Putin’s China Deal Won’t Help Russian Economy Much, Moscow Experts Say

June 5, 2014
Putin with Chinese counterpart Xi Jinping. Photo by AFP.

Staunton, June 5 – The much-ballyhooed gas deal Vladimir Putin signed with Beijing will only have an “insignificant” impact on Russia’s economic development and state revenues, according to an analysis by experts at the Center of Development of the Moscow Higher School of Economics.

Their 43-page report is available here. Its main conclusions are provided by Nikolay Kondrashov in an excerpt that is posted here.

The micro impact of the May 21st agreement involving Gazprom, the economist says, is quite difficult to predict because many of the parameters set by the accord have not been released. But the macro-economic impact of the agreement is clearer and “useful to know,” he adds.

The macro effects, Kondrashov says, are the impact the deal will have on investment in Russian infrastructure, on income from the sale of gas to China, and on the revenues the Russian state treasury will receive from such sales.

The agreement calls for US $55 billion of investment in Russian infrastructure, spread over seven years. How much of an impact such investments will have on the economy depends on how large a share imports form of these investment projects and whether these investments will stimulate broader economic activity in the sectors where they occur.

Russia has the capacity to produce large-diameter pipeline, Kondrashov says. Indeed, its capacity in that area is currently underused. Consequently, any expansion of production will not have the same multiplier effect it would have if its plants were working at full capacity. Another limiting factor is what amount of raw materials Russia may have to import.

According to Kondrashov, he and his experts do not expect such infrastructure investments to boost the growth of the Russian economy a percent in some years and less in others and then only until 2021. After that, he suggests, whatever investments have been made will have little impact on growth.

Russia will earn money from the sale of gas to China, but the impact of these sales on the economy as a whole will be small in the near term and equal to “zero” in the longer term. But there is “one constant positive effect,” the Moscow economist suggests. This deal will boost the revenues of the government. Indeed, the state treasury is “the chief beneficiary” of the deal.