Russia’s Sinking Economy and Wandering Politics

Publication: Eurasia Daily Monitor Volume: 6 Issue: 16

The high-intensity but low-yield gas war with Ukraine allowed the Russian leadership to engage in the bargaining and blackmailing that it thrives on. Now that Prime Ministers Vladimir Putin and Yulia Tymoshenko have struck a deal, which has left most observers puzzled about what the war was really about, the duumvirate in Moscow has to return to the pressing needs of managing the economic crisis. The renewed efforts at summoning the prosperity that had been taken so completely for granted at the start of Dmitry Medvedev’s ersatz-presidency remain, however, frustratingly fruitless. The rosy picture of Russia as an island of stability has long been discarded; expectations that the ruble would show new strength against the subprime dollar followed suit; and now the Kremlin’s confident promises to prevent any decline of real income among the fledgling “middle class” ring hollow. Last week the Ministry for Economic Development revised its outlook for 2009 down from a 2.4 percent growth in GDP to 0.3 percent decline; and the RTS stock exchange index plummeted below the 500 level from the peak of 2,500 in May (Nezavisimaya gazeta, January 23;, January 22).

There is nothing extraordinary about this economic debacle: No country has been spared by the financial meltdown and contraction of trade, and Russia is not as close to state bankruptcy as many EU member states or, for that matter, Ukraine. What makes the Russian case particularly complex is that it combines the problems of the petro-economy, heavy industries, and investment banks, so that the sharp drop in oil revenues comes together with the falling demand for aluminum and the new outflow of capital, which reached $130 billion in 2008 (, January 13). This fusion of different economic ills creates strong inflationary pressure in the course of a recession, so that the target figure for 2009 is a 13 percent rise in consumer prices (Kommersant, January 20). The doyen of Russian economists, Yevgeny Yasin, argues that the government should aim at curbing inflation; but Putin assumes that slashing budgetary spending would be too risky, so stagflation is set to deepen (Echo of Moscow, January 23).

The key variable in the reluctant process of revising the budget is time; and the bureaucratic horizon does not stretch beyond 2009, so the working assumption is that oil prices will resume their “natural” climb after that and everything in Russia’s economy will be fine again. That makes it possible to plan a budget deficit reaching 5 percent of the GDP for 2009, which could be covered by tapping into the accumulated reserves (Expert, January 19). One problem here, however, is that these reserves are shrinking with astounding speed: Russia lost $30.3 billion in just one week in January (, January 22). The total amount of reserves is still around $400 billion, but Russian companies will have to pay some $160 billion to foreign creditors in 2009 without access to new credit. The Central Bank will also have to expend capital on supporting the ruble at the target rate of 36 to the dollar, and the bottom line of these financial calculations is that reserves could evaporate before the end of 2009 (, January 19).

Putin might not be able to buy enough time to outlast the recession, but a larger problem with his anti-crisis policy is that its basic philosophy is simply “muddling through” and waiting for the good times to return. The proactive part of this policy is aimed at sheltering such manufacturing sectors as the car-, aircraft-, and ship-building industries by protectionist barriers, pumping money into “privileged” banks, and helping Gazprom secure access to Central Asian resources and European markets. Even the state-owned Rosneft is complaining that Gazprom, in the aftermath of the quarrel with Ukraine, is preventing independent producers from selling gas directly to domestic consumers (Kommersant, January 23). The anti-crisis policy implemented in such an ad hoc and selective way becomes, in fact, pro-crisis because its immediate aims exacerbate the decline in the sectors that fall outside Putin’s attention, while his “protectionism” stalls the necessary modernization of the chosen “champions,” including even Gazprom (, January, 20).

Each new week of the evolving crisis makes it increasingly certain that no status quo ante can be restored after an economic disaster of such proportions, so the policy of softening its impact and expanding the zone of state control over key industries is fundamentally inadequate. This economic policy, however, is a natural product of Putin’s state-building policy focused on maintaining the monopoly of power by the ruling elite under the guise of stability. The pressure of the crisis inevitably erodes the foundations of this self-serving regime, so experts keep looking for signs of a split between groups of elites forming around the two “poles” in the tandem leadership or perhaps even around such discarded alternative figures as Sergei Ivanov or Vladimir Yakunin (New Times, January 19). For now, however, Putin’s and Medvedev’s approval ratings remain at 75 to 80 percent, even if the index of consumer confidence has fallen by 20 percent into negative territory (Levada Center, January 22; Nezavisimaya gazeta, January 19).

This rent-harvesting regime cannot invent any consistent policy that would unleash the modernization potential hidden in every crisis. The inherent counter-reformism of the vast bureaucratic class that forms the real support base for Putin denies Russia a chance for a dynamic recovery and probably condemns it to protracted stagnation. Corrupt “expropriators” (in the old Marxist meaning of this term) cannot reinvent themselves as modernizers; and it may be highly significant that consumers, while pledging loyalty to their leaders, have, in fact, lost faith in the regime. Whatever arrogance Putin likes to demonstrate, there is a pronounced fear factor in his political behavior. The flashing TV pictures of angry demonstrations in Reykjavik and Athens, Riga and Vilnius accentuate this fear; and the huge wave of enthusiasm created by the inauguration of President Barack Obama does not help either. The progressing inability to control the discontent among Russian entrepreneurs and workers, students and officers might prompt Putin to respond forcefully. Vladivostok has seen the first of such inadequate reactions, and it is much further from Moscow geographically that politically.