Political and economic consequences of the coronavirus pandemic

MOSCOW, 31 Oct 2021, RUSSTRAT Institute.

This report is a continuation of the RUSSTRAT Institute’s series of reports on the coronavirus pandemic. The first report of the RUSSTRAT Institute on this topic, entitled “Coronavirus – command and staff exercises of the deep state” , was published in May 2020.

On August 9, 2021, the first part of the report “Total vaccination of the population: Operation Coronavirus enters a new stage of implementation” was published. It examined the general theoretical and methodological aspects of the coronavirus pandemic, as well as evaluated some hypotheses and conclusions that were made in the above-mentioned report. This report analyses the political and economic consequences of the coronavirus pandemic. A continuation follows.

 

Two years of the coronavirus pandemic have seriously changed the world around us in an economic and political sense. The single open economic space that prevailed until the end of 2019 and is based on the postulate of the universality of the unity of legal norms of the universal political space no longer exists.

However, it is fundamentally incorrect to consider such a result as a consequence of COVID-19. A pandemic is just as typical a challenge for society as war, a change in geological epochs or economic stages. The emerging threat requires the society to implement protective measures, thereby clearly showing the results and scale of the processes that began and developed long before it.

For example, the European Commission and the European Parliament were unable to consolidate the efforts of all EU members to develop and implement effective anti-pandemic measures. Moreover, especially in the initial period of the pandemic, Brussels directly demonstrated complete paralysis of the leadership’s will and a blatant unwillingness to take responsibility, thereby forcing national governments to seek salvation on their own, in the “save who can be saved” mode. This resulted in a sharp increase in their competition among themselves for medicines, medical equipment and basic consumables, such as simple medical masks.

The United States behaved in a similar way, demonstrating even under Biden a fair amount of selfishness under the slogan “America first”, aggravated by Washington’s attempts to use the crisis as a tool to regain world leadership in the international arena.

The open market was also not tested by the pandemic. The closure of borders due to quarantine restrictions brought down entire industries and broke the complex web of trade, production and logistics links.

In particular, the closure of borders stopped tourism. This led to a drop in air traffic volumes. This, in turn, forced the airline management to radically revise plans for the purchase of new aircraft. Thus causing a drop in sales of aircraft manufacturers and a radical reduction in the portfolio of promising orders.

And this is just one of the many processes of “falling dominoes”. Among other things, as a result, they clearly demonstrated the problem of the global economy’s extreme dependence not only on logistics links “with the main factory of the world” – China, but also its extreme fragility due to the dominance of the service sector in “developed Western countries” over the sphere of material production.

The COVID-19 pandemic has once again convincingly shown the validity of Vladimir Lenin’s words that politics is always a concentrated expression of the economy. It was the destruction of the existing economic ties that turned out to be the main incentive for making subsequent political decisions. Therefore, the impact of the coronavirus pandemic on the economy should be considered first.

The introduction of quarantine divided the common market into several rather clearly separate territories, the economy of which behaved in very different ways, both at the stage of decline and then at the stage of recovery. Relatively speaking, they can be divided into: China, the United States, Europe, and Russia. It is in this order that we will conduct our analysis.

Economic impact of the pandemic on China

2020 has hit China’s economic machinery hard. Back in 2010, the UN recognised the People’s Republic of China (PRC) as the “world’s main factory”, which produces on its territory the overwhelming (from half to 90%) share in more than 300 product names out of 500 that are considered the main types of world industrial products.

On the one hand, this made it easier for Beijing to maintain a sufficient level of commodity supply for domestic demand, but, on the other hand, it stopped exports, which formed almost 20% of the share in the structure of total GDP. By the end of 2020, its size in the general Chinese economy sank to 18.1%. With the total volume of Chinese GDP for 2020 at $15.42 trillion, we can say that the coronavirus pandemic hit Chinese exports in the  estimated amount $308.4 billion. And these are only direct losses. There are also indirect ones.

Summing up the results of the crisis year, the session of the National People’s Congress ended on a major note. According to the State Statistical Office of the People’s Republic of China, the Chinese economy ended 2020 with 2.3% growth. This is a fantastic achievement against the background of the almost universal minus of the results of all other countries. However, do not forget that before the crisis, Beijing confidently predicted to maintain between 6.2% and 6.5% of annual economic growth for the period up to 2030. So the $633 billion shortfall in growth is also the economic impact of the pandemic on China.

Thus, the scale of total losses of the Chinese economy can be estimated at almost $1 trillion. At the same time, it is important to note that the losses were unevenly distributed in the economic structure of the state. The largest enterprises “lost” mostly lost profits, which resulted in a decrease in the size of their exchange capitalisation. In particular, in the first, most difficult quarter of 2020, the volume of output at joint-stock enterprises fell by a maximum of 14.2%, and at enterprises with state participation even less – by only 7.9%.

At the same time, 18 million medium and small enterprises, which employ almost 80% of the working-age population and account for 50% of China’s private sector exports, are on the verge of survival. In the first quarter of the crisis year alone, their production fell by 20.2%.

According to FITCH RATINGS, the share of issuers of RMB-denominated bonds that declared their inability to pay their debts reached 4.9%, while the number of total defaults increased by 3.7%. This was due to the tightening of the monetary policy of the People’s Bank of China, aimed at reducing the availability of credit and the ability to refinance debt.

Unlike other countries, China did not resort to purely monetary “urgent anti-crisis” measures. At the end of 2020, the budget deficit of the PRC increased to only 3.6%, while in 2019 it was 2.8% of GDP. Thus, the Chinese leadership made the main bet on maintaining conditions for maintaining domestic business activity, and it paid off.

The domestic market of 1.4 billion people managed to maintain demand for goods and services in a volume sufficient to continue the normal functioning of the producing economy. One of the leading roles in this was played by the success in forming a “middle class” in the country, the size of which reached 400 million people by the end of 2019.

At the same time, the internal structure of economic relations has significantly changed in the direction of electronic commerce. Roughly speaking, it can be stated that the Internet helped the Chinese economy to resist the impact of the pandemic.

The volume of e-commerce in China by the end of 2020 reached $1.5 trillion, showing an increase of 14.8%. Moreover, it increased by 7.6 percentage points in the first half of the year, when the country had the most stringent quarantine measures. The increase in the size of electronic sales has led to the expansion of the courier delivery sector, which has significantly absorbed part of the internal unemployment caused by the shutdown of enterprises in other industries. In 12 months, 83.36 billion parcels were delivered by couriers inside China.

In addition, the option of “live” online sales has become very popular. During the year, more than 20 million online broadcasts were conducted in China as a marketing tool. This supported not only domestic producers, but also led to an 8.2% increase in imports of foreign-made consumer goods to China.

Without fail, it should be noted that the key to the above-mentioned economic success was the comprehensive and resolutely uncompromising measures of the authorities to implement quarantine measures and promptly eliminate foci of infection. In some cases, they resulted in serious restrictions for citizens, small and medium-sized businesses, and in some places even turned into local outbreaks of civil unrest, which required the use of force to suppress them.

However, as a result, China managed to stop the pandemic by July–August 2020 and quickly return to the usual living conditions for the majority of Chinese citizens, thereby providing conditions for economic recovery much earlier than all countries of the world in the third quarter of 2020.

However, at the end of July, the Chinese industry managed to win back the crisis decline, reaching growth of 4.8% in annual terms. The value added of manufacturing industries showed an increase of 6% (calculated for the year), in the industries for the production and distribution of electricity, heat, gas, and water – 1.7%. Although it should be noted that the mining sector is still experiencing a decline of 2.6%.

Moreover, Beijing has managed to use this temporary advantage to expand the share of Chinese exports in all key markets of the world. Although, according to the WTO report, the total volume of total international trade in various industries in 2020 decreased by 13-32%, the share of Chinese exporters in it increased from 20% (2017-2019) to 25%, and the total number of Chinese-made goods on the world market rose from 23.4% to 33.8%.

Especially in such areas as construction and finishing materials, medical products, pharmaceutical products, detergents (especially soaps and hand antiseptics), special fibres for the production of masks and protective clothing, medical instruments. From 8% to 11.5%, the “Chinese share” in the electronics segment increased, especially monitors, computer headsets and webcams, the demand for which increased due to the growth in the volume of switching to remote work in the world.

Thanks to all of the above, Beijing was able to become the main recipient of money under the European “emergency anti-crisis programs to support citizens”. At least a quarter of all subsidies to the population allocated by their budgets eventually went to pay for “goods from China”. Stimulating the expansion of Chinese economic penetration into their markets. Especially in Europe and Asia. In particular, in the five largest economies of the Euro area, the share of “Chinese” imports increased from 9% (2017-2019) to 11.5% in January 2021.

The only exception is the United States, where the share of China in total imports decreased from 20.6% to 17.8%. But this was primarily due to the tightening of customs restrictions due to the growing trade and political “war” between Washington and Beijing.

All this allowed China to do without “helicopter money” to maintain domestic consumer demand during the growing pandemic in the country and the world, resorting to it only now. In particular, the government of the People’s Republic of China has launched a broad program to introduce a self-employment mechanism, as well as improve the tax system to reduce the fiscal burden for small and medium-sized enterprises.

At the same time, the Chinese leadership launched a program to “increase the social responsibility of large businesses.” However, not in the form of increasing the level of taxes on it, but through “stimulating” its voluntary participation from net profit in filling non-state funds for the development of territories. Such funds have already been established in six major provinces of the People’s Republic of China as pilot projects, with the prospect of extending their experience to the entire territory of China in 2022-2025. The state has a controlling stake in them, but their operational management is placed in the hands of the authorities of specific provinces.

The year 2021 showed the overall success of the measures taken to combat the economic consequences of COVID-19, allowing the Chinese leadership to state that the crisis has been overcome and that it is possible to move on to further development.

In the current conditions, China has outlined the next stage goal – to turn the country not just into a big one, but “into a big and smart” power. According to the plan for the 14th five-year plan (2021-2025), Beijing intends to focus on taking one of the top places in the field of high-tech implementation. By 2035, China is going to achieve full self-sufficiency in the field of advanced technologies, allowing China not to depend on other states.

 

Economic implications of the coronavirus pandemic for the United States

Although the United States continues to try to position itself as the world’s most developed, richest, most diverse, most advanced, and therefore most resilient economy, the coronavirus pandemic has caused it much more damage than China. David Cutler, an economist at Harvard University, and former US Treasury Secretary Lawrence Summers argue that it has already surpassed the amount of losses that are expected in the future due to climate change on the planet in the next 10-15 years.

Taking into account the long-term consequences, the US economy lost about $16 trillion, or 90% of annual GDP in 2019. Even with nearly $12 trillion in emergency financial injections under three “crisis management” programs, the US economy shrank by 3.5% in 2020.

The unemployment rate jumped from 3.5% to 14.7%, “leaving out” more than 25 million workers. Another 8 million citizens, according to the American bureaucratic definition, “left the labour force.” In other words, this means withdrawal from the unemployment register and stopping looking for a job as such. Thus, actual unemployment in the United States, including the hidden factor, reaches 19.4% or almost every fifth working-age American.

The situation is compounded by the fact that the budget funds allocated to support consumption (the same helicopter money) have given people who have lost their jobs the opportunity to maintain an almost unchanged level of income. This allowed them to survive the “dark times” relatively safely. But now they refuse to return to their jobs, demanding at least a one-and-a-half-fold increase in wages, which the American economy is not able to provide.

In fact, Washington was at a dead end. Falling sales and a reduction in domestic industrial production do not allow employers to increase wages, especially so radically. And the money poured into the US economy caused inflation to rise from 1.36% in 2020 to 5.4% in 2021. In just 12 months, the US budget deficit has grown 3.2 times and reached 3.13 trillion dollars, which is already 15.2% of US GDP.

In other words, the US economy does not have the means to continue the “crisis subsidisation” in the same volumes, but the budget is forced to find money for this due to the high risk of civil riots. In addition, most politicians take a populist position, trying to make political capital for themselves by “protecting the rights of victims of the pandemic,” including “those who have lost their jobs”.

It is important to note that structural unemployment was not the only negative consequence of the pandemic. The volume of US industrial production also fell, but it is difficult to say exactly to what level due to the closure of relevant statistics.

It is only known that in the service sector, the decline exceeded 40%, and the service sector itself in 2019 formed 77.4% of US GDP. But after the IMF report on the 38% drop in US industrial production by the end of the third quarter of 2020, open sources and official bodies stopped publishing any specific figures. Reducing all the talk to forecasts of a general decline in the global economy as a whole and estimates of its total losses, without separately highlighting the situation personally in the United States.

At the same time, the Joe Biden administration announced an ambitious plan to form a new long-term economic growth program in the United States called the New Deal. The US Senate approved its $1.1 trillion budget for the period 2021-2024. With an indication that this is not the last money, since according to the US Army Corps of Engineers, with current trends in infrastructure deterioration, only its repair and maintenance in an acceptable condition may require $ 5.9 trillion of capital investment.

According to this plan, extensive construction of generating capacities (mainly renewable energy sources) is expected, as well as the complete cessation of all subsidies for fossil fuels by 2025. 174 billion rubles will be spent on the electrification of land transport. In particular, at least 20% of school buses are supposed to be switched to electricity.

At the same time, investments will be made in the construction and repair of railways and highways, bridges, seaports, and car charging stations. The funds will be used for the introduction and extremely rapid development of “fast-growing industries of the future”, such as 5G networks. Within eight years, it is planned to build 1 million energy-efficient residential buildings.

Separately, there is a program to reduce US dependence on Chinese imports. First of all, in the field of consumer electronics, communications, computer technology, production of microchips and semiconductors.

The practical effectiveness of these measures is highly dubious. First of all, due to the lack of prerequisites for the growth of budget revenues. This means that the financing will go in the traditional way for the United States by further increasing the volume of public debt, which has already reached an absolutely record level.

And since the practice of all past such attempts clearly led only to an increase in the stock prices of American companies that have long and hopelessly broken away from the real level of their actual profitability, in the end, the declared measures will result in an acceleration of inflation not only in the United States, but also in the entire global economy as a whole. In fact, the United States is once again shifting its economic problems to the whole world due to the dollar’s status as a global currency and a global means of payment.

 

Economic implications of the coronavirus pandemic for the EU and the Euro zone

From the three leading markets in the world (China, USA, Europe), European economic losses due to COVID-19 were the largest. By the end of 2020, the EU’s GDP shrank by 6.3%, while the Euro Zone’s GDP shrank by 6.6%. However, unlike in the United States, these figures are “fair”, since the European monetary authorities did not resort to an emergency unjustified monetary issue.

The second quarter of 2020 was the most difficult for Europe, when the economy fell by 11.6%. The decline could not be compensated by the +12.5% surge in the third quarter, which was a manifestation of the realisation of deferred demand.

What happened clearly divided European countries in terms of the presence of domestic industrial power. The countries with the dominant shares of tourism and transit logistics in the structure of their economies suffered the greatest losses. Due to the widespread quarantine, 78% of domestic and more than 90% of external air traffic stopped almost simultaneously.

Without a tourist load, transport “stopped”, hotels were emptied, businesses connected to them (guides, consultants, mass entertainment services), as well as services for servicing hotels and public catering establishments stopped working. As a result, the tourism industry lost about $ 21.1 billion.

In the industry cross-section, the most affected sectors of the European economy were: energy, automakers, aircraft manufacturing and the fashion industry, which in total lost more than $100 billion. If tourism suffered losses because foreign tourists did not arrive, then in the industrial sector, economic problems arose due to the disruption of logistics chains.

For two decades, industries such as the clothing and footwear industry, as well as automotive manufacturing, have sought to reduce inventory by accelerating the logistics of receiving products from manufacturers of “nodes and blocks”, as well as ready-made clothing produced at enterprises in Turkey and Asia-Pacific countries. As a result, when the borders were closed due to quarantine, supply disruptions critically affected 51.7% of orders in the automotive industry, 43.3% of orders in the clothing and footwear industry, and 39.8% of orders in six other key production areas of the European economy.

If we take it as a whole, it should be noted that the economy of Germany in 2020 shrank by 1.5%, Belgium – by 3.4%, the Netherlands – by 1.6%, Sweden – by 1.4%, Bulgaria – by 0.8%, while the decline in Greece reached 7.9%, in Spain – 12.75%, Italy – 6%, and in France – 4.2%.

What happened led to four effects.

Firstly, as soon as anti-pandemic measures began to have a positive effect, European governments immediately began to weaken them. In combination with a number of other measures, such as special COVID-passports, which expand the rights of citizens to move and visit public places, this has brought restaurants and cafes, as well as other areas of the service sector, back to life.

A significant proportion of the working-age population has a job, since in most European countries it is normal to eat out of the house. In addition, especially in France, Belgium and Germany, the very fact of visiting cafes in public has become a legal form of protest against state quarantine measures that restrict “the rights and freedoms of citizens”. Thus, deferred demand started to be implemented, and it turned out to be very significant.

Moreover, the countries with the most significant share of the service sector in the GDP structure, which were the fastest to “fall” due to quarantine, now show the highest recovery rates. In particular, in 2021, compared to the same period a year earlier, economic growth in Belgium reached 21%, in Italy – 8%, and in Germany – 4%.

However, countries that are heavily dependent on tourism, such as Spain, are recovering slowly, as their dependence on tourism has turned out to be too high. Despite an active recovery, including cross-border travel, there are not enough tourists inside Europe to compensate for their combined volume of 2019 levels. Hotel fund utilisation remains 25-30% lower than what is traditional.

In addition, in countries such as France, Italy, Spain, and Greece, approximately 50% of hotel revenues come from the summer season, which this year was still limited for cross-border tourism. First of all, due to the shortage of vaccines, the introduction of politically motivated restrictions on the use of Chinese and Russian formulations, as well as difficulties with the development of common legal and technical standards by the European authorities. So the recovery of the tourism industry is expected no earlier than 2022-2023. And even then, provided that the problems with energy supply in Europe are solved.

The latter has a particularly strong impact on the gap between potential output and actual current consumption (production gap). It reaches the highest value in Spain (7.8% of GDP). In the developed countries of Western Europe, it is less (Germany – 2.6%, Belgium – 2.8%, the Netherlands – 2.9%), in Eastern Europe – more (in the Baltic states – up to 8.1%).

However, Eastern Europe shows dependence not on bureaucratic problems with “COVID-passports” or the energy shortage that has arisen this fall. From 7 to 15% of its small and medium-sized enterprises were on the verge of bankruptcy. The problem is being stopped by reducing staff and reducing the amount of remuneration for a significant part of the staff left behind. As a result, the volume of effective demand decreases, not allowing to increase domestic consumption and thereby stimulate the growth of production volumes.

Secondly, the long period of quarantine has had a strong stimulating effect on the growth of the scale of “life on the Internet”. This applies not only to expanding the practice of remote work, even to those areas in which it took root very poorly back in 2019.

Although this in itself has provided a strong support role for the information technology sector, one of the few that managed not only to “not fall” during the crisis period, but also showed an overall growth of 1.8%. It could have done more, but ran into the problem of logistics from the regions of the main production of electronic components and the element base in Southeast Asia stopping.

However, the fastest growing market in Europe was the transition of retail to the e-commerce format. According to estimates of the European analytical agency Euler Hermes, the COVID-19 pandemic has accelerated the development of e-commerce in Europe by at least 4-5 years compared to the average pace of the period 2005-2019. In the top five European countries, the share of e-commerce increased from 3% to 11% of total sales in less than 8 months. The dynamics were especially strong in the segments of trade in food, household goods, and personal hygiene products, where its size was twice the average value.

Moreover, the volume of online food sales, as the work of cafes and restaurants recovers in 2021, decreased by only 2.4%, which indicates the formation of a stable long-term trend and a noticeable change in consumer habits of the population.

But at the same time, the expansion of food sales via the Internet in Europe results in losses for retail in terms of revenue and profit. To attract the attention of consumers, electronic platforms widely use the promotion of the combination of “it is easier and more convenient due to the availability of delivery to the house door” with the price factor “it is also significantly cheaper than in the usual offline grocery store”.

As a result, the transition of just one percent of sales from regular grocery stores to online stores, in Europe as a whole, results in a drop in total revenue of €13.6 billion and a reduction in profit by 4% (to €1.9 billion) per year.

In addition, it turned out that at least a third of existing retail outlets in European countries, especially in specialised segments, were teetering on the verge of self-sufficiency. Because of this, the loss of even a small 3-5% share of the revenue “gone online” turned out to be fatal for them. Store closures further result in a “domino effect” that reduces the need for small wholesale logistics, personnel and services of intermediate warehouses, rental business, a decline in the real estate market, that is, ultimately, to an increase in unemployment and a decrease in overall effective demand in the domestic consumer market.

This effect is particularly strong in France and the UK, where the share of online sales in total food retailing reached 9% and 12%, respectively.

This is not to say that e-commerce turned out to be a more profitable option. Switching to online sales means that part of the costs in the value chain (for example, picking, processing, and delivering an order) is shifted from the buyer to the seller. And these costs are often not covered by the profit from the corresponding sale.

Offline, the average pre-interest and tax margin (EBIT margin) for grocery retailers in Europe is 3.7%. Since many of them made the transition to e-commerce under the pressure of a sudden crisis, so without careful preparation and preliminary modelling of business processes, the actual online margin turned out to be low – only 0.52-1.1%.

This leads to a number of conclusions. The combination of a lower price with delivery of the order “to the doorstep “(and even with the pick-up option) was pleasant to the consumer. Consequently, the process of moving trading online will accelerate and expand. But this business itself will undergo profound changes in the next 1.5-2 years.

To return to the usual EBIT margin rate, e-stores will need to either push down wholesale prices and manufacturers’ selling prices, or raise prices on electronic platforms to the level of offline retail. Or even higher, since online stores need to compensate for the additional costs of packaging, processing and delivery of the order to the buyer.

Until online retail takes a dominant position in the food retail industry, it cannot afford to increase selling prices. This means that the solution to the problem will be sought through lowering prices in the wholesale link. In terms of numbers, this will mean a decrease in the profit of the food trade sector by about €500 million for every percentage of the transition of trade from offline to online.

Thirdly, the pandemic-induced crisis in the European economy has exacerbated a trend that actually began in the mid-noughties of this century. European industrial production has gradually lost ground to China in international export markets.

The crisis showed this trend more clearly, showing that “European production”, with the exception of a few large “unicorns” like Airbus, Rolls Royce engines, or industrial power and generating units based on internal combustion engines that are the hallmark of Germany, is critically associated with obtaining components and units of Chinese or Asian production. The thesis that the scientific and technological growth of the PRC leads to the gradual displacement of Europeans from international export supplies is now proven in practice.

The weakness in the competitiveness of European exporters is most pronounced in the industries that for decades were considered the main ones for Europe. In particular, in the aircraft industry, the pharmaceutical industry, the automotive industry, and the production of electronic equipment. As the global economy recovers, total demand for these products is growing, while European exports in value terms are growing at a noticeably slower pace. The most negative results are observed in France (-1.7 percentage points), Germany (-1.3 percentage points) and Italy (-1.1 percentage points).

The crisis has shown that China is successfully realising its advantage in export markets due to its specialisation, primarily in fast-growing sectors, as well as its clear superiority in the price-quality parameter. First of all, in the areas of mechanical engineering, production of electrical equipment and all medium-sized machinery in general, which was previously considered the undivided patrimony of Germany, France and Italy.

Moreover, it turned out that the Italian industry was the most resistant to competition with China. German industry is in second place. And the French one is losing its former advantages catastrophically. Especially in the shipbuilding industry. As a result, the agricultural sector is gradually becoming the key for French exports. In this regard, France is beginning to follow the path of Ukraine, although for slightly different reasons.

Fourthly, the leading industrialised European countries, including Germany, are facing structural problems of industrial development. First of all, they are related to the inhibition of scientific and technological progress not only in new, but also in traditional industries.

The situation is dramatically aggravated by a clear shortage of personnel. The younger generation, from which the LGBT lobby raises consumer biomass, shows a decline in interest in engineering, which makes even maintaining current production volumes in Europe difficult. Meanwhile, China does not experience these restrictions.

Europe is trying to find a way out of the impasse by expanding its investment in industrial development in India, Vietnam and Malaysia. Trying to compensate for the defeat in the competitive struggle with China by increasing the profit margin in the remaining part of sales volumes at the expense of cheap labor in these countries. Strategically, this is a dead end, but in the current external and internal conditions, the Europeans simply cannot find any other way.

Thus, although the European economy is now recovering at a pace higher than expected in the summer-autumn of 2020, in general, this process is inertial in the implementation of pent-up demand. Its structure “after COVID-19” is clearly weaker than the state in the pre-crisis period.

In addition, the recovery process has already faced the negative consequences of mindlessly increasing the share of renewable energy sources in the European energy mix. This threatens to seriously knock out European chemical and, probably, metallurgical companies from their export segments in the world by the spring of 2022.

 

Economic consequences of the coronavirus pandemic for the Russian Federation

Unlike other countries, Russia experienced a significantly smaller decline during the pandemic. According to Rosstat, Russia’s GDP for 2020 decreased by 3.1%, while real disposable incomes of the population decreased by 3.5%, which is significantly less than the forecast values of the beginning of 2020.

The largest impact of measures to combat COVID-19 fell on the service sector, but since the size of its share in the GDP of the Russian Federation (54.1%) is significantly smaller than in Western countries (USA – 77.4%, Britain – 71%, France – 70.3%, Canada – 70.2%, Japan – 69.1%, Spain – 67.7%, Italy – 66.3%, Germany – 61.8%), as well as due to more effective quarantine measures and a much better degree of readiness of the health system to combat the pandemic, the final impact of the decline in the service sector on the economy as a whole turned out to be less.

Russia has managed to maintain the efficiency of basic industries and foreign trade, at least in its raw materials part. In addition, it was possible to quickly create effective vaccines, which also gave strong support to exports, along with other medical products, which were not able to quickly increase production in Europe and the United States.

At the same time, it should be noted that Russia also faced an increase in unemployment, which increased from 4.7% to 6.4% of the working-age population during the year, which is the highest in the last 8 years. However, it should be noted here that thanks to the anti-crisis measures taken, it was already reduced to 5.9% by December 2020, and even to 5.2% in April 2021. It follows that the recovery of the service sector is quite successful. Although it will not be able to fully return to the pre-crisis level until 2022.

The value added in the sectors focused on serving the population has significantly decreased: hotels and restaurants (-24.1%), cultural and sports establishments (-11.4%), transport enterprises (-10.3%) and organisations providing other services population (-6.8%).

Unfavourable export conditions and lower energy prices led to a decline in the physical value added index (-10.2%) and the value added deflator index (-17.6%) in the mining industry. The change in prices for petroleum products was one of the reasons for the decline in the deflator index of gross value added of manufacturing industries (-0.3%).

There are two long-term negative factors. The first is financial. The Russian government spent almost 4 trillion rubles of “unscheduled financing” on emergency anti-crisis measures. This step ensured the stability of the Russian economy during the maximum impact of the pandemic during 2020, so it should be considered correct.

However, an emergency injection into the national economy of an additional 50% of the federal budget expenditure and 20% of the consolidated budget of the Russian Federation for 2020 predictably resulted in an increase in inflation – from 4.1% to 6.5% in June 2021, the consequences of which will have to be stopped at least until the end of 2022.

The second factor should be considered the emergence of a labour shortage, which arose due to the cessation of the influx of labour migrants, who in 2019 provided up to 7% of “workers” and provided up to 6% of the GDP of the Russian Federation. The shortage of these personnel will be one of the main obstacles to the country’s economic recovery. But judging by the latest measures of the government (delivery of 300,000 migrants from Uzbekistan and Tajikistan), a solution has been found for this issue.

Equally important was the fact that the share of net exports of goods and services in the structure of GDP use decreased from 7.6% in 2019 to 4.8% in 2020 due to a drop in the price indices for exported goods. According to the Federal Customs Service of Russia for January-November 2020, compared to the same period in 2019 – by 20.5%, mainly due to fuel and energy products. The share of final consumption expenditures increased from 69.5% to 71.5%, gross accumulation – from 22.9% to 23.7%, including gross fixed capital accumulation – from 21.2% to 21.6%.

At the same time, as in other countries, the economic crisis caused by the pandemic has accelerated the pace of the modernisation of the economy. First of all, in the field of online commerce, the share of which in 2019 was 6.1% of retail sales, by the end of the first half of 2020 it rose to 10.9%, pulling with it the development of related areas.

So, in particular, courier delivery services increased 4-fold, and the volume of online trade goods in Moscow warehouses increased from 5 to 51% of the total retail turnover. According to experts’ forecasts, over the next three years, the pace of the process will increase by about 6% annually. Already in the third quarter of 2020, the volume of leased and purchased warehouse space reached a record for the last ten years of 861,000 square meters, which is 200% higher than the same indicator a year earlier.

Also, the remote work sector received a powerful boost, which led to the acceleration of the entire IT sector, from sales of computer equipment and other equipment (webcams, computer headsets, acoustic equipment), to the development and implementation of application software.

Thus, it should be noted that Russia has managed much more successfully than other countries to stop the economic problems caused by the pandemic, taking a confident second place in this ranking after China.

 

Political implications of the coronavirus pandemic

As it follows from the above, the pandemic did not just “temporarily” affect the global economy in some way. In fact, it not only burned off the excess accumulated fat, but also shook off the accumulated layer of traditional ideas about the open common market as an absolute achievement, exposing, deepening and accelerating all the previously formed problems.

Among the key ones, the following should be noted.

Firstly, geopolitically, the world has lost its monolithic unity. International organisations, including leading ones such as the UN, WHO, and WTO, have been prohibitively slow in dealing with negative factors and have been blatantly unable to take on the active leadership and coordination role that was previously attributed to them. In fact, national governments were forced to save their economies on their own.

Secondly, a serious fundamental discord has also emerged within the main geopolitical blocs, from the concept of the “collective West” to such previously considered fairly strong entities as, for example, the European Union. At times, it reached the point of attempts to directly intercept shipments of medicines and medical materials from each other, which in some places turned out to be similar to banal robbery.

This was especially evident in the US policy towards the EU, and in the actions of leading European countries in relation to the Eastern European limitrophes, which actually found themselves on the sidelines of the processes, left to themselves in the “everyone for themselves” regime.

Thirdly, faced with the transformation of the global economy in an undesirable direction, the United States, and then the European Union, resorted to the activation of isolationist processes, which significantly increased the disintegration of the common market into noticeably separate clusters. Their final formation is now only a matter of time.

Moreover, if the outlines of the “Chinese” cluster are already almost clearly formed within the framework of the Regional Comprehensive Economic Partnership (RCEP), then the final borders of other “clusters” are not yet sufficiently clear. The US’ position is more or less solid only within the North American continent. Washington’s claims to extend its influence to Central and South America have so far met with mixed success.

As far as Europe is concerned, four multi-directional trends are intensifying at once. On the one hand, Brussels is using what is happening to deepen the reform of the EU on the basis of transformation into a centralised version of the “United States of Europe”. On the other hand, France and Germany are trying to return to the stage of a “voluntary community of European countries” with a reduction in the importance of the European Commission and the European Parliament.

On the third hand, the increased internal contradictions about the ways and methods of further modernisation, as well as the growing general dissatisfaction of national elites with its current results, reinforce the centrifugal tendencies. Moreover, some states, such as France, are interested in two options at once, which only further destabilises European foreign and domestic policy.

On the fourth hand, Poland, under the influence of Britain (which is simultaneously conducting a similar project with Turkey), is trying to use the current circumstances to implement its own geopolitical project, the Three Seas Initiative, to form something like the EU-lite from the Eastern European limitrophes under the unconditional leadership of Warsaw.

Fourthly, the United States is trying to take advantage of the current crisis to radically revise its international obligations, both within the UN and in relation to its NATO allies. Washington openly demonstrates a decline in political interest in Europe and the transition in relations with it to instruments of purely economic dominance.

But since America has little to offer the Old World economically, its policy focuses on expanding sanctions pressure in two directions. On the one hand, it is necessary to prevent the economic rapprochement of Europe with Russia as much as possible, at least in the energy sector, and on the other hand – to block the leading European countries’ own initiatives to revive their geopolitical subjectivity (the European army, security forces, and so on).

Fifthly, the European Union, in turn, is trying to find a way out of this situation through an attempt to accelerate the “green energy transition” in order to build sustainable “hydrogen energy” as quickly as possible. If it succeeds, it promises to end its dependence on external energy sources, which provides an opportunity to impose a “carbon tax” on all foreign economic partners, and launch a long-term global process of scientific, technical and infrastructural modernisation that can provide the European economy with a self-sufficient source of further economic growth.

Proponents of the “environmental agenda” continue to stubbornly hold their views even against the backdrop of the current energy crisis in Europe, caused by the consequences and practical implementation.

Sixthly, the world as a whole is also undergoing transformation, both in terms of the redistribution of so-called “centres of power”, among which South-East Asia and China are gradually taking the leading place, and in terms of the directions of further economic expansion. The main one is Africa, as the last “region without strong power, while having from a quarter to a third of the world’s mineral reserves”.

 

Conclusions and recommendations

Summing up the above, it should be stated that the crisis caused by the coronavirus pandemic has not shown anything extraordinary either in the economy or in politics. It only intensified and exposed already formed processes, some of which accelerated. Some of them, especially in the sphere of geopolitics, lead to increased international competition. Especially in the area of opposing world-views and value systems.

Practice has shown that states with a stronger central government and an internally more cohesive society cope with the crisis much better and more effectively than “free democracies”. Moreover, for example, in the United States, liberal democratic principles clearly become a simple screen covering the internal totalitarian modernisation of the “new American society”.

Others, on the contrary, are accelerating due to the emergence of favourable conditions and the weakening of traditional resistance. In particular, the scale of progress in the field of transition to online trading, remote labor activity and the formation of new convenient formats for small business (for example, the introduction of a form of self-employment) in the crisis year 2020 alone exceeded everything that was done in this regard over the previous decade.

This suggests a direct reference to the fact that the concept of crisis in Chinese is denoted by a combination of two characters, one of which means risk or danger, and the other means opportunity or chance. This is exactly how what is happening should be interpreted for Russia.

In this regard, it seems appropriate:

1. Take it for granted that no measures can restore the outside world to its pre-crisis economic and geopolitical state. We can only consider strategies for adapting the Russian state to new realities, as well as its modernisation to ensure conditions for taking a worthy leadership position in this “new world”.

2. An important lesson of this development is China’s success in countering negative political and economic factors based on shifting the key focus from foreign trade to the domestic market. More precisely, the formation of a socio-social mechanism there, in which the presence of a fairly extensive middle class made it possible to provide its consumer demand with the minimum load of industrial production necessary to maintain efficiency.

As a result, foreign trade is gradually turning into a pleasant and necessary, but not critically important bonus, which brings only additional, and not the main, profit of the aggregate economy.

Applied to Russia, this formulates three interrelated tasks. First: the need to increase the country’s population. Second: the need to accelerate the formation of a fairly extensive own middle class. Third: the need for a proportional increase in the scale of domestic industrial production of the largest possible list of consumer goods. The rapid development of the size of the service sector in relation to the production sector is directly harmful for the economic stability of the state.

3. China has also shown that it is not only theoretically possible to compete with developed Western countries in advanced areas, but also quite achievable in practice. It was the dynamism in the development of new emerging areas of science and technology that gradually gave it the ability to displace “Western competitors” first from innovative ones, and then from those areas that were previously considered the undivided fiefdom of “advanced Western countries”. The latter is especially important for Russia, as in the new world it will have to compete not only with the stagnant West, but also with the rapidly developing East.

4. A comparison of the results of the “passing of the crisis” between the countries of the world convincingly shows that in terms of internal political and economic structure, Russia is not only not inferior to the “countries of the golden billion”, but is also able to serve as an example to emulate them in many ways. This is not so much a question of economics or propaganda, it is an objective fact, on the basis of which we should now rebuild the ideological education of society.

As was noted above, the acceleration of global transformation now directly affects not so much the economy, but the space of world-view ideas in the field of “the correctness of life and global meanings of existence”. The growing negative – including through sanctions – reaction of the West to the actions of the Russian Federation convincingly shows the awareness of its elites of the fact of the tendency to its defeat in this confrontation.

This automatically leads to increased attempts of its interference in the internal affairs of Russia and an attempt to destabilise society and the state socially and politically. To fight this only with purely defensive methods means a direct road to the ideological loss of Russia. With approximately the same consequences that the Soviet Union received in the late 80s, as a result of an attempt to ignore the Western ideological cultural pressure that began in the last quarter of the 70s.

Russia should not just have advantages. They need to be accompanied by active media and educational work both within their own society and in the outside world. Thus, we come to the necessity of forming clearly formulated ideological foundations of “our world”, which would be possible to systematically implement in literature, cinema and other areas of public consciousness.

Moreover, it is important to note the need to abandon the concept of constantly comparing oneself “with the West”. These ideological foundations are necessary for “us” and exclusively for “us”. The opinion of the “West” in our address should not worry Russia.

Institute for International Political and Economic Strategies – RUSSTRAT

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