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The Russian President, Vladimir Putin has made a national address this morning (Tuesday, February 21, 2023) to both Russian Houses of Parliament and numerous members of Russia’s business and political elite. While much of the Western media content will concentrate on the Ukraine conflict, and much will be analyzed concerning this aspect, in this article I concentrate on what was said concerning Russia’s economic trade and development.  This tells us rather more about the current commercial and trade environment in Russia and has implications for its major trade partners, including China, India as well as Middle Eastern nations, throughout Central Asia in addition to Africa. The subheadings are mine for ease of subject guidance.

Putin began his section of the speech as concerns commerce by praising and giving thanks to Russian nationals engaged in supply chains, agriculture, food, industry, education and the essential social services for keeping Russia’s society intact and on course during what have been difficult circumstances.

Impact of Western sanctions on Russia’s 2022 economic development

For employees, Putin proposed subsidized home rental programmes for essential services. Discussing the West’s ‘economic aggression’ he stated that different tools had been used such as export restrictions, the ‘theft’ of currency reserves and financial restrictions. He stated that these attempts had not succeeded and that Russia’s economy remained stable. He stated that the West had provided misinformation about the success of these measures, yet they had ended up damaging their own economies.

He stated that the West had indicated that the Russian economy would reduce by 20-25% and even total collapse but in fact the damage was restricted to a GDP reduction of just 2.2% in 2022.

Putin stated that in terms of trade volumes, despite the West’s attempts, Russia’s balance of trade and international payments for goods and services has actually increased with Russia’s partners who share an objective for creating a stable global economy.

He also mentioned that fewer countries now use the US dollar as a trade currency and that other countries were now following Russia’s example in this. He said that the currency was now gradually being devalued on a global scale. In contrast, the use of the Ruble in international trade doubled during 2022.

In terms of Russia’s domestic economy, Putin said that this had grown in numerous sectors, including the construction of 100 million square metres of new residential property. The agriculture sector has also grown with a record 2022 crop of 150 million tons of wheat. Of this, 60 million tons were exported – yet just 10 years ago this was just a dream with just 16 million tons exported.

Concerning the Russian labour market, Russian policies meant this did not drop, and that pre-pandemic unemployment levels of 4.7% have now been reduced to 3.7%, which is a historic low.

He stated that many risks were imposed upon the Russian economy over the past year, many of them unpredictable, yet the Russian government had reacted fast to overcome these. A major driver he said was that Russia has not over-regulated its markets and that the SME sector was buoyant.

It was significant that the GDP drop that occurred in Russia was only registered in the 2022 Q2, had recovered by Q3 with growth returning in Q4 and expected to continue throughout 2023.

Russia 2023 Economic Outlook

Putin said that as a result, in 2023, Russia is moving to a new cycle of quality economic development. He said that Russian domestic demand was growing, that manufacturing productivity in consumer sectors was growing and that Russian and some friendly nation foreign invested businesses had managed to fill the product niche gap left by Western manufacturers who had exited the Russian market.

Russia is now aware, he said, of the challenges and difficulties faced in the domestic logistics, finance and HR sectors but that structural changes were now taking place, and these would have a positive effect. Russia knows of the problems ahead and this is an improvement, the government knows what it must do, and it can avoid any external pressures or threats. The whole objective of the governments work, he said, was not to adapt to the current conditions, but to bring the Russian economy to a new height. “Everything is changing very quickly now. This is not just a time of challenges, but a time of opportunities.”

“We need to remove any intergovernmental conflict, ensuring everyone is on the same path. We must stimulate small family businesses and entrepreneurs; and develop new schools and research and produce new scientific solutions. All of these are wins and contributions to our common success.”

Infrastructure Development

There are areas we need to focus on in the relationship between government and business. We need to establish new logistical routes with our new partners. We need to complete the new high-speed highway between Kazan, Yekaterinburg and Chelyabinsk and continue to develop our Black Sea and Azov Sea Ports. We are paying special attention to the North-South Corridor (ed: of the INSTC from Russia to the various Caspian Sea ports)  and will open the Caspi Canal  (ed: Also known as the ‘Eurasian Canal’ project aimed at connecting the Caspian and the Black Seas) with a navigable depth of 4.5 meters.

We are also upgrading our rail services east, with increased cargo flows and will also be developing Siberia and the Russian Far East and highway routes to Irkutsk and Vladivostok, and potentially – to Kazakhstan, Mongolia and China, which will particularly expand our economic ties with the markets of Southeastern Asia, Russia will particularly focus on developing the North-South transport corridor, which will open up new routes for business cooperation with India, Iran and Pakistan, as well as other Middle Eastern countries. (ed: Russia recently announced new trade and development targets with Saudi Arabia and the UAE). This also includes communications, and transport infrastructure, by 2024 we will have upgraded 85% of regional roads and 50% of national highways in the Far East. Social infrastructure such as hospitals and schools will be developed and provided at government expense.

We are investing Rubles 4.3 billion into the utilities sector; and focusing on developing the technological sector of the Russian economy. We will be providing ‘industrial mortgages’; to the value of Rubles 500 million as loans for businesses investing in infrastructure, such as property for their companies, available at 3-4% interest for 5-7 years.

Starting this year, we have a new mode of development in forming ‘industrial clusters’ with demand for innovative designs provided by companies in these to be subsidized by the government with a programme until 2030 to finance Rubles 10 billion in this area. We are supporting business and providing systematic support, infrastructure support and tax support for them.

Tax Incentives – IT Sector

We are supporting the development of our national IT sector and will provide tax relief for businesses buying Russian domestic IT solutions. For every Ruble 1 they spend on this, they will receive a tax credit of Ruble 1.5 and is applicable to high-technology equipment purchases produced in Russia.

New Sources of Financing & Investment

Due to our strong balance sheet, we do not have to ask for money from abroad. (ed: Russia has some of the lowest foreign debt in the world). We don’t have to conduct lengthy dialogues about what and how much and at what terms, while our domestic banks are stable. In 2023, our corporate financing sector has grown despite us having some doubts about this. So far in 2023 we have corporate finance growth at 14%, whereas in 2021 it was 11.7%. We also have a mortgage portfolio showing 20.4% growth, meaning we have economic development.

In 2022, our banking sector also showed significant profits, not as high as previous years but still significant. Meanwhile, according to our figures, 2023 inflation rates in Russia will average out at about 4-5%. I’d like to remind you that in some Western countries, inflation has been 17-20%.

Given these positive dynamics, we can see we have objective conditions to lower long-term loan rates and that means that financing will become more available in Russia.

What is also very important is the long-term savings of Russian citizens, and we have to stimulate the flow of that money into investments. I’d like to create in April this year, special conditions for citizens to invest in Russia and to make money within Russia and to guarantee their contributions to this scheme. It needs to be a similar scheme to insuring financial deposits in banks.

For example, I propose doubling the amount that can be invested in private pension funds to Rubles 2.8 million.

We also need to look at attracting capital into the hi-tech sector and there will be mechanisms to place securities on the internal market for other companies and separate buyers. What is very important for Russian financial sovereignty is freedom of entrepreneurship. The recent attempts to restrain Russians in this regard in sanctioning specific products has demonstrated that Russians are able to adapt and very quickly. It is important that every initiative that is positive for Russia has to be supported by the government.

Comparisons with the West

We need to ensure that we do not over-regulate but at the same time maintain a criminal code so Russia does not develop into a market free-for-all, but we will be looking at liberalizing economic actions in this field. We should be mindful of the late Soviet economy and the mistakes and problems faced at that time. Some countries would like to push us back to those times. Back then, the model we chose to follow was the Western market system, but it is not enough just to copy. We became Western-oriented and generally, the source of commodities.

That was structured in a manner to generate quick profits and that meant Russia was just selling raw materials, oil, gas and timber and money was not being invested into long term projects. We were aware of this negative aspect in Russia and have invested a lot into adding value. However, there have been other conditions, a Western, cheaper money supply, meaning Russian capital began flowing there. It meant that capital that should have been used for developing Russian industry was spend on overseas real estate and consuming Western goods. It was very difficult for the Russian state to deal with this because we live in a free market.

But the West turned into a ghost, and we have now seen this – they have now been robbed in the West. I warned that Russians overseas would eventually end up running around the law courts in the West and this is exactly what has happened. Now it is time to choose a different approach and invest in Russia for Russia.

Analysis

Putin’s remarks on the Russian economy aren’t really anything new, although the strength and depth of the market may surprise some readers. Others will decry them as unreal and be dismissive. However, in experiencing the Russian economy first-hand I can stress that the figures as presented add up. Russian supermarkets are full and there are no shortages. What were once Western-sourced products have since been replaced with alternatives from Asia, the Middle East, Africa and even South America.

Little has also been made in the West of Russia’s strong financial position – it has little foreign debt, while the economy is sustainable and is growing. Regardless of what eventually happens in Ukraine, the Russian economy appears set for an extended period of adaption and growth, with the end result being a greater emphasis of self-sufficiency and domestic production – goods that can both satisfy the Russian domestic market and be exported.

Key to understanding how this will pan out is the high-tech arena and issues concerning computer speeds and operating systems. Again, Russia is often derided in its achievements here, but it should not be forgotten that it is a significant nuclear power and is technologically capable of sustaining human life and connectivity into space – something the United States is struggling with at present.

While the West’s disengagement with Russia can be expected to continue for much of the coming decade, the end result when sanctions barriers eventually come down is likely to be a Russia with enhanced national and Eurasian connectivity, with little to no reliance on either the EU or the United States.

In some cases, this will include advanced technologies that are superior to those produced in the West – particularly as many of the raw materials needed to manufacture items such as semi-conductors are mined in countries within Russian and China’s geographic orbits and not in Europe or the US. The Russian President may be long retired by then, but the self-sufficient and productive Russia will have emerged. Putin’s speech today provided a concise road map of how the country will get there.