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Even The Best Case Scenarios Look Grim For Russia.

RiskGlobal sourcingEuropeDisasters and UnrestGlobal RiskMarket VolatilitySupply DisruptionBlog+-
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Businesses have been caught off guard by the war in Ukraine, but the conflict will require careful watching in the future. To understand the various connotations better, the Economist Intelligence Unit (EIU) held a session in London, debating the future of the region.

Almost no one saw Russia’s highly aggressive policy against Ukraine coming. Putin’s invasion and annexation of Crimea, which was initially denied to the world, following by a military incursion in Donetsk and Lugansk has taken analysts and experts by total surprise. Now, the best we can do is try to chart potential scenarios of further escalations. Alex Nice, analyst at the EIU, described current affairs in the region as "in a period of extraordinary uncertainty…. We can still expect radical change."


The most ’positive outlook’ for Russia involves Europe dropping most of the hardest hitting sanctions by 2015 (although the US is expected to retain most of theirs). Although this will generate some investment in the short-term in reviving frozen deals, the long-term growth prospects are still doubtful, as companies avoid exposure to future political risk. Moreover, the continuing credit crisis for Russian businesses may tip the banking sector into collapse, eliciting more state involvement and even nationalisation within the market.


Given the reliance on the state on petrochemicals, the issue of oil prices was a significant discussion point. Nice believes that the state could withstand prices as low as $80 per barrel, although this requires substantial withdrawing of national reserves. However, prices falling below this point will raise questions over the viability of the state.


The country also has a number of structural factors that, for the moment, the war in Ukraine is masking.


Firstly, Nice sees a significant crisis of legitimacy within the state. The elite have yet to address the concerns of the urbanite Russians who took to the streets in mass protests in 2010. The decay of democracy since then has deepened the concerns of many even further. The country’s governance scores, in terms of political freedom, freedom from corruption and other prosperity indicators have been in a nosedive for the past five years.


Secondly, the country has yet to diversify its industrial base and as such is essentially an oil state. Entrepreneurial and highly skilled talent flee Russia as soon as they are able. The EIU is forecasting drops in the labour force of 20 million by 2050, and a fall by 10 million by 2030.


Given the return of geopolitical tensions, the price of Russia’s desire to aggressively confront its enemies (real or otherwise) is falling behind its economic competitors, which, intriguingly, it sees as political allies. The EIU believe that the country’s annual growth rate will not exceed 2% by 2030. During this same period, Brazil is to see annualised rates of 2%, China 5% and India 6%.


As many CIS states wish to join the prosperous European Union, it seems as though the Kremlin is set to be at odds with its neighbours for some time. “Russia is unreconciled to Europe’s expanding influence,” noted Nice. "This tension will continue for the next 10 – 20 years."

 

Businesses would do well to take note of the long-term risk in the Russian connections within their supply base.

Jon Webb
Posted by Jon Webb