Nov 28th 2016

How Russia Stays Afloat

by Anders Åslund


Anders Åslund is a senior fellow at the Atlantic Council in Washington and author of the forthcoming book Russia’s Crony Capitalism. 
 


WASHINGTON, DC – The long-term sustainability of Russia’s economy is an open question. Cronyism is rife, and Russia’s heavy dependence on oil revenues means that it will suffer whenever oil prices are low. But if the Soviet Union taught us anything, it is that unsustainable systems can survive for many years.

The Russian system today reminds me of the Soviet system I experienced in 1983, when I lived in Moscow, and KGB disciplinarian Yuri Andropov (the “Butcher of Budapest”) was still in power (albeit in poor health). The common economic features, then and now, include low oil prices, a nonviable economic ideology, state ownership of crucial industries, and authoritarian rule.

But one notable difference is that Russia’s macroeconomic management is much more competent today than it was then. Russia is not at risk of running out of financing, despite continued Western sanctions. But its tight resources do limit the Kremlin’s foreign-policy options and aggravate tensions among Russian elites.

Since oil prices started falling in June 2014, Russia has slipped from sixth place to 14th in the International Monetary Fund’s global economic rankings; its GDP (measured in current United States dollars) has dropped from $2.1 trillion to $1.1 trillion – just 6% of US GDP. (And it spends only 8% of what the US does on defense.)

But, though Russia is not economically competitive with the US, its government has maintained admirable macroeconomic balances, even as growth prospects have faded. It took some time for the Russian government to get things right, and its international reserves did slump dangerously in 2014; but that December, the Central Bank of Russia (CBR) finally floated the ruble’s exchange rate, and macroeconomic conditions have since stabilized.

In his public statements, Russian President Vladimir Putin emphasizes five indicators of stability: international reserves, the foreign-payments balance, the budget balance, inflation, and the unemployment rate. Among these, he places the biggest premium on international reserves. At the annual “Russia Calling!” investment forum in October, Putin reported that “international reserves are growing” and “currently stand at around $400 billion” – which is apparently his target amount.

Russia’s international reserves include the Ministry of Finance’s Reserve Fund, which will run out in 2017. But for Putin, all that matters the total size of Russia’s international reserves. By letting the exchange rate float with the oil price, the CBR has managed to maintain a significant current-account surplus, even though lower commodity prices cut exports and imports by half since 2013.

Similarly, the Ministry of Finance keeps the budget deficit at around 3% of GDP, and the falling exchange rate has kept revenues relatively stable in ruble terms, even as absolute revenues have fallen. The government has made up for budget shortfalls by ruthlessly slashing education, health care, and now pensions.

When the ruble depreciated early last year, inflation surged above 16%; but the CBR’s tight monetary policy has since reduced inflation to 6%, with a further decline, to 4%, likely to be achieved next year. Remarkably, the unemployment rate is currently 5.4%, and Russia has managed to keep it below 6% since the oil-price shock; what’s more, public debt is a minuscule 13% of GDP.

Despite these positive indicators, overall investment, GDP, and living standards are falling. Real disposable incomes fell 10% last year, and will likely shrink by another 5-6% this year; investment fell more than 8% last year, and will likely fall by 4% this year; and GDP declined by 3.7% in 2015, and will probably contract this year as well (though by less than 1%).

A Westerner would consider these numbers unacceptable. But ordinary Russians appreciate that their real (inflation-adjusted) incomes doubled between 1999 and 2008. And, at any rate, it is not as though they can protest under the current regime.

Still, Putin once based his legitimacy on economic growth. Now that he can no longer deliver improved living standards, he follows the recommendation made in 1904 by Russian imperial minister Vyacheslav von Plehve: “We need a small victorious war.” Putin has benefited from three so far: the 2008 war in Georgia, the 2014 annexation of Crimea, and the ongoing intervention in Syria since September 2015.

But a previously risk-averse Putin has had to take ever greater risks, not least in Eastern Ukraine, where the conflict that he precipitated has been neither small nor victorious. Eastern Ukraine represents a foreign-policy failure, and it demonstrates that, while Russia enjoys military superiority over its neighbors, it cannot afford protracted wars. The West has been exploiting this weakness with its financial sanctions, which shave about 1% from Russia’s GDP each year they are in place.

Russia’s domestic elites pose another threat to Putin, which is why, since August 2014, he has sacked one KGB general after another, and has sought to eliminate potential rivals. But his purge has stalled, with Russia’s generals still constituting a majority in the country’s “real” Politburo, the Security Council of Russia.

On November 15, Putin took his purge in a new direction with the arrest of Minister of Economic Development Alexei Ulyukaev, one of the remaining liberal technocrats. The next day, when Putin addressed the Ministry of Defense with a prepared, televised speech, the generals in attendance regarded him with evident disgust, and the powerful defense minister, Sergey Shoigu, seemed to ignore him altogether.

Putin is politically savvy and often hides his real intentions. He has frequently taken the world by surprise with improvised wars and diplomatic initiatives, as in Ukraine and Syria. He is financially constrained, but his situation is not hopeless, and we should always expect the unexpected from him. Now that US President-elect Donald Trump’s victory has created a power vacuum in Washington, Putin has a great opportunity to boost his own domestic standing. We can be certain that he will seek to exploit it fully.


Anders Åslund is a senior fellow at the Atlantic Council. He served as an economic advisor to the Russian government in the 1990s.

Copyright: Project Syndicate, 2016.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jul 5th 2020
EXTRACT: "The war on Yemen begun in 2015 by Saudi Arabia and the United Arab Emirates has been a failure militarily and a vast drain on resources that, in the age of Covid-19, neither country can any longer afford. Not only has the war been Saudi Arabia’s Vietnam, it has inflicted untold human damage on Yemenis. UNICEF has a new report out warning that millions of Yemeni children are on the brink of starvation. Yemen, with a population of about 28 million (think Texas), is one of the poorest countries in the world. Saudi Arabia, with a citizen population of some 21 million, is one of the richest. The United Arab Emirates, with a citizen population of a little over 1 million, is likewise very rich. Both have waged a high-tech air war on the indigenous Yemeni Houthis, but in the past year have pitched their Sunni proxies against one another."
Jun 25th 2020
EXTRACT: "The facts are clear: the wealthiest 0.54%, about 40 million people, are responsible for 14% of lifestyle-related greenhouse gas emissions, while the bottom 50% of income earners, almost 4 billion people, only emit around 10%. The world’s top 10% income earners are responsible for at least 25% and up to 43% of our environmental impact. Most people living in developed countries would fit into this category, meaning you don’t have to consider yourself rich in order to be globally affluent. Even many poorer people in wealthy countries have a disproportionately large and unsustainable resource footprint compared to the global average."
Jun 24th 2020
EXTRACT: "To be sure, the American Dream was always more aspiration than reality. Economic, social, and intergenerational mobility have always fallen short of what the myth of the self-made man or woman would lead one to expect. But with social mobility now declining as inequality rises, today’s young people are right to be angry."
Jun 19th 2020
EXTRACT: "There is only one way to repair America’s reputation, regain the trust of allies, and ensure that the US can act as an effective counterweight to China: address the root causes of the cracks that Trump’s disastrous presidency has exposed and widened. This is in line with the vision advanced in 2011 by two military strategists, Captain Wayne Porter and Colonel Mark Mykleby, using the pseudonym “Mr. Y.” Porter and Mykleby argued that national security depends not only on the capacity to respond to threats from foreign powers, but also – and perhaps more important – on the “application of credible influence and strength.” That influence, in turn, depends on America’s success in providing a “pathway of promise” for US citizens – and a model for the world."
Jun 14th 2020
EXTRACT: "The most critical question then is not how far Trump will go to promote his treasonous agenda, but for how long Republican leaders will silently accept and subserviently enable Trump to destroy the basic moral tenets and values on which this Union was founded, and which they swore to uphold and protect...............Of course, shame on us if we continue to be surprised by Republicans’ continuing silence, because as we all know, even when presented with overwhelming evidence that Trump committed crimes against the American people, Trump’s Republican stooges in the Senate exonerated him following impeachment almost unanimously...................The Republican leadership, to be sure, has made its bed. It has committed moral suicide. History will judge them harshly for their treason and betrayal of the nation, including all of those who have lived and died throughout our history to foster and protect our safety, integrity, and freedom."
Jun 9th 2020
EXTRACT: " Governments can do nothing about the quotidian offenses of living as a black person in America – the empty taxis that refuse to stop, being mistaken for employees in supermarkets, the myriad intentional and unintentional insults. Many now in the streets won’t be satisfied unless the result of this national spasm is improved schools, health care, and job opportunities for minorities – a fair shake for black people. What will happen when America once again falls short of honoring its professed values?."
Jun 8th 2020
EXTRACT: "It should be apparent to most observers of international relations that the Chinese government wants the world to play by its own set of rules. Beijing appears to believe that China’s rise and its assumption of global leadership positions are an inevitable extension of earlier periods in its history, when it was the world’s most powerful country. This is often at odds with the global norms that have been established – with China’s participation, it is worth adding – since the 1940s. While this is clearly the Chinese century, few outside of China would agree that Beijing’s global leadership is either inevitable or necessarily desired – certainly not on the Chinese government’s terms."
Jun 4th 2020
EXTRACT: "Many Americans are clearly horrified by their president’s crass and incendiary words. But will their disapproval be offset by anxiety about violent social unrest? Will age-old racial prejudices, often unspoken, or even acknowledged, still make them vote for the false security of a coarse white bully?  Much will depend on how hot this summer gets. If people think rationally in November, it is hard to imagine that enough of them would vote to keep this appalling administration in power for another four years. But fear is reason’s worst enemy."
Jun 2nd 2020
EXTRACT: "For starters, many Americans have accepted that they live in a winner-takes-all society of deepening inequality. While the wealth and incomes of those at the very top continue to grow, tens of millions of Americans struggle to afford health care, childcare, and other basic goods. This story has been told many times over. But what often goes unremarked is that the responsibility for managing the social costs of this system has been offloaded onto the police."
May 27th 2020
EXTRACT: "Obamagate is the latest conspiracy theory to be pushed by US president, Donald Trump. It started on the morning of May 10, when Trump retweeted the word “OBAMAGATE!” By the next day, the Obamagate hashtag had accrued over two million tweets and another four million by the end of the week. Trump has repeatedly reused the slogan on his Twitter feed since and it has been promoted by right-wing influencers including Glenn Beck, Sean Hannity and many others....You are not alone if you’re confused by what Obamagate actually is or why Trump is tweeting about it."
May 23rd 2020
EXTRACT: "Not all aspects of our near and medium-term future can be foreseen at this juncture of the Covid-19 pandemic, but we now know enough to make some hypotheses about what is likely to change, based on what has already changed. The future is sure to look very different than it did before this decade began, regardless of whether a vaccine is found. If a vaccine is found, it is unlikely to be tested, approved, manufactured, and efficiently distributed to the world’s population of nearly 8 billion people for years. Bearing in mind that there is no vaccine for any coronavirus, what is likelier is that the world will be living with Covid-19 as a part of our ecosystem for many years to come – possibly permanently. That means that our new normal is probably already here."
May 21st 2020
EXTRACT: "LONDON – The new Franco-German proposal for a €500 billion ($547 billion) European recovery fund could turn out to be the most important historic consequence of the coronavirus. It is even conceivable that the deal struck between German Chancellor Angela Merkel and French President Emmanuel Macron might one day be remembered as the European Union’s “Hamiltonian moment,” comparable to the 1790 agreement between Alexander Hamilton and Thomas Jefferson on public borrowing, which helped to turn the United States, a confederation with little central government, into a genuine political federation."
May 19th 2020
EXTRACT: "In April 2011, Donald Trump, then considering a run for the presidency the following year, said that he had sent investigators to Hawaii to check out rumors that President Barack Obama wasn’t born there, but in Kenya, which would disqualify him for the presidency. His investigators, Trump declared, “cannot believe what they’re finding.” I can find no record of Trump being challenged on this outlandish claim at the time. In the fall of 2016, Trump, now the Republican presidential nominee, was convinced by his staff that he had to abandon this “birther” nonsense. He did so reluctantly, charging – also with no evidence – that such rumors had actually been initiated by his opponent, Hillary Clinton. There, in a nutshell, is Trump’s modus operandi: he’s not just a liar but a fabulist, seemingly unconcerned with whether his fictions will be exposed. If they are, the world simply moves on as he invents fresh distractions."
May 19th 2020
EXTRACT: "Li, a doctor, was purportedly silenced and chastised by Chinese officials for warning on December 30, 2019, about a new virus in the Wuhan hospital where he worked. When it became evident that he was on to something serious – so serious, in fact, that it ultimately killed him – the Chinese government changed its tune and celebrated Li’s bravery. If only that had happened sooner, the argument goes, the world would have avoided this horrific pandemic.................... But that’s not what happened."
May 9th 2020
EXTRACT: "Jana Winter and Hunter Walker at Yahoo News broke the story that 11 Secret Service agents have tested positive for the coronavirus. Likely some of them served in the West Wing. This week it was revealed at that a US military valet who brought Trump food came down with the virus, sending Trump into a “lava level” rage. Two aides to Vice President Mike Pence have tested positive. Some observers are afraid that the virus is circulating in the West Wing itself."
May 6th 2020
EXTRACT: "There has been much debate around the world about the source of the COVID-19 pandemic, ranging from a laboratory to Wuhan’s seafood market to some other form of animal-to-human transmission. While there is no proof (yet) that the virus may have been inadvertently released from one of the two biological research laboratories located at Wuhan, there is evidence that viral release has occurred in the past, and a host of additional data that point to a laboratory connection. "
May 4th 2020
EXTRACT: "A better bet is that nothing will be the same. Wealth will be destroyed on a catastrophic scale, and policymakers will need to find a way to ensure that, at least in some cases, creditors take part of the hit, a process that will play out over years of negotiation and litigation. For bankruptcy lawyers and lobbyists, it will be a bonanza, part of which will come from pressing taxpayers to honor bailout guarantees. Such a scenario would be an unholy mess."
Apr 29th 2020
EXTRACT: "We need the twenty-first century’s two superpowers, America and China, to set the example, by burying their rivalry and uniting all of humankind around a collective response to the current crisis, and to those that await us. As COVID-19 has taught us, the old international system can no longer guarantee humankind’s safety and security. We cannot afford to be taught that lesson twice."
Apr 29th 2020
EXTRACT: "It should come as no surprise that Trump has abused his power in orchestrating the federal response to the pandemic. For example, he made sure that Colorado received 100 much-needed ventilators, and made sure that Colorado voters knew it, in order to help re-elect troubled incumbent Republican senator Cory Gardner.  More alarming, Trump effectively threatened to wage germ warfare against US Postal Service workers by denying them congressionally approved virus-mitigation aid unless the USPS quadrupled rates on packages. Trump’s actual target was Jeff Bezos, the CEO of Amazon and owner of The Washington Post."
Apr 28th 2020
EXTRACT: "These ten risks, already looming large before COVID-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimize many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression."