Russia is a post-apocalyptic state, enduring mass metanarrative collapse and total industrial failure in the aftermath of the USSR’s dissolution. In less than three decades, the Federation returned as a major world power. Russia’s continuing revitalization has been fueled, rather than hindered, by its many crises. The Federation’s antifragile tax, currency, and trade policies, the rebirth of Russian agriculture following sanction-induced strategic autarky, and the protectionist neomercantilism essential to its successful, positive trade balance illustrate this phenomenon best. Their relative wellbeing during a global pandemic and oil price crash is a lesson in geoeconomics, the organization of an economy based on national security and space, for the reigning neoclassical, neoliberal synthesis.
Without exception, the modern Russian economy is defined by its ‘energy superpower status’, replete with near unlimited oil, gas, and precious metals. The resulting dependency of its neighbors gave post-collapse Russia significant latitude to re-extend its influence – and so it did. The creation of the Eurasian Customs Union, the foray into Syria, and Crimean annexation were all possible because of the energy base which allows for Russian neomercantilism,[1] an organization of the economy around production and exports, and the usage of said exports to exert influence: its opponents simply cannot shut off the spigot. In response to Crimea and Syria, the United States and European Union did impose sanctions – the harsher among them at American rather than European behest. These sanctions instituted new penalties on Russian state energy firms, banks, arms exports, and key individuals, as well as new controls on Russian oil exports.[2] Russian counter-sanctions hit foreign automotive and aviation sectors, and most significantly, instituted a total ban on European and American food imports. Immediate results adhered to expectations, with the European Union’s eastern front feeling the pinch and Russian GDP growth going negative.[3] However, the half-decade since Crimean annexation has revealed the paradoxical benefits of sanctions and counter-sanctions to the Russian economy.
Russia’s ability to withstand the West’s punishment stems from their renationalization campaign, underway since the post-Soviet era’s frenetic privatization. Rather than deprivatizing companies outright, Russia embraced a ‘corporatist’ approach, either via the state acquiring controlling shares, state subsidiaries acquiring controlling shares, or the Duma drafting laws subordinating corporate authority to the state. Although methodologies and estimates vary, the Peterson Institute for International Economics places state ownership at 55% of the economy, employing 28% of workers in 2016 as compared to 22% in 2006.[4] As a result, the state can decisively direct and reconfigure energy, finance, and mineral giants in the face of sanctions.
This model of ‘strategic nationalization’ is premised on an idea of ‘national economics’ rather than the globally integrated ‘individual economics’ of liberalism, dominant since the fall of the Soviet Union. Among its aims are strategic autarky, or self-sufficiency in important sectors, and the prevention of capital flight. and accordingly the capacity of vital industrial sectors to weather crises, such as oil price wars or sanctions. Russian renationalization formed the foundation of their economy’s ability to withstand sanctions-induced isolation, and benefit from it.
Russia’s protectionist success is illustrated best by the incredible growth in their agricultural sector. European Union, Canadian and American agricultural imports were banned essentially overnight in August of 2014. In less than a decade, Russia went from being mostly dependent on Western food exports to being a net exporter, and for some commodities like wheat, the world’s largest exporter. Prior to this cut-off, the European Union’s exports accounted for nearly 40% of Russia’s agricultural market, and though Russia was not a primary food trading partner of the United States’ overall, the Federation was the fourth largest importer of American poultry, constituting nearly 40% of Russia’s poultry imports[5], poultry being a core foodstuff and agricultural commodity. Though still a net importer of meat, the Russian Federation has since achieved total poultry self sufficiency.[6]
The Russian chicken industry is only expanding, with most of its major producers gaining entry into the Chinese market just last year, positioning itself as a competitor to imported American poultry.[7] This trend extends beyond China: The Federation gobbled up American agriculture’s market share in Africa and the Middle East, propelled by a 20% increase in production from 2013-2018, the post-Crimea devaluation of the rouble driving prices down, and their geographical proximity and power throughout both regions.[8] Just last month, amidst their oil spat, Russia sent its first wheat freighter to Saudi Arabia.[9] A combination of corporatism and protectionism worked so effectively for Russia that the Federation broke its abject agricultural dependency in a handful of years to become a food superpower. Coronavirus has fractured the already weakened neoclassical consensus, and the Russian Federation’s economic comeback is proof-of-concept for the geoeconomic theory, policies and systems threatening to supplant it.
This policy combination is buoyed by antifragility, the organization of systems such that they not only weather, but are improved, by crises. The Russian National Wealth Fund (RNWF), which underwent a variety of permutations before being merged with Russia’s Reserve Fund in 2017. Now, the RNWF exists as a pension repository, an investor, an energy tariff collector, and an economic stabilizer in times of low oil and gas prices. In the midst of both a price crash and pandemic, the RNWF has shone.
Though the free-floating rouble has been hit hard by coronavirus, sanctions, and oil’s price crash, the RNWF’s $125 billion stockpile allows Russia to spend as if oil is selling at the ‘cut-off price’ of $42 USD for more than thirty months,[10] a critical rainy day fund should their coronavirus relief package necessitate drawing from the fund rather than federal borrowing. An important part of the fund’s success comes from ‘de-dollarization’, a dramatic decrease in ratio of the RNWF’s holdings in dollars as opposed to roubles.[11] De-dollarization was spurred by the half-decade of isolation from investment and trade in the US dollar as a result of sanctions for Crimean annexation and Syrian intervention. Since the rouble is free-floating, de-dollarization insulates Russia from American monetary and trade policy, as well as shocks to American markets (such as crashing oil prices).
Russian energy, nearly all of which is under government purview, is also organized according to antifragility – especially oil. This approach is buoyed by two key factors: the rouble, and an inventively flexible tax policy. As with the Russian National Wealth Fund, most of Russian national energy company’s holdings and assets are in roubles, not dollars, as a result of sanctions. In a head-to-head with the United States and Saudi Arabia, Russia can let prices weaken and the rouble fall, increasing domestic earnings per barrel up to a point. Energy producers are also automatically taxed less as oil prices fall. Rosneft can extract and refine a barrel of oil for roughly five dollars, orders of magnitude cheaper than what it costs for American shale and a multitude of other global producers.[12]
Though it is unclear how long Russia can hold to their current oil war strategy, their corporatist energy arrangements, antifragile oil tax policy, and sanction-fueled de-dollarization have strengthened their position since the crises of the post-Soviet era and the mid-2010s. Even amidst the coronavirus induced drop in demand and the accompanying price war, the Russian economy is fundamentally strong and poised to expand. Tying together their tidy bundle of corporatism and strategic autarky is neomercantilism.
A chopped up representation of neoclassical, liberal economics is that of atomized individuals making free choices in a global marketplace, the freer the better, to the benefit of the individual-as-consumer. Comparative advantage is more important than production per se, and concerns about trade balances are archaic holdovers from a pre-globalization world. Russia, and other neomercantilist economies, reject this description and its prescriptions. Instead, productive capacity and a positive trade balance are seen as essential aspects of national prosperity and power projection.
Russian energy has long been the crux of their positive trade balance, but the Federation is poised to broaden domestic production capabilities across a multitude of sectors. Russia recently escaped its decades long trade deficit with export heavyweight China,[13] courtesy of sizable increases in agriculture, manufacturing, and IT.[14] As infrastructure links and trade between the two geoeconomic titans continue to expand, so shall the gravitational pull of their alternative to the ‘Transatlantic power pole’. In correcting its trade balance with China, Russia positions itself as a coequal partner rather than a mere petro-vassal. Russia’s recent successes will be looked back on as a second ‘independence day’, with all the triumph and glory alien to the miserable, imperial collapse which forced the first. As they rocket down the road to strategic autarky and neomercantilist success, the Federation will only grow more able and willing to throw its weight around the international arena as an active defender of its own interests, and a state worthy of waging the long awaited post-Soviet revanche.
The international community forced Russia into a level of strategic autarky and protectionism that works to its long term benefit. From an explosion in investment and output in their agricultural sector to an edification of the rouble’s paradoxical strengths, Russia is better off today, and better prepared for the future, than it was before sanctions. Russia’s corporatist renationalization program, underway since post-Soviet privatization sputtered out, equipped the state with the necessary tools to guide investment and craft industrial policy. Russia’s increasing success amidst exclusion from swaths of the global market serves as an instructional warning to the transatlantic world order: that their approach to Russia is fundamentally unsound, and the liberal economic system they constructed increasingly detrimental to their own national power and prosperity. A new economic constellation of corporatism, strategic autarky and neomercantilism is emerging as the old liberal order burns out. Russia, the pariah state, is an example the West cannot afford to overlook.
[1] Charles E. Ziegler (2010) Neomercantilism and Energy Interdependence: Russian Strategies in East Asia, Asian Security, 6:1, 74-93, DOI: 10.1080/14799850903472029
[2] Congressional Research Service, U.S. Sanctions on Russia: An Overview, Doc. (Mar. 23, 2020).
[3] “GDP Growth (Annual %) – Russian Federation.” Chart. The World Bank. Accessed April 29, 2020. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=RU.
[4] Djankov, Simeon. Russia’s Economy under Putin: From Crony Capitalism to State Capitalism. N.p.: Peterson Institute for International Economics, 2015.
[5] Pospieszna, Paulina, Joanna Skrzypczyńska, and Beata Stępień. “Hitting Two Birds with One Stone: How Russian Countersanctions Intertwined Political and Economic Goals.” Political Science and Politics, o.s., April 2020, 243-47.
[6] Yordanov, Krasimir, ed. Russia Agriculture Sector 2019/2020: An EMIS Industry Report. N.p.: EMIS, n.d.
[7] Vorotnikov, Vladislav. “Russian Poultry Exports Booming Thanks to China.” Poultry World. Last modified February 19, 2020. Accessed May 7, 2020. https://www.poultryworld.net/Meat/Articles/2020/2/Russian-poultry-exports-booming-thanks-to-China-543587E/.
[8] The Economist Newspaper Limited. “Good Times in Grainville: Russia Has Emerged as an Agricultural Powerhouse.” The Economist. Last modified December 1, 2018. Accessed May 6, 2020. https://www.economist.com/business/2018/12/01/russia-has-emerged-as-an-agricultural-powerhouse
[9] “Russia Ships First Wheat Cargo to Saudi Arabia after Export Door Opens.” Middle East Monitor. Last modified April 9, 2020. Accessed May 6, 2020. https://www.middleeastmonitor.com/20200409-russia-ships-first-wheat-cargo-to-saudi-arabia-after-export-door-opens/.
[10] Seddon, Max. “Russia’s Central Bank Says No Further Intervention to Support Rouble.” Financial Times. Last modified April 4, 2020. Accessed May 6, 2020. https://www.ft.com/content/2fb09e5a-bc7b-49ee-acf5-0e290b75f2c3.
[11] “Volume of the National Wealth Fund.” Table. Ministry of Finance of the Russian Federation. April 28, 2020. Accessed May 9, 2020. https://www.minfin.ru/en/key/nationalwealthfund/statistics/?id_65=104686-volume_of_the_national_wealth_fund.
[12] Foy, Henry, and David Sheppard. “Why Russian Oil Groups Are Well Positioned for a Price Crash.”Financial Times. Last modified March 30, 2020. Accessed May 6, 2020. https://www.ft.com/content/87196fa8-6289-4f9c-9353-cdf18d5fabc8.
[13] Melkadze, A. “Value of Russian Trade in Goods (Export, Import and Trade Balance) with China from 2007 to 2019.” Chart. Statista. March 2, 2020. Accessed May 6, 2020. https://www.statista.com/statistics/1003171/russia-value-of-trade-in-goods-with-china/.
[14] Dezan Shira & Associates. “Russia-China Bilateral Trade Growing By US$500 Million A Month.” Russia-Briefing. Last modified September 2019. Accessed May 6, 2020. https://www.russia-briefing.com/news/russia-china-bilateral-trade-growing-us-500-million-month.html/.