Russian Economic Reform » Archive » Russia’s Economic Future: Part 5

Russia’s Economic Future: Part 5

Published on August 21 2023

Posted by: jeff

Products

Minerals and Metals

Ben Aris of BNE has written a very useful article on Russian metals and minerals exports[1] and this section quotes him extensively. Russia is the fourth-largest exporter of aluminium in the world. Rusal shipped 3.9mn tonnes of aluminium in 2021, according to company data.[2] Russia exported 15.9mn tonnes of semi-finished steel and 16.8mn tonnes of finished steel in 2021.[3]

Russia is already a major producer of copper, but its share in the global copper trade still remains small. However, some analysts expect this to change as there are new copper mines under development and Russia is on course to become a major supplier of the metal.[4] Thanks to the ongoing digital revolution, and especially the rapid expansion of the electric car industry, the demand for copper is expected to soar.[5]

Russia supplies about 10% of the world’s nickel. The International Energy Agency (IEA) has forecast that nickel demand in electric vehicles (EVs) will grow by a factor of eight from 2020 to 2030.[6]

Russia is the third-largest producer of titanium with a share of around 13 to 13.5% after China and Japan.[7] “Russia holds a key role in the titanium market and titanium is extremely important not just for commercial aircraft, but is also used for the production of defence equipment. Titanium alloys account for approximately 15% of the Boeing 787 airframe by weight.[8] The US remains particularly vulnerable to disruptions in the global titanium supply chains, as it imports 95% of the titanium it consumed in 2019.[9]

Agriculture

Agricultural exports can be a continual success story for Russia in it medium-longer term economic futures, with the potential to feed two billion people, according to the Food and Agriculture Organization of the United Nations (FAO). Four federal districts (the Central, North Caucasus, Urals, and Volga) produce 73% of agricultural outputs in Russia. “Russia has brought in a new all-time high record harvest of 153mn-155mn tonnes of grain”, Putin said in March 2023, up from the previous record of 135mn tonnes of grain.”[12]

“Russia the world’s top wheat exporter as the 2022/23 agricultural trading year comes to an end, the US Department of Agriculture (USDA) says in its latest update July 2023.”[13] “With record production of 92mn tonnes. Russia is estimated to export 45mn tonnes in 2022/23. Its main destinations are in the Middle East, North Africa, and Central Asia.”[14]

In 2019, Russia was the world’s largest producer of barley; the second-largest producer of sunflower seeds; the third-largest producer of potatoes and milk; and the sixth-largest producer of eggs and chicken meat.[15] In 2018, the Russian Government announced a $51 billion plan to boost domestic agricultural production, setting the ambitious goal of increasing food exports by 70 percent by 2024 (to $45 billion).[16]

“According to data from the World Bank (2020), the country’s value-added agriculture (in constant 2010 prices) increased from $45.9 billion in 2000 to $66.2 billion in 2019. However, a share of the agriculture (in value added terms) in Russia’s gross domestic product decreased from 5.8% to 3.4% for the same period.”[17]

A 2021 – and thus pre-invasion of Ukraine – report by Eurasian Research Institute, International Hoca Ahmet Yesevi Turkish-Kazakh University[18] says that “Russia’s agricultural development model is mainly state-centered, but based on the state-private partnership. Large farms and agro holdings mainly represent the private sector. The government of Russia supports the sector through financial interventions, where the state-owned agricultural bank Rosselkhozbank plays a key role.”[19]

As discussed earlier in this text, Russia’s counter sanctions on Western countries – particularly after the annexation of Crimea – targeted agricultural products. As a result, the Russia’s imports of food products decreased from record $43 billion in 2013 to $30 billion in 2019. For the same period, its exports increased from $16 billion to $25 billion.”[20]

This seems to have been a success that is – in my view – very unlikely to be repeated in “advanced technology” although the Russian government has made it a priority to increase domestic production of agricultural equipment and is providing manufacturers with incentives to localize as part of its strategy to achieve the goals of having 80% of agricultural machinery used in Russia produced domestically, tripling overall equipment production, and increasing exports of agricultural equipment by a factor of 12 by 2030.[21]

Agricultural machinery and food processing equipment are not subject to U.S. sectoral sanctions or Russia’s “countersanctions” on agricultural products and are generally allowed to be sold without restriction.[22] However, Russia’s agricultural machinery market has been highly dependent on imports. In 2019, the share of the imported machinery accounted for 42%. In the total number of tractors produced in Russia in 2019, the share of Russian brands was 51%.[23]

The Turkish-Kazakh University report says that “food production and processing represent a key component of Russia’s economy. As of 2019, there were more than 22,000 food processing companies operating in Russia, employing an estimated 2 million people.”[24] “There are currently more than 2,000 companies involved in the packaging process and about 900 companies involved in the production or distribution of packaging machinery. Russian food and food processing industry enterprises often buy equipment directly from manufacturers, and large businesses enterprises typically prefer new, imported equipment. Less expensive, second-hand models are often purchased by small- and medium-sized businesses.”[26]

The Turkish-Kazakh University report concludes: “The ban on imports of food from many countries, along with the Russian government’s import substitution policy, means that the Russian food industry will continue to develop and expand in a favorable competitive environment, incentivizing investment in modern technology for processing and packaging.”[27]

Manufactured and Tech Products

As discusses earlier, the professed ideology of “technological sovereignty” does not exclude the idea of boosting Russian exports of technologically complex products – especially to “friendly” countries! There is, for example, no suggestion that Russia will seek to limit exports of nuclear technology – either physical products or services associated with them – or any suggestion of a planned reduction in military exports.

As should be clear from the earlier section on Russian “technological sovereignty”, I am high sceptical that this approach will eventually satisfy Russia’s internal needs. I find it hard to believe that it will result in the sort of high-quality products and services that will be competitive; although there will be niches where lower (possibly government subsidized) prices will still make them attractive despite lower quality, or where export restrictions of other countries are in play.

Russian nuclear technology is largely an exception in that it is “general considered to be amongst the safest in the world”[28] and is price competitive (sometimes with the help of Russian loans). Russia had over $100bn of orders for Nuclear Power Plant (NPP) exports at various stages of commitment before the invasions of Ukraine, and have since increased.

There are about 60 reactors under construction around the world, 300 more in the planning stages.[29] Many of the 30 countries generating nuclear energy in some 440 plants are importing radioactive materials from Russia’s state-owned energy corporation Rosatom and its subsidiaries. Rosatom leads the world in uranium enrichment, and is ranked third in uranium production and fuel fabrication, according to its 2022 annual report.[30]

Rosatom, which says it is building 33 new reactors in 10 counties, and its subsidiaries, exported around $2.2 billion worth of nuclear energy-related goods and materials last year, according to trade data analyzed by the Royal United Service Institute. The institute said that figure is likely much larger because it is difficult to track such exports.[31] Rosatom’s CEO Alexei Likhachyov told the Russian newspaper Izvestia the company’s foreign business should total $200 billion over the next decade.[32]

NPP hardware deals usually come with 60 years of fuel supply and maintenance deals that keep the customers dependent on Russia for decades afterwards. While both Russia and Kazakhstan are big producers of the uranium 235 fuel the NPPs burn in the eastern bloc, processing and refining of the ore is almost all done in Russia.[33]

“NPP construction projects take about 11 to 12 years to construct and commission. For instance, the agreement between Russia and Turkey for the construction of the Akkuyu NPP was signed in 2010; construction of the first of the four planned reactors did not begin until 2018. Negotiations in advance of the start of an NPP project can also take considerable time. Commissioned reactors will then operate for decades, requiring fuel, maintenance and servicing – all of which is often bespoke to the reactor.[34]

Russia’s role in the global nuclear market includes not only the construction of nuclear reactors, but also the mining of raw uranium, conversion of uranium ore into fuel-useable compounds, the fabrication of nuclear fuel assemblies, and the provision of other services across the nuclear fuel cycle – ‘from assessing and developing key nuclear infrastructure components in customer countries to NPP decommissioning’, as the company notes in its 2021 annual report. According to the 2021 report – the latest available – Russia occupied the greatest share of the global uranium enrichment market (38%) (other sources show that it had 46% of the world’s total operational and planned uranium enrichment capacity), was second in the world in terms of uranium production (15% of the market) and third in its share of the global nuclear fuel market (17%).[35]

According to Matt Bowen and Paul Dabbar of Columbia University’s Center on Global Energy Policy, subsidiaries of Rosatom provided 31% of enrichment services to EU nuclear utilities and 28% to US ones. They point out that “replacing Russian uranium enrichment and conversion capacity is possible, but that additional alternative capacity will need to be brought online, likely resulting in higher nuclear fuel prices. Alternative nuclear suppliers will also need to be convinced that the resources they invest in expanding their operations will not be in vain should any restrictions on Russian nuclear supplies be rescinded in a few years”.[36]

Alternative suppliers would also have to be found for the fabrication of nuclear fuel. Bowen and Dabbar note that reactors often rely on unique components produced by the original equipment manufacturer (OEM), which results in significant dependence on the OEM for replacement parts and servicing.[37]

“Bulgaria, Czechia, Hungary and Slovakia all continued to purchase Rosatom uranium, unable to source the fuel elsewhere; although Bulgaria and Slovakia have announced plans to cancel Russian uranium imports and swap to other suppliers.”[38]

Ukraine has five working NPPs and was also a Russian customer until recently, when it cut ties and now sources its uranium from Westinghouse Electric Co.[39]

Russia is also building Turkey’s first NPP and gave Turkiye a $20 billion loan at one stage to help with this.[40] In 2014 Hungary commissioned Rosatom to construct two new NPP, largely financed by a €10bn Russian loan. The facilities should go operational in 2025-2026, according to the original schedule.[41] Rosatom is also in talks with other countries around the world from Iran to India to China for similar deals.[42]

Still heavily dependent on Russian nuclear power technology and fuel, the West has shied away from sanctioning Russia’s nuclear industry.[43] Russia supplied the U.S. nuclear industry with about 12% of its uranium last year, according to the U.S. Energy Information Administration. Europe reported getting about 17% of its uranium in 2022 from Russia.[44]

Russia’s arms exports dropped 31% in the five years that ended in 2022, compared with the five years ended in 2017, according to the Stockholm International Peace Research Institute (SIPRI). Russia’s share of global arms exports dropped to 16% from 22%.”[45] SIPRI uses multiyear periods because annual figures can be distorted by large deliveries; it bases its figures on a points system that calculates the military value of arms exports.[46]

While the Russian military has proved to be very effective in setting up defences to counter the present Ukraine counter-offensive, it has displayed much less capability on the offensive. Despite this, in August 2023, the head of Russia’s Federal Service for Military-Technical Cooperation, told state news agency TASS that operations in Ukraine have led to increased interest in Russian weapons from countries in Africa, Latin America and elsewhere.[47] If this is true, lower prices and Russia’s Western qualms about supplying some potential customers are probably significant factors. For example, “Germany’s Leopard 2 tanks each cost more than €10 million, the equivalent of about $10.68 million, while Russia’s new T-90 tanks will likely sell for less than half that price”, says Nicholas Drummond, a defense-industry consultant.[48]

China and India, typically big Russian customers, are producing more of their own weaponry. Russian arms exports to China have been falling since 2005, SIPRI data show. While China was once dependent on Russian technology, it is increasingly developing its own, analysts say, including switching to Chinese engines in its jet fighters.[49]

India is also working to reduce its reliance on Russian arms. Soon after Russia’s invasion of Ukraine, India’s Defense Ministry published a list of foreign-made components that it wanted to produce at home, including parts for Russian weaponry – although this policy also predates February 2022.

According to Alistair MacDonald and Jon Emont in a WSJ article,[50] “other Asian countries appear to be stepping away from Russian arms. Vietnam in December held an arms expo that it said was aimed at diversifying where it sourced weapons. Before 2014, almost all Vietnam’s weapons imports came from Russia. Since then, Vietnam has for the first time in decades bought some U.S. equipment, including reconnaissance drones and electronics.”

China’s rise as an arms manufacturer could challenge Russia’s dominance over the West at the lower end of the market.[51]

Balance of Trade

The research company “World’s Top Exports” has produced a useful analysis of data on Russian International Trade.[1] Below are exports from Russia that result in negative net exports or product trade balance deficits. These negative net exports reveal product categories where foreign spending on home country Russia’s goods trail Russian importer spending on foreign products. The data is for 2022, so will often be influenced by natural volatility:

Machinery including computers: US$31.5 billion

Electrical machinery, equipment: -$18.5 billion

Vehicles: -$13.6 billion

Pharmaceuticals: -$12.9 billion

Optical, technical, medical apparatus: -$6 billion

Plastics, plastic articles: -$5.3 billion

Fruits, nuts: -$4.1 billion

Footwear: -$3.2 billion

Knit or crochet clothing, accessories: -$3.1 billion

Other chemical goods: -$2.7 billion

The World’s Top Exports Site says that “Russia has highly negative net exports and therefore deep international trade deficits for machinery including computers”. The site says that the data indicates “key opportunities for Russia to improve its position in the global economy through focused innovations”.

While this statement may have some truth to it in some niche areas, it is on the whole quite silly!

The “terms of trade” is a more important issue than many people will suspect because it is basically the ratio of foreign currency import prices to foreign currency export prices. If Russia diverts certain production resources from producing and exporting particular basic commodities to producing and exporting particular technology products, then in economic terms Russian will generally be worse off if prices for these particular technology products decline relative to prices for the particular basic commodities. That is, the Russian economy would have been better off selling basic commodities and importing technology products. I wrote more about this in my 2016 report on Russia’s National Technology Initiative.[2] I noted the historical trend for ICT prices to fall relative to commodity prices.

Earlier in this text I wrote about the National Projects covering development and expenditure on various aspects of Russian society and economy in the 2019-2024 period.[3] One of these was for “International cooperation and export” covering (in addition to EAEU issues):

1. Achieving the volume of exports of non-commodity non-energy goods in the amount of $US250 billion[4] per year, including products of mechanical engineering – $US60 billion per year

2. Achieving the volume of exports of agricultural products $US45 billion per year

3. Achieving the volume of exports of services rendered in the amount of $US100 billion per year

4. Growth in the share of exports of manufacturing products, agricultural products and services in the country’s GDP by 20%

Deputy Prime Minister and Minister of Industry and Trade, Denis Manturov, was asked about this particular national project in a media interview in July 2023.[5] He said that it had been extended from 2024 until 2030 and that “after the sanctions imposed on our exporters and the import of our goods, in order to fulfill our tasks, we will not only have to increase exports in the coming years in absolute terms, but also fundamentally change the export geography, developing new sales markets. In addition, it is necessary to develop transport and logistics interconnectedness and ensure the functioning of efficient payment solutions. Given the ongoing challenges and increased sanctions pressure, work on reformatting the national project and extending its implementation for the period up to 2030 continues. It involves updating existing and creating new instruments to support exports, and the emphasis is on new markets, primarily the markets of friendly supporting countries. The transport subsidy will be finalized – we will focus on stimulating the use of priority international transport and logistics corridors. We are also updating preferential lending instruments to ensure the possibility of providing long-term financing.[6]

Manturov then said the “volume of non-commodity non-energy exports” is planned to grow “by 31% compared to the base level of 2020, and in 2035 by 70%”.[7]

So, as indicated earlier, there is still a export development component to “technological sovereignty – but the questions remains as to what degree the former will be impeded by the latter.

[1] https://www.worldstopexports.com/russias-top-10-exports/

[2] Jeff Schubert, “Waiting for the High-Tech Tooth-Fairy” RANEPA, 26 September 2016

https://russianeconomicreform.ru/wp-content/uploads/2017/01/NTI-ENGLISH-VERSION.pdf

[3] Национальные Проекты: Целевые Показатели и Основные Результаты

http://static.government.ru/media/files/p7nn2CS0pVhvQ98OOwAt2dzCIAietQih.pdf

[4] The goals are actually expressed in $US rather than rubles.

[5] “Денис Мантуров: у нас есть четкие договоренности с автопромом о недопустимости завышения цен”, Interfax, 10 July 2023

https://www.interfax.ru/interview/910842

[6] “Денис Мантуров: у нас есть четкие договоренности с автопромом о недопустимости завышения цен”, Interfax, 10 July 2023

https://www.interfax.ru/interview/910842

[7] “Денис Мантуров: у нас есть четкие договоренности с автопромом о недопустимости завышения цен”, Interfax, 10 July 2023

https://www.interfax.ru/interview/910842

[1] Ben Aris, “Russian metals are deeply embedded in global markets and hard to sanction”, BNEnews, 14 March 2022