The meaning of Nabiullina’s words about “structural transformation” —

An analyst from Finam FG explains what serious changes the main person at the head of the country’s financial regulator has warned of

There are no plans to reduce inflation in Russia “by any means”, Central Bank President Elvira Nabiullin said last week, warning that serious changes await the country’s economy this summer. “The days when the economy could live on reserves are over. We will enter a period of structural transformation and search for new business models in the second and early third quarters,” she said. According to the director of the Bank of Russia, a difficult period due to anti-Russian sanctions is coming. External restrictions first hit the financial market, but now they are increasingly affecting the economy. In a forum, the head of the macroeconomic analysis department of Finam GC, Olga Belenkaya, explains what the words of the boss of the main financial regulator mean for the Russians.

The Russian economy can be pushed back far

The events of the past two months can significantly change the structure of the Russian economy. It has been strongly linked to the Western economy over the past decades and can be thrown far back due to the disruption of economic, financial, production and transport chains.

Bank of Russia President Elvira Nabiullina reminded the audience of this during a speech in the State Duma early last week. The sanctions have been felt primarily in the financial sector so far, but product stockpiles will end in the second and early third quarters, and amid steadily tightening restrictions on imports, international settlement and logistics, from many companies will have to readjust existing business models: seek new foreign partners, readjust supply chains, or switch to producing components that were once imported domestically.

The European Union was Russia’s largest foreign trade partner — it held 36% of the country’s foreign trade turnover in 2021. In particular, the EU accounted for more than half of Russia’s exports of petroleum and petroleum products, more than 60% of gas supplies, almost 30% of coal supplies and 35% of aluminum supplies. In 2021, China held some 18% of Russian foreign trade turnover, including nearly 14% of Russia’s exports and 25% of our country’s imports. Crude oil, coal and timber are the main exports to China. The countries of the Eurasian Economic Union accounted for only 8.8% of Russia’s foreign trade turnover.

Даже в отсутствие прямого эмбарго на российскую нефть экспортировать ее стало зетало. Photo:

The countries which had an insignificant share of exports have announced the refusal of Russian energy for the moment: USA, Great Britain (from the end of the year), Canada, Australia. The EU has already imposed an embargo on Russian coal and hard fuel supplies (from August), black metallurgy imports and is discussing a gradual refusal of Russian oil imports under the sixth energy package in preparation course. The head of the FRG’s foreign ministry claimed that Germany intended to completely refuse Russian oil by the end of 2022. But even in the absence of a direct embargo on Russian oil, it was much more difficult to export it due to the refusals of some consumers, oil traders, container carriers, insurance and settlement difficulties, which affects a considerable expansion of the decline in the price of Russian Urals compared to the Brent – from a record $2-3 to $35 a barrel.

High dependence on imports

In addition, the EU was Russia’s main trading partner, especially in the fields of medicines, reinforcing steel, machinery and equipment. The United States and the EU were the main exporters of aircraft to Russia – not only supplies of aircraft, but also supplies of their components as well as repair, maintenance and insurance are now prohibited. China is second in imports to Russia and first in electronics, including telephones, supplies.

In the currency scheme of Russia’s foreign trade settlements for exports in 2021, the US dollar held 54.4%, the euro 29.7%, the Russian ruble – 14.3%, other currencies 1.5 %. Ms. Nabiullina confirmed: “The sanctions have cut us off from reserve currency settlement, our entire economy, the banks. And there, it would be necessary to develop payments in national currencies. In the future, the Central Bank sees a prospect of cross-border settlement in the use of a digital ruble.

The supply of goods to the Russian domestic market is highly dependent on imports of ready-made products and raw materials, components and equipment. Forbes cites a recent report from the Higher School of Economics New contours of industrial policy, which indicates that the dependence on imports of products from the textile and pharmaceutical industry, electronics, cars, computers, other machinery and equipment is more than 50%. In paper and chemicals and metallurgy, its level ranges from 30% to 50%. In addition, import dependence on the European Union and North America is higher in machinery and equipment (40%), medicines (34.5%), cars (28 .3%), rubber and plastic products (24.6%). In addition to direct sanctions on deliveries of certain products to Russia, many foreign companies voluntarily leave the Russian market, there are logistical difficulties (the EU and Great Britain ban on Russian-flagged vessels from entering their ports complicates the delivery of goods to Russia and from other continents, the ban on freight vehicles registered in Russia and Belarus to the territory of the EU, retaliation by Belarus).

AvtoVAZ was on a corporate vacation from April 4 to April 24 and plans to return to the production of “simplified” car models with the fewest foreign components in the coming months. Photo:

According to the media, all car factories have stopped in Kaluga: the manufacturer of Peugeot and Opel also took a break after Volkswagen and Volvo. The owner of these brands, the car company Stellantis, cited logistical problems and the inability to deliver the necessary spare parts as the explanation. AvtoVAZ was on a corporate vacation from April 4 to April 24 and plans to return to the production of “simplified” car models with the fewest foreign components in the coming months.

“Structural transformation” is a painful process for the economy and the consumer

Thus, the “structural transformation” of which Nabiullina speaks is a forced process that can become very painful for the economy and the consumer. There are not many options – a search for alternative supplies in countries that have not joined the sanctions, import substitution, a return to previous production models that do not conform to modern comforts, to environmental (and possibly safety) conditions. A shortage of goods on the shelves and a stoppage of production, which will lead to lower production and lower employment and a new turn of the decline of the economy and, consequently, a distribution system, which is not excluded, can become an alternative to saturate the internal market.

Henceforth, the situation obliges to redirect exports and imports “from West to East” at an accelerated pace and to make a real substitution of imports where possible.

Structural transformation can consist of several links:

  1. Saturation of the domestic market with raw materials in the context of sanctions and disruption of logistics supply chains, which can lead to a rapid reduction in the assortment. Here, the redirection of raw material flows to third countries can help, although it will be difficult to replace high-tech imports, in particular because of a threat of secondary sanctions.
  2. The reorientation of raw material exports to the EU towards alternative markets (Asia-Pacific, Africa, Latin America) and domestic recycling.
  3. Establishment of financial flows where settlement abroad can be made using national currencies and sanction-protected payment systems.
  4. Measures aimed at providing technological substitutions for imports (creation of new factories which will make it possible to avoid the deterioration of Russian industry in the medium term).
The head of the Accounts Chamber, Alexey Kudrin, recently assessed that it would take two years for the first phase of the Russian economy to adjust if the sanctions remained at the current level. Photo: Roman Khasayev

Discussions about the need for import substitution have been going on for many years, but the actual outcome is obviously below expectations. Some factories have really been transferred to Russia, but foreign raw materials, components, equipment and technologies are used in production. And that import probably can’t be located quickly. Import substitution for goods manufactured in third countries or parallel imports could be a more favorable option. But as the experience of the last two months illustrates, it is difficult, especially in conditions where suppliers and banks in third countries fear secondary sanctions, transport and settlement problems have worsened.

The head of the Accounts Chamber, Alexey Kudrin, recently assessed that it would take two years for the first phase of the Russian economy to adjust if the sanctions remained at the current level. However, hopes for a quick settlement of the conflict in Ukraine are low, and this threatens further sanctions.

At the same time, full structural transformation, including import substitution of high-tech products, may take much longer. Thus, in the book Transformation of the structure of the Chinese economy: success or failure? The Central Bank considers the examples of structural transformation of different countries that took 25-30 years and more. The Made in China strategic program, which is one of the examples of transforming the economy, is designed from 2015 to 2025.

In addition, it is not yet clear how Russia’s economic model will change during the transformation period, including from the perspective of business-state relations. Thus Oleg Deripaska speaks of the need to refuse state capitalism and of a return to the competitive market based on private property. Dean of the Faculty of Economics at Moscow State University, Alexander Auzan, speculated that the NEP 2.0 system might appear – with entrepreneurial freedom for small and medium-sized businesses and tighter control of the state on large companies, which will need support despite the sanctions (as a variant to try to recreate the state plan 2.0). However, he also explained that the NEP is not a sustainable system, i.e. the market mechanism (of the price) will come into conflict with the directive management mechanism and sooner or later it will be necessary choose (historically, in the USSR, was made in favor of the planned economy).

Olga Belenkaya


The author’s opinion does not necessarily coincide with the position of the editorial board of Realnoe Vremya.

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