Expert opinions, INVESTMENT CLIMATE

New centers of economic growth for Russia

The ongoing regionalization and development of new centers of economic growth along Russia’s borders – something that can provide the basis for the economic component of multipolarity in the future – are not only an opportunity for development, but also a significant risk for Russia.

An adequate strategic and tactical response to regionalization requires a different level of public administration and self-awareness as a geoeconomic and sociopolitical space, and a governance system that is compelled to actively compete with other players not so much on the global scale, as in the framework of regional interaction between various economic and political systems, using political and military political instruments along with economic ones.

It should be understood that the post-Soviet Eurasia might be seen as a non-critical region, geoeconomically, something that most important global geoeconomic players do not need as a dynamically growing and industrially developed region. All they want with Eurasia will be its space and resources. Russia and other countries in the region should realize that external players have no need to stimulate economic growth in Eurasia. The most we can count on is maintaining a moderate level of social stability (often pinpoint, not nationwide, reduced to economically important areas), but even that is not certain if China’s growing dominance in the region begins to be perceived as irreversible.

This scenario will raise a whole range of questions for Russia, one way or another prompting us to rethink our geoeconomic development model, but not only at the level of tactical decisions – although they have seemed adequate and have yielded significant positive results of late – but also in terms of a broader strategy. In the current circumstances, Eurasia’s economic consolidation can only happen from inside, with Russia’s dominant role as a source of military security and guarantor of the inviolability of financial, primarily investment, resources, as well as provider of opportunities to ensure national economic sovereignty. The latter should be understood as the national elites’ ability to make independent decisions on medium-term development, reflecting the interests of the majority of the population, and ensure their nationwide adoption.

So Russia needs to form, in a relatively short time, something that would be seen as its new economic identity and, by definition, differ significantly from its ‘Soviet-time’ economic identity. From the civilizational perspective – economically, socially, and politically – the formation of a new Russian identity should become one of the most important development priorities for the next 15 years, that is, for the period of intensive regionalization and restructuring of the international relations system. But this identity must have a pronounced economic dimension. The need for an economic dimension to Russia’s new identity is likely to increase during the period of intensive geo-economic regionalization.

This new identity has to be based on an understanding that, if Russia focuses too much on the scenario of regionalization of the global economy, it might end up at a disadvantage, for objective geoeconomic reasons, and isolated from key global centers of economic growth, a mere resource appendage in leading world-class economic players’ book.

The demand for the non-commodity component of Eurasia’s economic potential can be ensured by only two sources. The first is reindustrialization and economic modernization of Eurasia itself and creating internal drivers of economic growth built around the industrial and investment core linked to Russia. The second source is providing Eurasian economic structures with a direct access to markets that have higher potential in terms of products with a relatively high added value. Both of these factors cannot be ensured under the inertial scenario of economic development either in Russia or in the leading countries of the post-Soviet Eurasia.

Based on the example of Kazakhstan, the inertial scenario for Eurasian countries will also bring a breakup of a consensus among the elite with regard to the powers and authority distribution formats and models – that is, authority to access the natural resources rents that remain the basis of all investment and social processes in these countries. This means a systemic crisis of statehood in its form of the past 20 years and inevitable consequences – political rather than socioeconomic. 

The strategic question is what serves as the economic foundation of Russia’s “semi-hard power” that is taking over from soft power which is becoming inadequate to the new conditions of the global geoeconomic competition. As for the political and economic aspects of Russian influence, they are mostly clear: Russia’s ability to foster a dialogue with all interested parties, its respect for the principles of national sovereignty and capability to provide guarantees of political and economic stability subject to mutual interest. But the economic aspect remains not quite worked through.

The inertial development scenario implies that Russia will be able to realize its influence opportunities through expanding its impact in the area of global energy while organically boosting its opportunities in processing and partial re-industrialization of the country based on increasing the depth of processing hydrocarbons and completing the advanced petrochemical cycle (so-called “Kostandov revolution” disrupted by the dissolution of the Soviet Union and subsequent collapse of the post-Soviet economy) mainly oriented at the domestic demand. The large-scale infrastructure projects and Arctic exploration, which is becoming the top mid-term priority in territory development and exploration, are expected to relatively balance out the socioeconomic development. In general, this approach is sensible and corresponds with the relative evolutionary development of the world economy in the formats of globalization. Regionalization poses completely different challenges to Russia and brings profound changes to the structure of global economic links in general.

Global energy market re-formatting that is happening literally in front of us (and at that, is possibly propelled by the tendencies in the Middle East) is blocking the opportunity to fully employ the links that have been recently established. But the most important thing is that even serious positions in the fuel and energy industry at the global level, in isolation from developing own system for monetizing and re-investing the energy rents will not be enough for consolidating a full-fledged economic growth center around us. 

In other words, the most obvious geoeconomic response may not be the most efficient one. There is no question that, after bringing certain results (the significance of the energy industry will be growing within the next ten years, coupled with tougher competition in it), this model of developing Russia’s influence in the world economy will require extremely big efforts to achieve such influence and, to a certain extent, will recreate the late Soviet paradigm of the economic development and, therefore, will be a priori inefficient.

The use of food supplies to increase the country’s influence could have significantly more promising prospects, considering the need in the further stimulation of the development of large-scale agricultural production; but this will require Russia’s increased presence and influence in global and regional institutions that are engaged in the distribution and redistribution of humanitarian and food aid, which will open access to significant financial resources and investment-viable capital. In particular, this relates to all projects of industrial and economic modernization of Africa, which is currently much publicized.

The main conclusion we make regarding the regionalization strategy in relation to the processes of geoeconomic regionalization is that our country’s efficient participation in them is only possible if we remain involved in global and trans-regional processes. The main objective for the foreseeable future is to form a model of a geoeconomic selective globalism oriented towards the development of the most important and most promising sectors of the Russian economy, which includes an entire range of crucial political and organizational decisions, including the possible need to form a relevant public opinion.

But, in addition to strategic issues, there is a whole range of more practical matters that require clarification in order to develop a medium-term development strategy. These matters are not ‘tactical,’ but they are related to the forming a favorable operational and investment environment.

The first one is the attitude to the ‘outgoing’ formats and institutions related both to globalization and the Cold War period. So far, Russia (both on the official and practical levels) has emphasized its intent to preserve all these institutions to one degree or another. This is logical, given that the Russian foreign policy relies to a great extent on the remains of the Soviet and early post-Soviet formats, for instance, on the powers of the UN Security Council. The thing is that given the industrial degradation and given that many countries on the post-Soviet space are moving to the zone of ‘resource periphery,’ their value as partners on the geoeconomic level will reduce. It is also important that in the so-called ‘western’ direction this will happen faster than in the ‘southeastern’ direction.

The experience of relations between Russia and Belarus currently shows that the government of Belarus does not understand the changing geoeconomic realities that gradually reduce Russia’s need in Belarus as a partner in terms of geoeconomics (it will remain a military-political and political partner). But this problem, probably, is common for many political elites of the post-Soviet states and peripheral states of Eurasia. This problem is also partly created by Russia’s foreign policy makers, who have repeatedly expressed at the highest level about their intent to preserve international political and economic institutes that are traditional for the period of ‘emerging globalization’.

The second issue is investment policy. Russia has not yet managed to offer a comprehensive model of investment policy, despite the fact that payment mechanisms have been working quite well.

The further competition on global markets in the conditions of an ‘investment cemetery’ becomes simply impossible because it excludes the possibility to implement risk-laden (and investment, in general) projects outside of the existing lobbying systems that are currently stagnant and focused on the monetization of what was achieved. In order to efficiently take part in the processes of geoeconomic regionalization, Russia needs to form at least 2-3 new elite lobbying groups despite the fact that it will bring certain social and political risks related to the inevitable change of the stagnant balance of elite powers.

Accordingly, a necessary condition for Russia to enter into competition – even simply for influencing the development of regional economic growth centers – is the restoration of a regular investment process in the country, provided that the situation is normalized with access to state investment resources, which will be the major source of spare capital for medium-term investment at the initial stage.

The third issue relates to prospects for Eurasian integration. Under certain conditions, Russia can ensure the expansion of its influence outside Eurasian institutions and processes. Attempts by certain leaders of post-Soviet states to continue a policy of balancing are inadequate in today’s geoeconomic conditions. But it is a big question though whether this is justified in terms of possible effect on Russia’s interests. Moscow is generally ready for independent geoeconomic maneuvers outside the existing system of integration processes in Eurasia, although this creates certain difficulties.

With its policy pursued in the Middle East, as well as efforts to restore relations with major African countries, Russia has proved its capacity for geoeconomic multi-vectorness. In addition, a new system of relations is being formed in the Caspian Sea region without relying on post-Soviet institutions. From the operational point of view, a lack of support from the countries in New Eurasia has so far created certain difficulties for Moscow; yet, as the trends of industrial degradation increase, these difficulties will go down.

However, from the spatial point of view, the Russia’s growing influence in New Eurasia has no alternatives. Yet, this is not a priority, with elites of the post-Soviet states still harboring illusions about their ability to conduct an independent dialogue and geoeconomic ‘trade’ with major players regarding integration with the economies of adjacent centers of power without losing national economic sovereignty.

An example of such obsolete approach towards grasping geoeconomic processes is the current policy pursued by Belarusian leaders, who started the current round of rapprochement with Europe to rival Russia during one of the most disadvantageous periods, when both strategic and tactical foundations of possible Belarus-EU interaction have become problematic. Currently, Minsk simply has no efficient partners for a possible meaningful dialogue in Europe, while there is an apparently growing influence from Poland, whose attitude towards the Belarusian leadership and to Belarus in general is rather obvious. It cannot be ruled out that some part of Kazakhstan’s elite may follow the same wrong path in the future. The problem of Russia’s partners having an adequate perception of global processes is actually becoming one of the major ones – but Moscow so far underestimates its significance.

The fourth issue is the opportunity for using new formats and mechanisms of investment and payment activities. As to payment and settlement activities, for the last couple of years Russia has taken efficient efforts to create a system of relations with key trading partners that is secured against various kinds or manipulations; this is in fact a de-dollarized system. In recent years, these efforts have obviously evolved from apparent political statements to practical decisions and institutionalization measures, which, for instance, has become evident in the development of a new format of trade relations with Turkey. But speaking of the investment sphere, we are still dealing mainly with a dollar-centric system of investment activity, both regarding long-term direct investments and investments in financial instruments, which deprives Russia of important tools to struggle for control over investment space which is crucially relevant, particularly during the initial stages of regionalization, when an operational and organizational collapse of the existing global financial system will be inevitable. More specifically, this issue is about developing crisis response plans rather than planned absorption of outlying investment space segments.

By Dmitry Evstafiev, Professor at the Communications, Media, and Design Department at the Higher School of Economics

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