Social Tensions in Russia Build up as Government Turns Miserly

The soccer fiesta in Russia moves into its second week, but the noisy celebrations could not entirely hide the deepening discontent caused by the tightening of economic and social policies (see EDM, June 18, 21). The government has obviously decided that the World Cup opens a perfect window for executing unpopular cuts in social benefits necessitated by the sustained contraction of state revenues. The cheerful atmosphere marks a big change from the now-habitual gloom of Russia as the “besieged fortress,” which makes the appearance of street protests feel almost inappropriate (Moscow Echo, June 22). This injection of joy may, however, reinforce Russian society’s longing for a departure from the stability of stagnation: as many as 57 percent of Russians now say they want to see profound changes in state policies (Levada.ru, June 19). Vladimir Putin has just started his new presidential term, which is intended to deliver six years of “more-of-the-same.” Thus, this shift in public mood clearly deviates from his intended course.

The most shocking measure recently introduced by the government is the increase of the retirement age from 60 to 65 for men and from 55 to 63 for women, which was designed to resolve the deep crisis of the pension system without fueling inflation (Kommersant, June 23). The propaganda effort in support of this cut to social payments fails to persuade the working classes that their interests are taken into proper account, however (Rosbalt, June 19). Indeed, this decision signifies a striking departure from the economic populism that dominated Putin’s presidential campaign (Newsru.com, June 21). The Kremlin leader continues to try to distance himself from this “reform” and quite possibly is contemplating some revisions and postponements that would suffice to restore his popularity (Moscow Echo, June 21). He cannot, however, curtail pension privileges for state bureaucrats and the siloviki (security services personnel); and the State Duma (lower chamber of parliament) deputies are also exempting themselves from the new rules (Moscow Echo, June 23). Moreover, these privileged elite groups are unlikely to suffer from the wide range of tax increases that the government has also been quietly introducing—expecting that protests will focus solely on the retirement age issue (Novaya Gazeta, June 22).

The squeeze on social programs cannot solve the problem of revenue shortages in the state budget, however; so the government plans to increase taxes on the oil industry, in particular targeting export earnings (Kommersant, June 22). Several powerful lobbies—notably, Igor Sechin, the master of the state-owned Rosneft and one of Putin’s most-trusted lieutenants—resist such a redistribution of profits and are working to protect the interests of the hidden beneficiaries of the oil business (RBC, June 19). Corruption and embezzlement continue to flourish in the energy sector, but the profiteers are eager to explain away the evidence of gross mismanagement and declining efficiency by the impact of Western sanctions (Nezavisimaya Gazeta, June 22). The result of their reluctance to invest in the modernization of their own businesses is the price increase of gasoline at the pump, which has become yet another social irritant (Forbes.ru, June 22).

The crucial question related to revenues in the Russian oil industry, and for the state budget as well, is the fluctuation of the global oil price. And Putin used the occasion of the World Cup opening to play a round of petro-football diplomacy with Saudi Crown Prince Mohammad bin Salman (RIA Novosti, June 16). Their initiative to raise production quotas by 1.5 million barrels a day was met with opposition from Iran, which cannot increase its production due to the sustained impact of sanctions, aggravated by the United States’ withdrawal from the nuclear deal (Gazeta.ru, June 19). A compromise was found at the meeting between the Organization of the Petroleum Exporting Countries (OPEC) and Russia (now known as the OPEC+ mechanism) in Vienna. But the desired uplifting influence on the oil price is by no means guaranteed (RBC, June 23).

What could have a depressing effect on the oil price is the looming trade war between the US and China, in which Russia is an insignificant variable but potentially a major casualty (Nezavisimaya Gazeta, June 20). Moscow has been trying to demonstrate its readiness to partake in this conflict by countering the US tariffs on its aluminum exports with taxes on imports from the US, which are miniscule (Kommersant, June 20). China, meanwhile, is holding firm against the US economic threat but finds Russia, punished by the sanctions regime, an ally of no value in this confrontation. Indeed, Moscow’s decision to dump half of its portfolio of US Treasury holdings (now amounting to $48.7 billion) made no impression on the global financial markets (Moskovsky Komsomolets, June 23). Rather, Russia has continued to see the sustained outflow of foreign investments, amounting to $1.8 billion in the last eight weeks (Kommersant, June 23).

The Russian economy is starving from the lack of investments, so this capital flight has a notable effect on Russia’s prospects of achieving meaningful growth, which the government tries to orchestrate by manipulating statistics (Vedomosti, June 20). In reality, the Russian lag compared to the rest of the world continues to deepen, and Putin’s talk about innovation and the digital economy is even less convincing than (current prime minister) Dmitri Medvedev’s modernization proposals during his presidency in 2008–2012 (Republic.ru, June 21). The falsity of Putin’s talk is exposed by the order to shut down the Moscow School of Social and Economic Sciences, which has been one of the country’s top universities for cultivating an innovations economy (Meduza, June 22). What the Russian ruling elites continue to hope for is a “structural deficit in oil,” as confidently predicted by Sechin, despite all the evidence of shifts in the global energy markets, making such oil shortages exceedingly unlikely (RBC, June 21).

The present-day inflow of petro-revenues is perhaps the best external economic condition Russia can hope for; but it only keeps its economy on the unsatisfactory trajectory of stagnation. Many sources of growth are available for a country rich in natural and human resources; however, Russia’s bureaucratic predation and systemic corruption are depleting those. The Kremlin tends to dismiss the signs of growing discontent with faith in the stability of decline—and to overreact to protests driven by this discontent. The technically sound economic policy of cutting spending—as the revenues are embezzled—becomes a powerful accelerator of protest activity, forcing Putin to rely on his police state to suppress it. The joyful soccer party could turn ugly in a matter of weeks.