to the sanctions is extremely harsh, they can also warn us in a harsh way. As you know, US ambassador to Armenia has already made a statement on the matter.
But it is no secret that something useful may be taken from any complex situation. If we take into consideration that Russia may need import substitution, in that case, Armenian companies will have a limitless market for the export of agriculture produce, diary products, mineral water, etc. But unfortunately, experience showed that we are rather unbusinesslike when using such opportunities. Perhaps, Armenian building companies will make use of the open niche at the building market of Russia, where Moldavians and Ukrainians have been actively working now. But the innovation level of our building branch is quite low and lags behind our opponents. Will the Russians seriously take it and how will the West react?
Another positive thing is that in this context, we have to wait for sharp growth of the economic relations with Iran. Iran’s role will grow, and the trend of Iran’s rapprochement with external world continues, Iranian capitals may inflow into Armenia, including such braches of economy, as engineering, machine tool building, etc, that were earlier non-available because of sanctions. Fortunately, the staff potential of Armenia has not been exhausted yet.
The new geopolitical situation will enhance Azerbaijan’s role but may also enhance the demand for Armenia. Therefore, no wonder the West has started speeding up the settlement of the Armenian-Azeri conflict, which should be transformed into an Azeri-Karabakh one. But it is already another matter.
Thanks for the interview.
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