The COVID-19 pandemic has put Russia's economic muscles under enormous stress. It has introduced a combination of painful challenges for Moscow, three of which should be emphasized.
First, the pandemic has reduced the global demand for energy exports and stimulated a slump in oil prices. It has also intensified competition with other international suppliers on the European markets vital for Russia. The EU's Green New Deal would transform European energy consumption substantially, further aggravating the implications for traditional Russian exports. At the same time, Russia is facing growing difficulties in the Chinese market. Pressure on Moscow is also aggravated by the controversial terms of Russia's recent energy contracts with Beijing, including covering Chinese loans. The blow to Russia's national reserves will be severe if these problems persist for another year or two. These challenges, among others, make it much more important for Moscow to keep its position on the EU energy market and fight for increasing oil prices (to at least 40$ per barrel) in 2020.
Secondly, there will be a drastic loss in GDP, possibly around 10%, if the quarantine lasts into the second half of 2020, and Russia's need for financial resources will become desperate. Before 2014, the EU was Russia's key source of foreign direct investment and bank credits. Today, however, EU and US sanctions have barred the country from international financial markets and deterred even their close partners, like China, from providing loans. With Russia's internal capabilities shrinking, finding a way to undo this "credit knot" will become one of the most pressing challenges that the Russian leadership and economy face.
Thirdly, domestic demand in Russia, which has staggered a little since 2014, is likely to embark on a prolonged downward curve. Even without sanctions, this will not encourage foreign investors and exporters, including those from the EU, to become more deeply involved in the Russian market.
In this new reality, Russia needs to find innovative ways to achieve its economic recovery. Among other things, this should include wider integration into global supply chains (GSC), which could re-emerge after the pandemic, as well as identifying new niches in the international market. The country's involvement in GSCs was underdeveloped even before the sanctions and counter-sanctions, particularly in comparison to many EU countries. Moreover, as a supplier of commodity sub-products, Russia has been limited to the lower levels of the existing GSC. After 2014, the gaps have become even bigger. High oil prices have so far assuaged the ruling elite's appetite and have not offered the impetus that is required to strive for the innovation and integration that will lead to more profitable and technology-intensive GSCs. Today, Moscow has to think urgently and strategically about a future that moves beyond international commodity markets, along with much needed reforms. The EU is the better partner for both.