Russia’s New Stagnation
PARIS – In early November, the Russian government released its latest macroeconomic forecast. It could not have been an easy decision: Whereas President Vladimir Putin and his government campaigned in 2012 on a promise that the Russian economy would grow at 5-6% per year during his six-year term, the growth rate is now expected to average just 2.8% from 2013 to 2020.
Minister of Economic Development Alexei Ulyukaev explicitly acknowledged that achieving the targets set by Putin “will take longer.” In some cases, that means much longer. For example, in May 2012, Putin promised to increase Russia’s labor productivity by 50% by 2018; the current forecast does not envision this outcome even by 2025.
For independent observers, the ministry’s grim forecast comes as no surprise. Judging by low stock prices and high capital outflows, investors were already betting against high growth rates. Now Putin and Prime Minister Dmitry Medvedev are pessimistic as well. Medvedev, who had been publicly forecasting 5% annual growth as recently as January, told foreign investors in October that this year’s growth rate would not exceed 2%.
Previously, the government blamed the country’s economic problems on the global slowdown. Today, that argument makes little sense. The global economy – and the US economy, in particular – is growing faster than expected, and world oil prices are above $100 per barrel.
The ministry’s forecast answers the perennial “who is to blame” question very clearly: the slowdown reflects Russia’s own “internal problems.” The ministry’s baseline forecast assumes that the price of oil – Russia’s main export – will grow at 9% per year in real terms over the next 17 years, or more than three times the forecast for Russia’s annual GDP growth.
A week after the ministry’s forecast was released, the European Bank for Reconstruction and Development – Russia’s largest foreign direct investor – followed suit, cutting its growth forecast for Russia to 1.3% in 2013 and 2.5% in 2014. The EBRD’s view was even more straightforward: the slowdown is the result of the Russian government’s lack of structural reform. Poor governance, weak rule of law, and state-owned companies’ assault on competition undermine Russia’s business climate and cause capital flight.
Russia’s ruling elite understands very well that reforms are needed; indeed, the Putin-Medvedev era, now in its 14th year, has suffered no shortage of reform programs. Back in 2008, for example, Aleh Tsyvinski and I praised then-President Medvedev for his seemingly credible commitment to implementing the changes that Russia’s economy needs. But Medvedev’s one-term presidency – like Putin’s administrations before and since – did not deliver on these promises.
The Russian government’s reluctance to fight corruption and strengthen the country’s legal institutions reflects a perverse – yet stable – political equilibrium. In 2010, Tsyvinski and I predicted a “70-80 scenario” in Russia in the coming years: As oil prices, which had plummeted to $40 per barrel, recovered and surpassed $70-80/barrel, Russia would return to the stagnation of the 1970’s and 1980’s.
Sure enough, GDP growth from 2010 to 2012, though averaging a respectable 4%, turned out to have been driven by the post-crisis recovery and the further increase in oil prices to $100/barrel. Now all of these short-term factors have been exhausted, and a Brezhnev-like period of stagnation has begun.
Russia’s political elite understands that the economy is capable of 5-6% annual growth. The problem is that the reforms needed to achieve such growth – fighting corruption, protecting property rights, privatization, and integration into the global economy – directly threaten the elite’s ability to hold on to power and extract rents. For those in power, a big piece of a shrinking pie is preferable to no piece of a growing one, which is what most of the current elite would receive under a fair legal system with clear rules and predictable enforcement.
Seen against this background, the November release of the ministry’s grim forecast for growth is both surprising and welcome. At the very least, the authorities deserve praise for frankly admitting that Putin’s promises are impossible to fulfill, rather than continuing to ignore, sugar-coat, or divert attention from the evidence.
The growing realism of the government’s internal – and public – discourse is no small matter. It is finally leading, for example, to the much-needed discussion of budget cuts. What this – and officials’ new candor more broadly – means for Vladimir Putin’s political future remains to be seen.
Copyright: Project Syndicate, 2013.
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