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STRATFOR.COM
Global Intelligence Update
July 30, 1999
Touting Barter, Russia Continues its Economic Regression
Summary:
Moscow has begun floating barter schemes for international trade
and for the repayment of debts to Russia. This comes on top of a
report that Russia's industrial output has risen, though serving
only domestic consumers who cannot afford imports. The only
major export growth being experienced by Russia is in arms sales.
Finally, Moscow has made it clear that it is simply unable to
service its international debt. Russia's economy is
introverting, reverting to a model reminiscent of the old Soviet
Union. Closed off by inefficiency and lack of foreign capital,
it is focusing its domestic economy on meeting domestic needs,
limiting its interaction with the global economy for the most
part to barter in machinery and raw materials, and earning its
foreign currency with arms. The seal on this introversion may
arrive in the form of default on international loans.
Analysis:
Russian First Deputy Premier Viktor Khristenko proposed at a
meeting of the Confederation of Indian Industry in New Delhi on
July 29 that India repay its debt to his country by establishing
joint ventures in India that would produce civilian aircraft.
The proposed ventures also include Russian upgrading of coal and
power plants, and leasing of aircraft to India. Khristenko also
signed an agreement with Indian Finance Minister Yashwant Sinha
about partial repayment of the Indian debt by establishing a new
nuclear power plant in India.
Similarly, Russia is currently negotiating an agreement with
Ukraine on repayment of a portion of Kiev's gas debt to Moscow in
the form of 10 strategic bombers. Ukraine has offered to supply
Tu-160 and Tu-95 bombers to Moscow. On July 28 Russian Foreign
Minister Igor Ivanov proposed a barter agreement between Russia
and the Association of Southeast Asian States (ASEAN). "In view
of the foreign exchange constraints in Russian and the ASEAN
countries, the use of a mutually linked trade mechanism could be
a promising area of trade relations for instance, food supplies
to the Far East regions in exchange for Russian machinery and
equipment," Ivanov said.
Russia's return to barter reflects both the noncompetitiveness of
Russian products and the strains imposed on Russian foreign
currency reserves by the country's massive foreign debt.
Reminiscent of the Soviet economy, during which the
nonconvertible ruble forced exchanges like Pepsi syrup for
Stolichnaya vodka, it is just one aspect of Russia's economic
regression.
Another feature of Russia's economic regression is its increase
of industrial production to serve impoverished domestic demand
while exports are on the decline. On July 15, the Russian
Statistics Agency announced that Russia's industrial output was
up 3.1 percent in the first six months of 1999 as compared to the
same period the previous year. Officials said the fall of the
ruble made Russian goods cheaper to manufacture and more
competitive in the domestic market, where imports have become too
expensive for most Russians. At the same time, Russia's GDP fell
2.9 percent year-on-year in the first six months of 1999. The
only place Russian exports are surging are in the arms industry.
Russia may be focused on barter because it can neither compete
abroad nor afford imports, but this does nothing to help Russia's
debt crunch. And giving its own debtors relief in the form of
barter arrangements further limits Russia's ability to service
its own debt burden. As it awaits additional loans to apply to
its existing loans, Russia is heavily tapping its existing
currency reserves. Russia's ITAR-TASS news agency has reported
that, due to government debts, Russia's gold and currency
reserves plummeted by $300 million during the week of July 9, to
$11.8 billion. Barter may free up more of Russia's reserves for
debt service, but without income form exports or payments from
Russia's debtors, this is simply not sustainable.
Moscow is aware of this, and has already begun arguing to
international lenders that Russia is simply unable to pay its
debt. According to Russia's Interfax news agency, Moscow informed
the IMF in a document that Russia's foreign debt amounted to $150
billion, or 90 percent of its GDP for 1999. The document called
the figure, "well beyond any realistic threshold for repayment
capacity." The document also stated that Russia was still
actively trying to reschedule Soviet-era debt accumulated before
January 1, 1992, while simultaneously attempting to pay its more
recent debts.
In an interview published by AP Worldstream on July 23, Russian
envoy to international financial organizations Mikhail Zadornov
said Russia will see no economic growth for at least a decade
unless the debts are rescheduled, because Russia's debt payments
to foreign countries almost equal its expected revenue. Russia is
supposed to pay between $13 billion and $19 billion per year to
foreign lenders until 2008. Zadornov said that while Russia is
scheduled to pay out $17 billion of its approximately $20 billion
in revenues, these creditors will not see more than $9 billion.
Having failed to rise above its Soviet roots, Russia's economy is
rapidly reverting to the Soviet model, collapsing into the
protectionism of noncompetitiveness. Reform has failed.
Investment has dried up. Unable to compete abroad, Russian
industry has begun to focus on domestic consumers who are unable
to afford imported goods. With little to offer but raw materials
and weaponry, and no currency to spare, Russia is drafting an
international trade model based on bartering the resources and
selling the arms. And with most of its arms sales earnings
already earmarked for rebuilding its debilitated military in the
face of open NATO contempt and presumed hostility, Russia will
quickly find itself truly unable to service its debt. Its
default could put the seal on Russia's economic introversion, as
its economy closes off from the world and the ruble is again
unconvertible.
Still, the Soviet economy did not collapse when it remained
isolated from the world. It collapsed when it attempted to
integrate with the world economy and thereby exposed its vast
inefficiencies and inferiorities. The Soviet Union had the
Soviet Republics and it had COMECON. It survived in isolation,
exchanging shoddy farm machinery for substandard electronics, but
with food and shelter and employment for all -- however mediocre.
Given the current economic situation in Russia, there is more
than a little sentimentality for the COMECON days. What is
missing are the partners. Russia's economy is not complete. It
needs the Slovak telephones and the Ukranian wheat and the Kyrgyz
cotton. The question is not whether Russia's economy will
continue to regress. The question is, which of its former
COMECON partners will it take with it. It already has Belarus,
and is eyeing Kazakhstan and Ukraine.
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