Tuesday, 6 May 2014

Why the Russian economy matters

In Ukraine, fighting spread from the east to Odessa. Each day witnesses new battles and deaths, most recently in southern Mariupol although the now familiar battleground of Slavyansk continues to burn. Now, in a callow (or callous?) move, pro-Russian militias let civilians man the barricades in the east. Certainly, this may slow down the advance of Ukrainian troops, but it does nothing to protect ordinary people, Russians or Ukrainians, of eastern Ukraine. The nationwide elections of May 25th do seem hopeless, now, but so does the referendum planned in eastern Ukraine for May 11th. Russian troops may yet officially invade Ukraine.

On this dark background it seems perhaps misguided to focus, for a moment, on the state of the Russian economy. Yet we cannot avoid looking at this economy if we are to properly guess at the longer-term involvement of the Russian state in Ukraine - and in Russia itself.

Three questions are particularly pertinent.
  • Is the economy of Russia in trouble?
  • Is the state of the economy of Russia connected to Western sanctions?
  • Do Russian elites care about the state of the Russian economy? 

On the first question: Yes, the economy of Russia is in trouble, in the short term but, much more importantly, over the medium to long term, too. In Q1 for 2014, Russian GDP contracted by 0.5% according to the Russian Ministry for the Economy, which also states that growth may not exceed 0.5% for the year. Now, Maksim Oreshkin of the Russian Ministry of Finance has confirmed that Russian GDP is set to contract again in Q2, meaning that Russia is technically in a recession.

This is not, or not primarily, due to Western sanctions, however. Russian economic growth has been sluggish for a while. Last year, for instance, the IMF measured Russian GDP as 1.3%. Admittedly, this growth has now been downgraded to a projected 0.2% (the OECD project a 0.5% growth rate for 2014), but even if growth for 2014 were to equal that of 2013, it would hardly be impressive. Remember, this is a BRIC we are talking about - one of the four great developing economies (together with Brazil, India, and China - and South Africa for BRICS) immortalised for a decade by Jim O'Neill of Goldman Sachs. You cannot really blame O'Neill for the comparison; it made fine sense in 2001 and the years thereafter.

But now... In 2013, admittedly, according to the IMF Russia remained the eighth-largest economy of the world, with China second, Brazil seventh, India ninth (and South Africa thirty-third...). The Russian economy still matters - but look at growth rates. According to the IMF DataMapper for April 2014 (which even has Russian growth rates at 2.5%), India is at 6.8%, China is at 6.5%, and even Brazil has a projected year-on-year growth of 3.5%. (http://www.imf.org/external/Datamapper/index.php). Also, tellingly, with the exception of Ukraine (for which no secure data can be obtained presently by the IMF), all other post-Soviet states have a higher economic growth than Russia. For sure, the Russian economy is so much larger than that of its neighbours that its relative sluggishness still conceals assets much larger than those of the neighbouring states. Yet, clearly, the Russian regime is in no position to promote their state as the powerhouse that shall drag surrounding states into a glorious economic future. So much for that Customs Union, perhaps? Much more importantly, so much for Russian aspirations to show their country as an economic powerhouse of the world.

Western sanctions against Russia do have an impact; as does the uncertainty fostered among Russian and international investors by the persistent unrest next to, and partly fomented by, Russia. Apart from sharply curtailed GDP growth, inflation in Russia is rising with the Central Bank recently rasing the base rate by 50 basis points to 7.5%. Yet if this was the Russian economy of the early noughties it could probably ride out the storm. Now, sanctions may not force the Russian regime to be constructive in Ukraine. Russian elites do (mostly) care about the state of their country and its economy, but the fight for Ukraine and the incendiary anger against the West is taking precedence. So far, so understandable.

But what comes next? As mentioned above, Russia can no longer show itself internationally as a quickly growing economy. For better or for worse, the Russian economy has "matured" - and this thanks mainly to great world market oil prices over the last decade. And how has Russia and Russians benefitted from this? Especially outside Moscow and St Petersburg? Not very much, it seems. For 2013, the Economist Intelligence Unit compared living standards in 80 countries (that is, "where is it best to be born?"). Russia was not last. Oh no, only number 72 - and it beat Syria! (while losing to Indonesia, but there we are...). (http://www.economist.com/news/21566430-where-be-born-2013-lottery-life). Surveys of political and civil freedoms, and on corruption levels, do not make for more cheerful reading for Russia.

Maybe these measurements are misguided, run by Western, subversive agencies? Well, if so - why, in June 2013, did almost half of all Russian students dream of emigrating? Why did 38% of businesspeople want to leave. This according to Russian pollsters, from the respected Levada Centre. (http://en.ria.ru/russia/20130606/181540254/Almost-Half-of-Russian-Students-Dream-of-Emigrating---Poll.html).

The real problem is not that the Russian economy is getting sluggish. The real problem is that Russians (and everyone else) are ever less convinced in the Russian economy, and in the ability of their regime to better ordinary people's living standards. Russians and Westerners alike know of the American Dream; it stayed alive and well even when the American economy was in the doldrums. There must be a Russian Dream, too. It should be brave and optimistic. Instead, it seems just unrest and death. And that, it seems, is all that President Vladimir Putin and his staff is able to leave behind.

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