The rouble is falling fast while support for Putin reaches new heights.
Recent statements and forecasts by both Western and Russian economic experts as well as renowned institutions all cast a long shadow over the future of the Russian economy. In its annual economic forecast for 2015 (published on 13 March), the Vienna Institute for International Economic Studies drew a clear dividing line between Russia and the post-communist Eastern European states that have joined the European Union. While the latter countries are expected to produce an overall growth of about 3% this year, with similar prospects for 2016-17, the estimates for Russia’s future growth look dire. Even if no new sanctions are imposed by the West and the crude oil price levels off at around $60 per barrel, the experts in Vienna expect that after the 0.6% growth recorded last year, the Russian GDP will slump by at least 3.9% in 2015.
Russian sources are even more pessimistic. Last week the Russian National Bank predicted a 5% drop and economic commentators made informal statements indicating that they expect the country’s GDP to contract by as much as 7%. It has also been pointed out that the country’s economic performance would be poor even without the costs of the war in Ukraine and the US and EU sanctions.
It’s worth remembering that from 1999 to 2008 the Russian economy grew at an impressive 7% per year, thereby doubling its GDP in R rouble terms. But owing to its failure to enact reforms and take action against rampant corruption coupled with reckless spending on the military and the collapse of oil prices, Russia is now once again beset by economic stagnation and high inflation. Productivity is still dismally low and the health and school systems have sharply deteriorated.
The unavoidable and devastatingly quick devaluation of the rouble has had serious repercussions on the central government’s budget, on the entire banking system and on consumption, after years in which consumer spending had risen by more than 5%. The main victim of this downturn is the new middle class that has emerged in recent times. Some 30 million strong, they have the means to travel and shop abroad and have also profited from foreign investments and a booming stock market.
The aggressive actions taken against neighbour Ukraine and the annexation of Crimea followed by the covert operations in support of the separatists in East Ukraine have isolated Russia and irrevocably damaged its important relationship with Germany and the EU. The long overdue structural reforms, cutbacks in bureaucracy and support for businesses have given way to a wave of nationalism inspired by the concept of a Greater Russia.
Stephen Kotkin, a professor at Princeton University and the author of a new biography on Stalin explained the situation in the journal Foreign Affairs: “The country is back in a familiar place, a one-man regime. The methods Vladimir Putin used to fix the corrupt, dysfunctional post- Soviet state have produced yet another corrupt, dysfunctional state. Putin himself complains publicly that only 20% of his decisions get implemented, with the rest being ignored or circumvented unless he intervenes forcefully with the interest groups and functionaries concerned”.
President Putin’s temporary absence in early March fuelled a spate of partly absurd speculation, but it is important to bear in mind what a Russian commentator said to the Financial Times: “We know there is a constitutional process in case the president is incapacitated, but Putin has definitely left his stamp on the Russian system to the extent that now his temporary disappearance has thrown everyone into disarray. It shows the system is based on one pillar”.
So far the government has responded in a low-key way to the increasingly serious economic- financial crisis. Putin has ordered 10% pay cuts for presidential administration employees and First Deputy Finance Minister Tatjana Nesterenko announced a cut in state expenditures of €16.2 billion. Hard currency reserves have fallen from a peak of €550 billion in 2008 to €348 billion in February 2015. During the last 12 months, the rouble lost 44% of its value against the dollar. The inflation rate in January reached 15%. Not surprisingly, all the top rating agencies have drastically downgraded Russia’s financial rating.
One of the baffling consequences of Western sanctions is that instead of losing ground, the President’s popularity has reached an unprecedented peak of over 90%. With overwhelming and totally pro-regime television coverage of the conflict with the West, average Russians blame the West and above all the United States for this homemade crisis. So far Putin’s regime has managed to deflect the blame for its economic woes onto foreign governments and companies.
But are the sanctions likely to backfire and end up being detrimental to Western interests? A recent commentary in the opinion pages of The New York Times suggests that “sanctions could prove far more damaging to American interests than Kremlin’s aggression in Ukraine”. With 6% of the proven global crude oil reserves, Russia is the largest world oil producer along with Saudi Arabia, and the controversy over future sanctions creates widespread uncertainty which could be as heavy a burden as the sanctions themselves.
The greatest losers so far have been Russian consumers. It is to be seen whether and when they will turn against Putin’s expansion policies that so far have curried such favour with most of the population of 142 million people, who are subjected to massive brainwashing by state-controlled television and radio. Another question is whether the pressure brought to bear by Russian consumers and even more by major entrepreneurs both in the West and Russia will force both sides to look for a compromise, which would, of course, revolve around the Ukrainian question.
The rouble is falling fast while support for Putin reaches new heights.
