How bad is the Russian economy, really?

Analysis Commercial trade port in Vladivostok, Russia. Shutterstock
Commercial trade port in Vladivostok, Russia. Shutterstock
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Updated 16 March 2022

How bad is the Russian economy, really?

How bad is the Russian economy, really?

RIYADH: On March 9, Russia’s central bank ordered new capital controls, limiting withdrawals in foreign currencies.
The Bank of Russia or the Central Bank of the Russian Federation, CBR, declared that it would cap cash withdrawals of citizens holding accounts in foreign currency to $10,000 until Sept. 9.

The decision came in the backdrop of a Fitch Ratings warning of an imminent Russian government default on its external debt. At the end of February, Russia’s central bank had already introduced some capital controls and doubled its key policy rate to 20 percent per annum. The measure was an attempt to prevent the free fall of the ruble since the beginning of the Ukraine invasion on Feb. 24 and sanctions imposed by the US, the EU, UK and Japan.

But is the war sustainable in the long run? 

“There are two main sets of reserves that many people thought would allow Russia to fund its war and weather sanctions. The first is the foreign reserves held by the CBR worth about $640 billion. Sanctions against the CBR mean that it cannot access those reserves held abroad, nor can it easily exchange its domestically held reserves on international markets,” said Robert Person, professor of international relations at the US Military Academy (West Point), while speaking in his personal capacity to Arab News. 

This situation essentially limits Russia’s ability to shore up the ruble, use its funds to pay off some of its debt, or pay for imports. Many hinted at Russia’s rising reserves from 2015 onward as evidence of Russia’s growing war chest. But that money is only good if Russia can access it and, right now, it cannot access a large portion of those funds, explained Person. 

National Wealth Fund

The second set of reserves is Russia’s National Wealth Fund, known as NWF. “This is where surplus revenue from energy sales gets deposited when oil prices are high. Again, many people pointed to this fund as evidence of Putin’s ability to fund a long-term war or weather sanctions indefinitely,” pointed out Person. 

However, the academician reasoned that this assumption has two main problems. During the financial crises of 2009 and 2014 in Russia, Moscow had to withdraw heavily from this fund to support the economy. “It is not a bottomless piggy bank,” added Person.

Valued at $189 billion in June 2021, Russia’s NWF is far smaller than Saudi Arabia’s PIF in comparison, valued at around $430 billion, he remarks. 

The NWF value stood at $174.9 as of Feb. 1, 2022, according to most recent data from Russia’s Ministry of Finance.   

Banking sanctions

Another problem the Russian government is facing is banking sanctions, which block Russia’s ability to convert their funds into foreign currencies, limiting their usability, said Person. “The recession Russia is likely to experience in 2022 onward is to be far more severe than what they saw in 2009, 2014, or 2020. Whatever funds from the NWF Russia can spend is unlikely to last very long in providing macroeconomic stability,” argued Person.

Analysts polled by the CBR showed the Russian economy is expected to contract by 8 percent in 2022. However, this survey was conducted before the 20-percent interest rate hike was announced by the CBR. 

In addition, Bloomberg Economics predicts inflation will peak at an annual 19 percent around July, in comparison with 9.2 percent last month, and end the year at about 16 percent.

Russia’s NWF was severely depleted by the crises of 2008 and 2010. A low-level conflict in Ukraine between Russian separatists and the Ukrainian government in 2014 further dwindled Russia’s funds. “Russia had to spend heavily out of the NWF to cover federal budget deficits and finance off-budget stimulus,” said the professor.

Historic data shows NWF value fell to some $60 billion at end of June 2019 from $88.6 at end of 2013 only to jump to $125.6 billion at end of 2019 and continued rising to reach $197.8 billion at end of October 2021.   

Military expenditures

Today, the most intriguing question is how much is Russia spending on its war efforts since the onset of tensions in 2014. Person said it is tough to estimate, especially since Russia denied any involvement in the Donbas conflict from 2014 until its current invasion.

“However, overall Russian military expenditures rose steadily throughout Russian President Vladimir Putin’s reign, reaching a peak of just over $200 billion in 2016,” he added. 

Other challenges faced by Russia stemmed from US President Joe Biden’s announcement on March 9 to impose an immediate ban on Russian oil and other energy imports in retaliation for Russia’s invasion of Ukraine. The UK said it would phase out its Russian oil imports by the end of 2022. If more countries follow suit, this could prove disastrous for Moscow. Russia is counting on high oil prices to boost its revenues.

“On the other hand, Russia can be expected to use whatever funds it can spend to prevent the collapse of the Russian economy. I would expect the value of the NWF to drop sharply as Moscow tries to deal with a severe recession,” said Person. One advantage it still benefits from is that the Russian economy is not heavily indebted. 

“Before COVID-19, the annual growth from 2016-2019 averaged 1.7 percent. It posted a 2.95 percent decline in GDP in 2020, while it registered a 4.3 percent recovery in 2021. But there are many deep structural features of Russia’s economic system that severely limited its long-term growth potential, even before sanctions were imposed,” explained Person.  

 

Economic strength

Russia’s economic strength is that it is one of the least indebted countries globally, with its national debt equalling 17.88 percent of the GDP, according to Person.

Budget deficits are often in positive territory. In 2019, the Russian budget deficit was a surplus of 1.8 percent, followed by a deficit of 3.8 percent in 2020 and a surplus of 0.4 percent in 2021.

Yet, Russia’s Finance Ministry said it was preparing to service some of its foreign currency debt in rubles if sanctions prevented banks from paying their debts in the currency they were issued in, according to Reuters.

Person further said that it was still too early to tell how hard the sanctions would hit the key macroeconomic indicators such as GDP, inflation, and unemployment. “But we’re already seeing the effect with bank runs and the collapse in the ruble’s value,” he added.

The Russian currency was trading at 121.85 in mid-day trading on March 14, down from previous close of 132.9, representing an extraordinary drop from the 75 rubles to a dollar, before the crisis. 

 “With the Bank of Russia unable to use its reserves to defend the ruble, domestic unrest may grow in Russia as citizens’ purchasing power evaporates,” he augured.


Kuwait Airways plans to expand its network with 20 new routes in 2023  

Kuwait Airways plans to expand its network with 20 new routes in 2023  
Updated 05 February 2023

Kuwait Airways plans to expand its network with 20 new routes in 2023  

Kuwait Airways plans to expand its network with 20 new routes in 2023  

RIYADH: Kuwait Airways plans to launch 20 new destinations in 2023, including a number of new cities to its winter schedule, as the airlines moves towards diversifying its network around the world, revealed the company’s top official. 

"The company is preparing accurate studies on the feasibility of these markets and destinations, as well as the extent of customer demand for them,” said Shorouk Al-Awadhi, director of Distribution and Network Planning at Kuwait Airways. 

The airline will operate its flights, starting in June to Budapest in Hungary with two flights per week to Malaga in Spain, three flights per week to Sarajevo in Bosnia, and two flights per week to Mykonos in Greece.  

She revealed that this is in addition to their flights to Athens in Greece with one flight per week to Vienna in Austria, three flights per week to Nice in France, and two flights per week to Antalya in Turkey.  

Operations to Trabzon in Turkey will include three flights per week to Bodrum in Turkey, three flights per week to Sharm El Sheikh in Egypt, and three flights per week to Salalah in Oman. 

“The company will also operate its flights to Izmir in Turkey from April with three flights per week on Tuesdays, Thursdays, and Sundays, and will be launching its flights to Alexandria in Egypt starting from March with three flights per week on Mondays, Fridays, and Sundays,” she explained. 

This comes as Kuwait Airways has included a number of new cities to its winter schedule, commencing from October, such as Barcelona in Spain, Berlin in Germany, Abha, Al-Ula, Taif and Al-Qassim in Saudi Arabia. 


No one-size-fits-all solution to achieving net zero, says Saudi energy minister  

No one-size-fits-all solution to achieving net zero, says Saudi energy minister  
Updated 8 min 54 sec ago

No one-size-fits-all solution to achieving net zero, says Saudi energy minister  

No one-size-fits-all solution to achieving net zero, says Saudi energy minister  

RIYADH: As the world pushes to achieve net zero, there is no one path or a defined one-size solution that fits all, said Saudi Energy Minister Prince Abdulaziz bin Salman during an energy event in Riyadh. 

“There are many pathways that get us there ... pathways that take into account national circumstances, economic development, and solutions that are local, national, regional, and global,” the minister said during his inaugural speech at the 44th International Association for Energy Economics conference. 

The energy event, which is being held for the first time in the Middle East and North Africa region in Saudi Arabia with the King Abdullah Petroleum Studies and Research Center and Saudi Association for Energy Economics, will run from Feb. 4 to 9. 

The conference’s theme this year is “Pathways to a clean, stable, and sustainable energy future”.  

The minister who also held a conversation with energy expert Daniel Yergin at the IAEE 2023 added that there is always a better chance for collective efforts and holistic solutions.  

“Cocooned solutions tend to bring people far and tend to create more chaos. So, in the endeavor of everybody trying to bring the solution to these problems, I’m afraid we might end up with a more chaotic situation than what everybody’s aspiring.” 

Prince Abdulaziz said that the Kingdom is working toward sequestration, which is the technique of capturing and storing carbon dioxide from the atmosphere. 

“We are reaching out to everybody around the globe, trying to market our hydrogens. We’re going to move by producing electricity, converting it to hydrogen.” 

The minister added that the world needs hydrocarbons, not fossil fuels.  

“To have the world continue using hydrocarbons, you have to mitigate and you have to showcase that you are mitigating all greenhouse gases because people are overlooking methane,” he said.  

With sequestration in mind, the minister further added: “We have a proven record on methane emission. Let me see who is gonna match us. We will produce, we will continue to produce, we will be the last man standing.” 

He said that it has been the Kingdom’s endeavor to work on mitigating all greenhouse gas emissions in all sectors. 

“Our motto for advocacy simply said, we need the whole world to produce all sources of energy, albeit mindful of climate change.” 

Prince Abdulaziz spoke about the humanitarian aspect of clean energy, which is cooking or preparing food for the poor.  

“This is a noble humanistic cause that people need to focus on, as there are hundreds of millions of people who are devoid of modern energy resources,” he added.  

The conference offers academia, the scientific community, businesses, and governments the opportunity to examine the ways in which the energy environment is changing, and to investigate concepts and tactics that ensure long-term success in a low-carbon future. 


Business confidence hits 2-year high in Saudi Arabia as PMI climbs 58.2 in January  

Business confidence hits 2-year high in Saudi Arabia as PMI climbs 58.2 in January  
Updated 05 February 2023

Business confidence hits 2-year high in Saudi Arabia as PMI climbs 58.2 in January  

Business confidence hits 2-year high in Saudi Arabia as PMI climbs 58.2 in January  

RIYADH: Saudi Arabia’s Purchasing Managers’ Index touched 58.2 in January 2023, the second-highest since September 2021, as the Kingdom steadily diversifies its economy in line with the goals outlined in Vision 2030, according to a report.

The latest Riyad Bank Saudi Arabia Purchasing Managers Index report, formerly the S&P Global Saudi Arabia PMI, noted that the confidence among non-oil private sector firms in the Kingdom climbed to a two-year high in January.

In December, the Kingdom’s PMI stood at 56.9, while in November, the index hit 58.5, the highest in the last 16 months.

According to the index, released by S&P Global, readings above the 50-mark show growth, while those below 50 signal contraction.

“Saudi Arabia is continuing its strong performance and outperformed the global economic trends for activity and demand. The non-oil sector is starting this year with a strong headline growth at 58.2 in January, recording the second highest growth since September 2021,” said Naif Al-Ghaith, chief economist at Riyad Bank.

He added: “This growth confirms the Saudi position as the fastest-growing economy among the Group of 20 countries despite economic headwinds.”

According to Al-Ghaith, the rise in business confidence in January was primarily driven by the ongoing improvement in the business environment, private-sector employment, and increased foreign investment with governance and labor market reform.

According to the report, new order inflows continued to rise at a marked pace in January, as firms typically commented on improving demand conditions and stronger client orders.

The report further added that demand from foreign clients increased rapidly and to a greater degree in January than at the end of 2022.

“Inflation is expected to soften in the upcoming months with the reduction in input cost pressures and the continued improvements in supply chains. We have started to see weaker increases in output prices corresponding with input costs. The rise in output prices was the softest in nearly a year, despite the growth in new orders which remained marked in January,” added Al-Ghaith.

The report went on and said that non-oil activity levels expanded sharply in January, with around a third of all surveyed companies seeing an uplift in the month.

“The degree of positivity picked up to the highest level since January 2021, as panellists largely expect demand growth to continue and market conditions to improve,” the report added.

As outstanding business levels fell for the consecutive eighth month, hiring growth moderated from December’s near five-year record.

According to the report, supply chain conditions remained relatively healthy at the start of 2023, while vendor performance improved at a solid pace as suppliers responded positively to requests for faster deliveries.


Mideast’s share of renewables in energy mix to double by 2030: SAEE chairman

Mideast’s share of renewables in energy mix to double by 2030: SAEE chairman
Updated 05 February 2023

Mideast’s share of renewables in energy mix to double by 2030: SAEE chairman

Mideast’s share of renewables in energy mix to double by 2030: SAEE chairman
  • Region plays crucial role as it continues supplying hydrocarbons as the world enters a new energy system

RIYADH: Saudi Arabia is committed to driving energy transition using renewables but not at the cost of traditional fuels as the world needs adequate supply to meet its demand, according to a top official of a Saudi energy body.  

In an exclusive interview with Arab News, the Saudi Association of Energy Economics Chairman Majeed Al-Moneef said that the Kingdom, and the Middle East region as a whole, will be at the forefront of both traditional and renewable energy sources, as it steadily progresses in achieving sustainable goals.  

“We will follow the world trend in increasing the share of renewables in our energy mix. But that will not be done by sacrificing our oil and gas sectors, but along with the development of our oil and gas sectors,” said Al-Moneef.  

The chairman of SAEE which works toward building capabilities in energy economics said the Middle East region is playing a crucial role in the energy transition journey, as it continues supplying hydrocarbons which are pivotal as the world enters a new energy system. 

“We have the Saudi Green Initiative and Middle East Green Initiative. So, we are an important player in traditional energy sources and renewable energy sources. We will be in the forefront of both.”  

He further pointed out that countries in the Middle East region are now heavily investing simultaneously in traditional fuels like oil and gas and renewable energy sources including hydrogen.  

Al-Moneef expects that the share of renewables in the energy mix in almost all regional countries will double or triple by 2030.  

Talking about Saudi Arabia’s Vision 2030, the SAEE chairman said a massive socioeconomic and institutional transformation is taking place across all sectors including energy as the objective is to diversify the economy. “We have got new energy resources like renewables, hydrogen, carbon sequestration and carbon management. They are the sectors of tomorrow. So, we are investing in future energy.”  

This comes as Saudi Arabia is leapfrogging in sustainable energy generation while setting a net-zero target for 2060. 

Al-Moneef pointed out that the region’s financial institutions including corporates, government financing, and multi-regional financing institutions have a crucial role to play in renewable energy projects to achieve sustainable goals within the stipulated timeline.  

IAEE International Conference 

SAEE which works toward facilitating dialogue among various stakeholders is hosting the International Conference of the International Association for Energy Economics for the first time in the Middle East and North Africa region in Riyadh with the King Abdullah Petroleum Studies and Research Center. 

Al-Moneef sounded confident that the IAEE conference which begins on Feb. 4 will witness a record number of participants.  

“This conference will have the largest registration in the history of energy economic conferences. This is the first time that such a conference is being held in the region. So, this is a testament to the importance of Saudi Arabia and the region in the global energy sector,” he said. 

Al-Moneef revealed that regional universities will present scientific papers during the event, and added that events like these hold significance as “they will accelerate the participation of more regional research institutions, individuals and students in the energy sector.”  

Majeed Al-Moneef, chairman of the Saudi Association of Energy Economics. (Supplied)

He disclosed that they had two major meetings involving all the universities in Saudi Arabia to encourage them to submit papers. “We tried to have a wide representation of the region. So, we have good numbers. As a matter of fact, something close to 40 percent of papers is from Saudi Arabia and the region.”   

The SAEE chairman pointed out that the purpose of the conference is to encourage research in energy economics in the region. “That was our main goal. The field of energy economics is of crucial importance to the region, and we should have more researchers in the research institutions, individuals, and students who are engaged in that subject matter.”  

He revealed that the conference will hold special plenary sessions on investment and trade in the energy sector, “as the conflict in Ukraine has changed the trade flows of oil and gas globally.”  

Al-Moneef further pointed out that Saudi Arabia and the region as a whole will host more similar events related to energy economics in the future.  

“As a matter of fact, one of the outcomes of this conference will be to have annual regional conferences in the Middle East. So, one of the outcomes will be to institutionalize a MENA Middle Easy symposium to be held every year,” he said.  

Saudi Arabia is leapfrogging in sustainable energy generation. (SPA)

Al-Moneef noted that Saudi Arabia will be on the organizing committee for the MENA Energy Economics conference that will be held every year, and the Kingdom will make sure that researchers from the institutions in the nation will participate in these upcoming events.  

Regional cooperation  

Talking about the necessity to ramp up power generation and increase the efficiency of energy usage, Al-Moneef stressed that sufficient investments are needed to elevate efficiency “so that the production process will be clean, and efficient with the least cost possible.”  

He also highlighted that international and regional cooperation is very crucial to ensure the growing power demand in the future.  

Al-Moneef who had served in multiple high-profile positions including the Secretary General of the Supreme Economic Council of Saudi Arabia, Governor of Saudi Arabia in the Board of Governors of OPEC, stressed the need to create a common grid that will solve power-generating issues. "It will allow countries with power scarcity to secure help from nations that produce excess power.”  

He added that a common energy market will be soon materialized in the Middle East region, supported by a proper regulatory framework.  

According to him, promoting regional cooperation in the energy field is the key to a new Middle East. “And we have to improve the transportation lines.”  

For Al-Moneef, what the region needs is the proper regulatory framework. “Europe has done it. They have put in place the regulatory framework to see to it that there is a common energy market. We can have someday a common Middle East energy market. We are capable of doing it,” he signed off.  


Saudi Arabia, GCC taking holistic, far-sighted approach to city building, expert says

Saudi Arabia, GCC taking holistic, far-sighted approach to city building, expert says
Updated 05 February 2023

Saudi Arabia, GCC taking holistic, far-sighted approach to city building, expert says

Saudi Arabia, GCC taking holistic, far-sighted approach to city building, expert says
  • Mega-projects have massive future benefit, says Daniel Hajjar
  • Architect’s firm has designed iconic structures in Mideast

LONDON: Saudi Arabia and the Gulf region have seen a significant shift in the concept of city building with modernized infrastructure plans taking into account ways to improve people’s lives and experiences as opposed to “purely a functional response,” according to a UK-based architecture expert.

“It’s all about how can you create a terrific sense of being in a city and having a great experience,” said Daniel Hajjar, managing principal for Europe and the Middle East at HOK — a global architecture and engineering firm.

“Particularly in Saudi Arabia, you’re seeing a lot more use of those types of facilities, because there’s a lot more encouragement to sort of knock down both physical and figurative walls within the Kingdom. And I think that’s a very good thing, as it’s only a matter of time before you will begin to see, and you’re already seeing it, much more engagement from Saudis in their own country,” he told Arab News in a recent exclusive interview.

Daniel Hajjar

HOK, which has been engaged with the Kingdom since the 1970s, has designed several iconic projects, including the 80-story PIF Tower, which is the tallest of the five structures that make up the financial plaza of the King Abdullah Financial District and symbolizes “the dawn of a new era of financial leadership” within the Saudi capital.

A lot of the architecture that is being produced, within Riyadh and perhaps within the Najd area in particular, this whole aspect of Salmani architecture or Salmani expression, seeking an expression that is genuine for the region.

Daniel Hajjar, HOK managing principal for Europe and the Middle East

The US-based firm, which was founded in 1955 in Missouri, began to officially expand its footprint in the Middle East in the early 1980s, and the first major project where the company brought a lot of its talent to complex designs was in Saudi Arabia. It was King Khalid Airport, King Saud University and King Fahd University of Petroleum and Minerals in Dhahran that changed the way it operated as a firm, Hajjar explained.

“Those were sort of the first two institutes of higher education within the Kingdom that really propelled Saudi on the international stage that they began developing this fundamental infrastructure, and as a result, HOK was instrumental in delivering that, as well as the airport,” he said.

Cities mature when they begin introducing large-scale infrastructure projects that help people live in it, and a decade in terms of the city’s life is not a very long time at all, Daniel Hajjar said. (Supplied)

The company also developed other high-profile projects, among them King Abdullah University of Science and Technology and King Abdullah Petroleum Studies and Research Center in Saudi Arabia. Others included the National Assembly building and the Central Bank headquarters in Kuwait, Abu Dhabi National Oil Company corporate headquarters, Dubai Marina, and the masterplan for Dubai Expo 2020.

Hajjar said that the Kingdom’s projects have always challenged the company to develop the way they work, and have invested heavily in technology to deliver massive and complex Lead in Energy and Environmental Design Platinum projects within months, and the first of their kind in the region.

Focus on future generations

Saudi Vision 2030 “is incredibly ambitious, and because of that, it raises the bar significantly in terms of what is it that’s going to drive that economy, post-oil, or post-hydrocarbon, because that is going to happen, and this diversification of the economy,” he said.

FASTFACT

HOK, which has been engaged with the Kingdom since the 1970s, has designed several iconic projects, including the 80-story PIF Tower, which is the tallest of the five structures that make up the financial plaza of the King Abdullah Financial District and symbolizes ‘the dawn of a new era of financial leadership’ within the Saudi capital.

“Those master plans that are being done now are not necessarily for the generation today, but they’re for future generations to use, and master plans, by their very nature change and evolve over time. So as a result, we believe that setting a framework in place where you have the ability to engage people along the journey is incredibly important, because … they’re part of that evolution (and) it is part of their genetic DNA, if you will, but within the country,” Hajjar said.

When designing projects, Hajjar said it was important to ensure they had cultural or physical relevance, and to interpret natural and heritage aspects into a modern form.

Cities mature when they begin introducing large-scale infrastructure projects that help people live in it, and a decade in terms of the city’s life is not a very long time at all, Daniel Hajjar said. (Supplied)

“A lot of the architecture that is being produced, within Riyadh and perhaps within the Najd area in particular, this whole aspect of Salmani architecture or Salmani expression, seeking an expression that is genuine for the region, as opposed to looking at something in a pastiche manner.

“So as a result, you’re beginning to see much more authentic architecture, without copying the past, and look at a modern interpretation of those historic principles behind the architecture has a tremendously valuable proposition.”

Comparing Riyadh and Jeddah, he said that they were two totally different cities because they grew based on different parameters when they were established.

“If you look at Jeddah and the way the Al-Balad part of Jeddah has sort of grown out further from the original port, and then if you look at Riyadh as being the capital of the Kingdom, very much different in terms of the approach to city building between the two of them, and it doesn’t mean that one’s necessarily better than the other.

“Because there wasn’t as much of an economic boom in Jeddah, it sort of boomed and then it slowed down and then they didn’t simply just build. I think Riyadh now is looking at the various initiatives, in terms of greening Riyadh, public art, and creating that level of richness, while Jeddah has had international art exhibits along the Corniche,” he said.

These also differ from new developments such as the NEOM megacity project or Diriyah Gate, which is the birthplace of the first Saudi state and now everything is leveraging off that historic core as they begin to build out from there, he said.

The big challenge with Saudi Arabia is it is so geographically diverse from one region to the next, so how do you begin bringing those cultures together within the Kingdom and ensure “the richness that occurs in one region should be introduced to the richness from another in order to create this fantastic mosaic that is the Kingdom of Saudi Arabia,” he said.

Another major challenge is the future of transportation, and there will be a strong focus on linking cities together within the Kingdom and the Gulf region and cutting down on air travel carbon footprint.

“The irony behind all of this is pre-World War I, there was a railway in the Kingdom, and now there is no railway. So I think you’re going to begin seeing a lot of that, particularly GCC-wide (and) it’s going to serve the function of transporting commodities and everything else, but at the same time, they have the ability to encourage people to travel by rail and I think that will come,” he said.

Cities mature when they begin introducing large-scale infrastructure projects that help people live in it, and a decade in terms of the city’s life is not a very long time at all, Hajjar said, as the Vision 2030 target ambitions rapidly approach.

“Ultimately, a city has a continuum to it,” he said, “because when a city stops to develop and stops challenging itself, it slowly begins to lose meaning to people within the city. You have to continually reinvent the city, bring new things into the city, and have people engaged in different ways.”