How Russia wins economically

By Phil Butler

Potential - Russia has always been about the future, and about what "could be". Now, owing to the current economic situation, never before has Russia been so close to achieving her full potential. Most of your reading this, especially in Russia, you may scoff at this statement. If you will bear with me, I can prove what I claim is actually true, that Russia is about to emerge as the most progressive and financially stable country in the world.

Russia is locked in a struggle right now. Western powers and business competition is keenly focused on negatively impacting the economics of the world's largest nation. We needn't explore the geo-politics of this fact here. However, the "effects" of sanctions and a so-called economic war will eventually benefit the Russian people. How, you say? Well, the answer is fairly simple. The one facets of sustainability Russia always needed, infrastructure and diversity, are literally being forced upon a nation that has been narrowly focused on energy exports economically. In April of 2015, Russian President Vladimir Putin announced that Russia would use the West's sanctions to springboard for the country becoming more self reliant. This is exactly what is happening.

In the Nation's Interest

The West's sanctions against Russia, according to many experts, were a blistering mistake in many regards. The unilateral sanctions, considered as near permanent now by the Kremlin, cannot be lifted by the United States and the EU if they wanted to, at least not with Russia's help. Not so many people realize this, but this report at The National Interest details the situation fairly well. This fact has put a great deal of pressure on the government to make more efficient key sectors of Russia's economy such as the internal energy sector. With high oil prices and no end in sight to development, Russian oil and gas stakeholders had no impetus for modernizing and making more efficient the country's energy infrastructure. The focus was on exports, and on raking in fortunes from EU customers paying top dollar/ruble for energy. Sanctions have made this market situation disappear, so Mr. Putin's prophesy has gained momentum out of necessity.

Gazprom and the other energy giants in Russia no longer depend on foreign energy technologies. Russia will now create her own energy tech sector, and there is evidence this is already underway. Shale oil deposits are a key energy potential for Rosneft, Surgutneftegas, Lukoil, Slavneft, Russneft and Gazprom Neft, but the sanctions have left Russia wanting for better technologies to extract this energy. Russian energy technology companies have already stepped in to replace Western tech cut off by the sanctions. A good example was in the news last week when Gazprom announced a supplier, TMK which produces for Gazprom six types of casing and pump & compressor pipes of cold- and corrosion-resistant design, would deliver "western banned" pipes the company needs for launching Astrakhanskoye field later this year. This is but one example of new business developing internally in Russia, but there are scores of others. The vacuum American and EU sanctions have created dictates Russia's course toward greater potential, and within that potential we will find jobs, growth, and even more innovation and investment.

With regard to the so-called "shale oil revolution" in the United States, Rosneft's President Igor Sechin laid all this on the line by saying that the devalued ruble has also lowered Russia's shale oil production costs. Sechin went on to tell reporters America's shale reserves would be depleted by 2017, leaving Russia to compete ongoing, thereby eradicating the US advantage in the mid and long-term. Mr. Sechin said:

"Rosneft had some of the lowest wellhead oil production costs in the world thanks to the rouble depreciation, which has cut the company's production costs from $4 to $2.7 a barrel, and the country's flexible tax regime."

Foreign Investment Re-Direct

The energy sector is only one facet of positive momentum for Russia developing better and faster due to this strange economic situation. Sanctions imposed by the West were partly intended to reduce the amount of outside investment Russian projects needed. But investments are flowing into Russia from the China sponsored AIIB financial institution, and dozens of other outside sources, and even American conglomerates. General Electric, for one, just voiced a commitment, signing a series of agreements with its Russian strategic partners. The list of multi-nationals still pouring money into Russia is as long as the proverbial arm. Moving from energy into high-tech, a Russian-Indian high technology private equity fund announced in January illustrates what I mean by Russia/Putin filling in the void. In news from last month, RUSNANO and the National Investment and Infrastructure Fund (NIIF) will invest $2 billion in equal shares in dual-use technologies and defense industry products. So as any observer can easily see, sanctions warfare has created a void, and a stimulus for new business with Russia.

In other trade news, earlier this month it was announced Iran and Russia having signed mutual trade agreements worth $40 billion. Announced back in January, a memorandum of understanding in between the Ministry for Development of Far East of the Russian Federation and National Development and Reform Commission of the People's Republic of China tells of $10 billion earmarked for agricultural development and cooperation. Also, Russia infrastructure and logistics has always been hampered by the sheer size of the country, but there is a hidden silver lining to this as well. I was just reading about an upcoming E-Commerce conference jointly set up by East-West Digital and E-Commerce Solutions coming in March. The key meetup brought to mind a recent study, "Russia B2C E-Commerce Market 2015" by yStats that tells of the huge potential for growth in Russian E-Commerce. The gist of this report is shows Russia as one of the largest B2C E-Commerce markets in the world, and with nowhere near 100% Internet penetration. Now, factoring in the scope of transportation logistics alone, any potential "Amazon-like" entrepreneur can see the distribution bonanza sitting in Russia waiting. Furthermore, imagine the manufacturing potential localized, for supplying products locally and regionally. Efficiency wise, Russia does not have to go through the metamorphosis the United States did, in order to ramp up to drop shipping etc. The need for superhighways to support container cargoes nation wise in Russia, it will be non-existent. The bottom line is, Russia in the new century can easily innovate like America did after the industrial revolution, only more sustainably. Of course this is theory, but the initiatives are underway.

The Real Russia Surfaces

In this article, I've only space to list a few examples of the multitude which enumerate how Russia will be better off post-sanctions by far. While the people suffer now because of low energy prices and an artificially stagnant economy, tomorrow the world's biggest emerging economy will flourish. A country and expansive, diverse, and well endowed with resources is a foregone conclusion to lead the world, at least if logic counts for anything. One does not have to have a set political ideology to understand, Russia and other BRICs having been isolated or marginalized the last 100 years had positive effects too. For one thing Russia's natural resources, by comparison to those in western countries, are largely in tact. With the US and the Saudis draining the last drops of energy from their reserves, only Iran, Russia, Venezuela and perhaps Australia remain as significant repositories.

But energy only serves as one example, developmentally Russia has more potential across such industries as construction, real estate, tourism, and in new age manufacturing than any other country in the world. This is fact, not fiction. The fallacy that Russia needs or wants more land or resources is ludicrous; 143 million people are fitted inside a nation 2.5 times larger than the United States. And the country is nowhere near as developed overall. This study from October 2015 by the Agency for Strategic Initiatives, "Doing Business in Russia: Map of Opportunities #4" (PDF), it supports my contentions. On of the regions outlined for investors in the study is the Altai region, somewhat characteristic of the kind of development I speak of. Largely agricultural, the Altai is also interesting because of its relative proximity to major city hubs and its pristine agri-business potential. Key competitive advantages of the Altai include: its proximity of Altai Republic, Novosibirsk and Kemerovo region, and the Republic of Kazakhstan; being number one in the Russian Federation by the area of fertile acreage; its natural surroundings and weather conditions, promoting development of improving and medical tourism. Furthermore, the Russian Federation offers fairly massive subsidies for development in this region, and a broad spectrum of privileges for agri-business there. The study also offers a "tip"with regard to the hospitality industry too. Altai, for all its majestic beauty and benefits for tourists, is ripe for hotel development. The report outlines the Belokurikha resort complexes, where we can see a vast potential for filling yet another gap. 10 hotels and a few boarding houses cannot support the growth in tourism there in the coming 5 years.

This article was not intended to be a Russia-wide economic forecast, nor is there room for further prospectus on each region or industry sector. My point has been well made however. Western powers trying to isolate or curtail Russia's growth after globalization is going to backfire. These sanctions, though they hurt every citizen in Russia right now, will usher in an era of unprecedented rewards. Trying to punish or marginalize Russia or any BRICs nation as this stage, it's like trying to un-ring a bell. The speed with which technology and business can shift today, it benefits emerging nations greatly. Through becoming progressive and self sufficient, Russia can glean advantages in every business sector, form energy, to technology and manufacturing, to tourism and agriculture as well.

Phil Butler