Saturday, August 2 2014

 

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.