Putin’s political triumph - but economic impasse

2014 dawned as a year of triumph for Russian president Vladimir Putin. Forbes magazine named him the most powerful person in the world, and he did indeed have some considerable successes in 2013.

First, he emerged victorious from the tussle with the EU over Ukraine.  Second, he managed to propose a sensible way forward for dealing with the situation in Syria, so for the first time in decades leading foreign politicians were actually listening to the Kremlin. Third, next month will see Sochi hosting the Winter Olympics, which means that for more than two weeks the attention of the whole world will be focused on Russia. Many people consider Russia’s selection as host country for the Olympics a personal Putin coup and by the end of February his popularity ratings will almost certainly have improved.

At the start of 2014 Forbes magazine has named Vladimir Putin the most powerful person in the world.

But in actual fact Putin is currently facing a very testing time: the Russian economy is in such a bad state that the difficulties of the 2008-09 crisis and the 2011-12 protests will pale into insignificance by comparison.

Stagflation hits Russia

In 2009 Russia’s GDP fell by 8% because of oil price slippage, though economic growth began to recover as soon as prices started to climb again. The crisis didn’t last long enough for the Russian public to start really feeling the pinch and, though Putin’s popularity may not have reached the dizzying heights of pre-crisis times, he continued to enjoy the support of most Russians. 

At the end of 2011 many people took to the streets in Moscow and St Petersburg to protest about the fraudulent parliamentary elections; there were many fewer protesters in the provinces. The protests lasted for several months, but the opposition failed to offer any real threat to Putin’s political regime. Today, only Moscow has any opposition politicians (Aleksei Navalny and Mikhail Prokhorov) who enjoy mass support – on the whole Putin has no serious rivals to speak of in the rest of the country. 

Rivals might well appear on the horizon, though, if Russia becomes mired in economic stagnation. There were definite signs of this kind of threat in 2013, when GDP grew by only 1.3%, and that at a time when the price of oil, Russia’s main export, was stable and high. In crisis-ridden 2009, politicians and economists were optimistic that the Russian economy would receive a shot in the arm when the global economy recovered; today neither group expects anything good from the future. A best case scenario would be long-term GDP growth of 2.3 – 2.5% per annum. For a developing country like Russia, with many social problems still to be solved, this growth rate is clearly not sufficient. Most importantly, it is not sufficient for the continued survival of the current political system where, irrespective of elections, power remains in the hands of one and the same person, one and the same regime.

Russia's economic growth since 1992. High levels of growth under Putin may be a thing of the past. Image CC LokiiT

In 2013 Russia’s GDP grew by only 1.3%, at a time when the price of oil, Russia’s main export, was stable and high.

This year’s Gaidar Forum recently took place in Moscow. This major annual economic conference is named after Yegor Gaidar, the prominent Russian politician and academic who was behind the very significant reforms of 1992 – effectively the transition from the Soviet system to a market economy. At last year’s Forum, Prime Minister Dmitry Medvedev demanded that the GDP growth projection be increased to at least 5%, but this year he did not risk any such unrealistic requests. Moreover, this year saw the first discussion of the Russian economy in terms of ‘stagflation’ (slowing economic growth rate and high inflation). 

Shortage of money has already forced Putin to abandon several costly projects that so recently seemed surefire winners. Arms spending has been cut back and construction plans for high speed railways have been frozen; but the main problem is that there is not enough to spend on welfare. The situation is not expected to improve in the next few years, so it is highly likely that ordinary people will become increasingly disillusioned with Putin’s running of the country. Ten years ago he was popular because the public could see that life had improved by comparison with the difficult 90s. There are no such hopes today, so Putin will find it hard to hold on to the affection of millions of Russians.

Ways out of the crisis… one

The Kremlin regularly consults economists and commissions projects in search of ways to deal with its problems. There are many different ideas around in Russia today, including some very strange suggestions as to how the economic difficulties might be overcome, but these can be boiled down to two main approaches, bearing the names of two leading politicians, Kudrin and Glazyev. 

Aleksei Kudrin is a former Finance Minister who worked with Putin in the period 2000-11, resigning because he did not want to be part of the current Medvedev government. Today Kudrin heads up the Civic Initiatives Committee, founded by him and one of Russia’s most influential public bodies. Putin still asks his advice on ways of developing the economy.

Former Finance Minister Aleksei Kudrin with former President Dmitry Medvedev in 2009, when both occupied higher offices. Photo CC London Summit.

Kudrin’s approach is based on the view that traditional economic instruments will not enable Russia to buck the current unpleasant trend towards economic contraction. He believes that neither increased government spending nor cheaper credit for businesses can guarantee the growth of the economy. Russia today has serious institutional problems, which make capital outflows inevitable. In other words, there is money in the country, but it’s not worth investing it there. It’s better to send it abroad. 

Kudrin believes that if the rules of the game are changed, the flight of capital can be halted and foreign investment will increase.

This is because the investment climate is so unfavourable. Businesses have no protection from attacks by criminals and the ‘siloviki’ (i.e. the police, the public prosecutors and the security services). Court decisions favour those who pay up, or who are assured of the support of powerful people. The economy is in the hands of the very few and barriers in the way of newcomers to the market are extremely high: clearing them requires enormous bribes and takes a long time.

As the current government can’t (or won’t) continue with the reforms which could change the situation for the better, Kudrin sees Russia as in desperate need of democratisation. If the rules of the game are transformed (first in politics, then in economics), the flight of capital can be halted and foreign investment will increase, as is happening in many developing countries where the state protects business.

… and two

The second leader of economic opinion, Sergei Glazyev, is Putin’s current economic adviser. During the period of reforms twenty years ago, he was minister for external economic relations; he then joined the ranks of the nationalist opposition. He is a full member of the Russian Academy of Sciences.

Glazyev approaches the question of the economy very differently from Kudrin, leaving politics out of the equation. The presidential adviser considers that the economy needs money and if this is forthcoming, by whatever means possible, then economic growth will pick up, possibly to 8% per annum. 

Glazyev approaches the question of the economy very differently from Kudrin, leaving politics out of the equation.

In Glazyev’s view, it is the job of the government to provide money for the economy and there are various ways of doing it, for example by increasing public funding, support for the military industrial complex, more public contracts. Or, on the other hand, by lowering the official bank rate, providing cheap loans via the banks and making borrowing easier. The positive benefit of this will, he believes, be much greater than the cost of achieving it, as the industries receiving government support will drive the economy in a particular direction: demand for a whole range of goods will increase, so growth will accelerate, even in those industries which do not themselves receive financial support.

The experts’ opinion (to be ignored)

Most economists of any worth take Kudrin’s view. His view of the problems facing the Russian economy is not narrowly liberal. There is a broad consensus among academics and experts of various affiliations on the need to regularise the investment climate, and so President Putin, on the whole, supports this view.

However, even if Putin formally agrees with Kudrin, this doesn’t mean that Russia will actually take the steps needed to improve its investment climate. The main priority of the current political regime appears to be self-preservation, so it is not prepared to change the rules of the game in such a way as to halt capital flight. So even though he recognises Kudrin’s approach as the correct one, Putin cannot act on his recommendations because he fears democratisation.

Though he recognises Kudrin’s approach as the correct one, Putin cannot act on his recommendations.

For this reason the government, with an eye on improving growth rates, is more likely to take up Glazyev’s recommendations in one form or another. The authorities would rather have a dubious economic policy than no policy at all, which would mean waiting passively for the economy to start disintegrating in front of their very eyes. But Glazyev’s theories are indeed dubious, based less on a clear understanding of what’s happening in the country than the belief that government support will in itself produce powerful engines of growth. In an ideal market economy, this would probably actually happen, but Glazyev is ignoring the realities of the Russian economy. His approach is strictly theoretical and his theories will be unlikely to withstand the test of being put into effect.

The problem is that in such an unfavourable climate for investment, making money more accessible could end up increasing profiteering and speculation, rather than developing the economy. Or else causing a scramble to convert roubles into foreign currency for export to safer investment havens. And if this is how matters develop, increasing rates of inflation and the fall of the rouble will make Russia an even less attractive investment environment.