High Priority Risks Facing Russia - Term Paper Example

National Risk Register for Russia Name Institution Date Introduction Russia is the largest country by Land mass globally but just like several other countries, it faces strategic risks, both financial and non-financial. The Risk facing Russia is classified under economic, environmental, geo-political, social and technological risks. According to the Russian Analytical Digest, the risks relates to the financial sanctions, Russia’s rising aggression in world geo-politics, growing threat of terrorism and recent assassination of opposition leaders have all added to the volatility in Russia (Rutland 2014). There are several other trends impacting on risk assessment facing Russia. The country is facing the most destructive and dangerous financial and economic processes in Putin’s presidency. The paper seeks to identify the priority risks facing Russia including their quantification on risk matrix and their impact on individuals, population, industry and the nation. High priority Risks Facing Russia Risk of Sanctions Russia’s economic problem is caused by three main factors. The first one is bad economic policies and corruption. The second cause of economic troubles is falling prices of oil which have negatively impacted on its export revenues. The economic deterioration has been reinforced by financial sanctions imposed mainly by E.U and United States limiting access to financial market to borrow money for mitigating current blow. The first risk relates to geo-politics and comprises the complex of sanctions imposed on Russia and the “Containment Policy” adopted by European Union and United States and countries (Dreyer and Popescu 2014). Russian Analytical Digest estimated that financial sanctions that sanctions reduced economic growth by 0.3 percent in 2014 and could affect it by higher margin in 2015 (Rutland 2014). According to the Russia’s ministry of Finance, the Geo-political tensions have affected Russia’s balance of payment; it suffered a shock equivalent to 2% of GDP last year. The government of Russia has acknowledged that Russia could fall into recession due to geo-political tensions and sanctions. A forecast by Russian Analytical Digest indicates that consumer price will increase due to the international restrictions against Russia. The measures taken by Russia in response have bored negative effects to the business environment and have eventually lead to the falling value of national currency, high interest rates, accelerated capital outflow and inflation. The sanctions have also increased the risk of recession and aggravated structural flaws as Russian firms were restricted from the global capital market. The Fitch estimates that capital outflow from Russia will reach $100 billion in 2015. Macroeconomic experts’ analysis has shown that the country already facing banking crisis that is likely to deepen with time (Rutland 2014). The preliminary estimates presented above indicate the risks Russia will continue to suffer in years to come (Rutland 2014). Regardless of relative calm in Ukraine, it is still clear that E.U and United States are not reviewing the sanctions against Russia anytime soon. Besides, Russia has not conformed and appears very unlikely to comply by the main demand by the west to remove its troops from Ukraine. In this regard, the geo-political risk and its impacts on Russia will remain and continue to depreciate the economy of Russia by weakening the Ruble, increase inflationary pressure, declining reserve and outflow of capital and disappoint investors. The general public and Russia’s companies have suffered from systematic through economic downturn while corruption has unleveled the playing field for firms to do business. The public are hit by high prices of commodities and this has the potential of generating resentment towards the regime. The price of buckwheat have surged by over 70% while basic food stuff have sharply increased setting in motion panic among consumers as Rubles continue to depreciate. Russia’s energy sector has been widely affected due to declining currency and inability to borrow money from financial market to cushion its business from economic risks. The banking and energy sector of Russia are largely affected by the current financial instability in the country with potential of bringing under some banks if they are no recapitalized. Systematic Risk Russia has plagued into acute systematic risk occasioned by external shocks, high level of corruption, ineffective ruling system and poor economic policies pursued by President Putin, poor quality of law making, weak government and lack of civil, parliamentary and media control are mainly to blame for the current systematic risks facing the country (Holmes 2012). The country has for the last two years struggled to implement Putin’s “May Decrees” that were issued when he was inaugurated into office for the third time as Russia president. The Russian economy was in crisis tendencies before annexation of Crimea and revolution in Ukraine, and made it impossible to implement the programs. In spite of all this, the government appears unable to come up a better plan to address economic crisis. Oligarchic risks This risk is connected to the desires by Presidents inner circle to obtain privilege working conditions over other businessmen by distributing assets among themselves. Financial sanctions have it difficult for businessmen to access long term loans from international financial market and have also frozen any relationships with foreign investors. The action has put much pressure on state owned companies and key businessmen close to the president. Further to that, the personal sanctions targeted Russian and Crimea leaders for their roles in annexation of Crimea. The target individuals are Putin’s inner circle and prominent businessmen such as Timchenko (founder of Gunvor, a commodity trading company), Sechin (Rosneft chairman), Arkady and Rotenberg for magnates with majority stakes in SMP and Invest-capital banks, and Stroygazmontazh constructions. The sanctions had real damage on these individuals and in return their companies were offered more contracts by the government in response to the sanctions. The actions by the government are not popular in Russia as they alienate elites who are not Putin’s close friends. Since they are unlikely to rise against Putin, elites can retaliate by taking their money outside the country to destabilize the country further (Faccio 2010). The action could eventually lead to social unrests in major cities such as Moscow and St. Petersburg the ordinary people begin to feel the pinch of deteriorating economy. Financial sanctions targeted sectors of the economy such as energy and banking by reducing access to credit international financial market. Consequently, the United States and French oil and gas companies ExxonMobil and Total have respectively withdrawn from joint ventures involving Russian companies, the Rosneft and Russia’s Lukoil respectively. In the wake of dwindling economy, the affected Oil giants have demanded preferential treatment from the government. For example, Rosneft requested for 1.5 Trillion Rubles from the government through the National Welfare Fund while Novatek, Russia second largest Gas and Oil producer received 150 Billion from the government to inject in its projects. Several other companies running Putin’s economy is facing similar problems and some have considered to reduce their production in coming years should if they fail to get privileged support and funding from the government. The impacts of economic hardships are not only financial but also non-financial. There have been arrests of prominent business personalities like Vladimir Yevtushenkov, the Chairman of Sistema believed to be connected to business deals. There has been also been relentless efforts to change the law that will facilitate compensation of personalities from the government for the unlawful freezing of their foreign held assets. The initiative was first rejected in early 2013 but has been revived following the freezing of Rotenberg assets, a key member of Putin’s inner circle and influential Russian businessman by Italian government. If the law is passed to allow for the compensation of Russians blacklisted by European Union and United States, the consequences on the Russian budget are hard to imagine. The effects of oligarchic risks are insurmountable as businessmen close to Putin continue to push for privileges in working condition from the government. The oligarchic risks are a form of compensation for damages suffered by sanctions on their businesses and will be paid by Russian tax payers. Energy Market Risks The negatives effects related to energy markets another category of risk facing Russia today. The energy risk is one of the factors causing economic troubles through falling prices of oil and gas, has negatively impacted on export revenues. The price of oil and gas has fallen significantly in recent years thereby reducing Russia’s export revenues to less than two-thirds. That implies that Russia will have to cut its net exports and this will also affect it reserves that have declined in recent years (Åslund 2008). For instance, the price of oil dropped to less than $83 per Barrel in October 2015, which is the lowest in history since 2010. But Russian budget needs a minimum of $90 per Barrel to balance hence the low price is a serious risk to the economy of Russia. The ministry has acknowledged that low prices of oil and gas could reduce economic growth by two percent and reduce annual export value by $55 billion. The economic effects of falling price of oil and gas is compounded by worsening geopolitics in Ukraine and sanctions. These have led to uncertainty and decline in economic growth. The economic impacts could be even worse, and the economy could contract between 4-5% if the price of oil remains at between $45-55 per barrel. The economic growth of Russia is estimated to remain negative even when the prices rise to $80 per barrel and could record positive growth if it reaches $90 per barrel. The fall in price of oil and gas presents a threat to the budget and economy of Russia. Subsequently, oil and Gas companies have suffered from declining global price and have sought for government support to stay afloat. The government can respond to budget deficit by increasing taxes and cutting on public spending through salary cuts and retrenchment. This is likely to create tension and resentment from the public due to unemployment and reduction in household income amid rising prices of food stuff. The energy sector is affected by falling oil and gas price, and government is expected to provide financial support through national welfare fund and worsen the country’s budget further. Socio-Political Risks The shift is public attitude are likely to provoke the concern of the government. Sociological and polling research organizations such as Levada centre has recorded shifts in the opinion and attitude of the population towards the regime due to rising commodity prices, economic decline, high taxation, cuts in public salary and unemployment. The rise in prices is a major issue affecting Russian citizens and efforts to mitigate escalating prices after imposing embargo imports from Europe have proved futile. The Russians are seeing a different picture from government which has insisted the situation is temporary. The continued weakening of Ruble has worsened the situation by reducing the purchasing power and profits of the Russians in international market as imports become expensive. The government through the minister of Finance acknowledged the end of reforms that can revive economic growth due to the pressure from western sanctions and election cycle. There are no signs of complying with western demands to withdraw troops from Ukraine, the sanctions will remain. The country will continue to face economic stagnation and possibly recession in years to come because there is lack of political will to bring about necessary reforms. However, if the current tendencies continue, it is not stagnation that will be much worse but rather the inertia of the current regime is the main threat to future stability of Russia. The cumulative effects of the risks could trigger economic, political and social crisis that could be hard to prevent when they explode. The risk has the potential of bringing about regime change in the years to come if tendencies continue unaddressed. Risk of Terrorist Activities The involvement of Russia in Syria airstrikes has increased the risk of terrorism on Russian soil and abroad. Security experts have warned that launching of Airstrikes has increased motivation of Islamic state to retaliate against Russia. This has been felt by downing of Russian bound airbus plane in Egypt killing 224 people on board. The Metro was carrying Russian tourists from the red sea resort, and government confirming it was an act of Terrorism. The Russian current activities in Syrian situation is similar to the combat operations and security sweep waged in Northern Caucasus two decades ago that intensified the efforts terrorist activities against Russia. The country has been targeted severally by terrorists in previous years but most attacks were contained by the security forces, particularly from causing massive deadly acts. Accordingly, the Jihadists, Islamists and extremist groups appear not happy with interference of Russia in Syria and could be preparing to retaliate. Such retaliatory threats are not new to Russia, as Islamic State considered Russia an enemy the moment it started building up arms in Syria. Russian MiG fighter Jet in was once seized in Syria by Islamic State militants, who then declared war on Russia. Therefore, airstrikes are likely to trigger them to translate their words into actions. More significantly, the threat of terrorism to Russia high due to home grown danger. According to Federal Security Service, there are over 2,400 militants are from Russia’s Southern region of Dagestan and Chechnya who are currently fighting for Islamic States in Syria. Besides, most terrorist attacks in Russian soil such as 2010 bombing of twin metro are carried out by Russian natives. The continued Russian airstrikes will force some to return home to perpetrate terrorist activities in Russian soil. The risk of terrorism targeting Russia is high despite heightened security after launching airstrike attacks in Syria. The likeness of terrorist attack is high and would target large cities such as Moscow and symbolic targets to generate media storm and make political point. The actions could include taking hostages and suicide bombers to strategic targets in Moscow and elsewhere. Schwartz, Dunkel and Waterman (2009) extends that terrorists have a tendency of hitting targets abroad to a change in foreign policy, such as the bombing of commuter train in Madrid in 2004 to force Spanish to withdraw from supporting United States in Iraq. However, this is unlikely to change Putin’s policy on terrorism and in Syria. The previous attempts by separatist to pressure Putin to negotiate with extremists were futile despite holding school children hostage. It is also by analysts that threat of terrorism to Russia would grow and be prolonged if Russia is drawn into long conflict in Syria. This is a possibility in countries that embark on such missions and Russia is also being seduced by Syria government and western countries into the pattern. The decision could force terrorism groups to develop grievances and try to avenge. The soft targets would could also include Russian citizens based abroad, both ordinary Russians in Damascus and other cities and military specialist. Risk of Infectious Disease Russia faces a flood of infectious and parasitic diseases mainly tuberculosis, Cholera and Tuberclosis. Pollution of Moscow River, neglect of health care system and leakage of sewage in Moscow has contributed to the rising levels of cholera bacteria. In addition, a new cholera strain that is highly resistant to antibiotics and ability to spread rapidly has been discovered in the water. Discovery of cholera threats in Moscow has confirmed long standing belief that neglecting of health system and environmental pollution could escalate infectious disease. It is projected that these diseases will soon replace poisoning and accidents to become the leading cause of death in Russia. The socio-economic constrains has affected health care infrastructure to compound the risks of infectious diseases. What is more worrying is that, because of costly medical bills Russians present at later stage, when their health status have been compromised. There is risk of other diseases such as influenza pandemics that recurs after some years, the most recent being H1N1 in 2009. The future impact of this pandemic is not easy to predict but historical evidence predicts the occurrence of this pandemic and would potential cause illness and deaths on a considerable scale to interfere normal economic and social activity. There is also a risk of SARS infections among other infectious diseases. The lack of adequate government funding has made it cumbersome for the ministry of health to fight the rising cases of infectious and other diseases. Therefore, the risk of infectious is real threat to the country causing death and affects economy through the ailing work force. Risk of Chronic diseases The rising incidence of chronic diseases such as cancer, hypertension, childe obesity and diabetes among the Russian population is a risk to the country. These are the leading causes of deaths and morbidity in the country. The increasing rate of childhood obesity and related trends indicates future rise in chronic illness among the Russians. The number of adults with chronic diseases in Russia is estimated to rise significantly by the year 2020 to more than 40%, with elderly persons being the most affected by the illness (Abegunde and Stanciole 2008). Analysis predicts that much of health care budget will be used to treat chronic diseases. The condition has economic and social impacts and will burden health care sector. The condition will considerably affect household income and health system, and will compel workers to apply for early retirement due to poor health and make them dependent on welfare support and social care. It will also increase absenteeism of workers and diminish productivity of workers and have overall negative effects on economic growth of Russia. Extreme climate change The global warming is a real risk facing the world in general and Russia as a country. The extreme and harsh weather is rated among the top risks to the global security. The climate of Russia is changing in line global and regional trends. The trend is projected to continue and increase over years. The change in climate is impacting on the society, environment, economy and related sectors such as agriculture, water resources and food security including coastal zones, biodiversity, critical infrastructure, human health and terrestrial environments. Besides direct risk of climate change, there are costs related to compliance with carbon emissions and renewable energy targets. There are also risks associated with failing to invest into adapting measures aimed at meeting the climatic change impacts. Companies are required to pay for the amount of carbon they emit into atmosphere. The carbon print is very costly to energy intensive sectors such as construction, oil and gas exploration and cement industries. Russia by virtue of its physical features, high latitude and topography experience significant climatic change in the 21st century. The increase annual mean temperature is Russia will be higher than global warning by the year 2020. The number of hot days has increased by 5% per decade since 1970s as the number of cold days declined by 6% over ten year period since 1970s. General, the rise in temperature has increased more than global increase for the last 100 years by 1.29 to 0.74 degrees Celsius respectively. There has also been significant increase in precipitation and decline in snow cover due to global warming. This presents significant threat to the society, environment and economy through effects on agriculture, water resources and food security, coastal zones, biodiversity, critical infrastructure, human health and terrestrial environments. Risk of Industrial accidents Russia is highly prone to industrial accidents. The renewal of fixed capital is Russia has fallen in recent years by 60% since 1992. This means that mots industrial equipment and basic stock of machinery have already exceeded their lifespan and are likely to break and cause accidents. Russian workers are the main victims of job related deaths and injuries in Europe. The country has consistently recorded an increase in serious industrial accidents, estimated at two accidents each day in oil and gas pipeline system, one accident per week in transport sector and one per in industry. The main causes of industrial accidents are the continued use of worn out machines and equipment and the habit of economizing on safety. The greatest industrial catastrophe in Russia today is not aging and leaky nuclear power plants but chemical industry. The chemical plants are surrounded by stocks of harmful and toxic substances capable wiping the entire earth. There is high potential of leakage from these stocks that is likely to put thousands of Russian life in acute danger. The incidences of leakage and fire explosion are real risk facing the country as equipment in chemical industry are not serviced regularly The environment is also affected by leakage and frequent oil spills due to corroded and cracked pipes of oil and gas pipeline system. Risk Matrix The risk matrix a graphic presentation of different risks facing Russia as derived from risk assessment. The risks the country is facing are plotted on the matrix based on their likelihood to occur and the level of impact on social and economic aspects, their cost to infrastructure, natural environment and health and welfare of the population in terms of number of injuries and fatalities (Ni, Chen and Chen 2010). The risk assessment matrix reveals that chronic disease (H) and climate change (I) are likely to occur in Russia in coming years. These risks will also have less impact on compared to other risks identified and hence would require normal emergency. The systematic risk (B) and Oligarchic risk (C) are very likely to continue given there is no political will to bring about necessary reforms. The current regime has no political will to fight corruption and change economic policies. Systematic risks will persist in the current regime due to external shocks, corruption, ineffective ruling system and poor economic policies. In similar manner, Oligarchic risk will continue to as the regime will have to give some companies work privilege to sustain the economy. As long as financial sanctions are still in place, government will have to provide financial support to the companies to sustain their operations. The political leaders in Russia have refused to comply with western demands of withdrawing its troops from Ukraine and hence sanctions are very likely to persist. The privilege to his close friends will continue as long Putin is in power as a way of compensating for their support in Crimea and policies. Besides, there are efforts to change the law to allow for the compensation of personalities for the unlawful freezing of their foreign held assets. The passage of such law could have serious negative impacts on already constrained budget. The risk is very likely to persist and worsen if no positive reforms are taken. The risk of sanctions energy market risks and socio-political risk have moderate impact but are also very likely to continue and would require moderate emergency efforts. Sanctions will persist because Putin Regime has refused to comply with demands of the west to withdraw military troops from Ukraine. In addition, the current aggressiveness of Russia in global politics is viewed as a threat to the west, and hence it is very likely to impose more sanctions. The price of oil and gas may continue to drop and increasing competition for European market from Middle East and Africa could reduce exports of oil and gas. The changing public attitudes against the regime due to economic hardships could cumulatively trigger economic, political and social crisis in the country. The risk of terrorists attack, infectious disease and industrial accidents are most likely to occur in near future and will have the greatest impact on the country. Major emergency efforts would be required when they occur to reduce their impact. Infectious diseases are on the rise due to neglected health care system and pollution of water bodies. The attack by terrorist organization is likely to be motivated by Russia involvement in Syria while industrial accidents are eminent due to the worn out industrial machines and equipment. Conclusion The paper has unfolded the priority national risks Russia is likely to face in coming years. The country’s economy is deteriorating due to sanctions, corrupt, poor and ineffective polices pursued by the current regime. The increased aggression of Russia in geo-politics particularly in Ukraine, Crimea and Syria is viewed as threat to the west. Besides, the regime has put on a brace face regardless of the worsening economy, public resentment and declining export due to falling oil and gas prices. The risk of terrorism, industrial accident and infectious diseases are eminent. The risks are many and would significant negative impact on the economy. Bibliography Abegunde, D.O. and Stanciole, A.E., 2008. The economic impact of chronic diseases: how do households respond to shocks? Evidence from Russia. Social science & medicine, 66(11), pp. 2296-2307. Åslund, A., 2008. Russia Energy and the European Union: Perspectives on Gazprom. Speech. European Parliament, Brussels, 15. Dreyer, I. and Popescu, N., 2014. Do sanctions against Russia work?. European Union Institute for Security Studies (EU ISS) Brief, (35). Faccio, M., 2010. Differences between politically connected and non-connected firms: A cross‐country analysis. Financial management, 39(3), pp. 905-928. Holmes, L., 2012. Corruption in Post-Soviet Russia. Global Change, Peace & Security, 24(2), pp. 235-250. Ni, H., Chen, A. and Chen, N., 2010. Some extensions on risk matrix approach. Safety Science, 48(10), pp. 1269-1278. Rutland, P., 2014. The impact of sanctions on Russia. 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