Russia in 2016: when power precedes development (BRET on NEE)

Cyrille BRET – Michael BEGORRE -January 2016

Can Russia’s economy afford its leader’s ambitions on the geopolitical scene? The country’s military power is hampered by an economic model which means strong exposure to exogenous shocks. Repeatedly, the Russian president has announced that growth will return in 2016. But international institutions think otherwise, with expectations of a GDP contraction (-0.6 per cent) after the recession of 2015 (-3.8 per cent). Russia’s geostrategic role has obviously risen from the ashes, but what about its economic recovery?

Here is the column on New Eastern Europe: NEE Russian Economy

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Following the 1998 crisis, macroeconomic dashboards had been reading back to positive territory. The Putin years brought back prosperity with 7 per cent annual growth on average between 1999 and 2008, an unemployment rate of around 5 per cent and recurring budgetary surpluses (up to 9 per cent in 2006). It brought up its GDP to the 9th position globally. Chiefly, the country built up massive currency reserves, reaching 540 billion US dollars in 2012. This prosperous moment allowed the Kremlin to consolidate its power within the country and launch a military modernisation programme in 2009. Military expenses now amount to 4 per cent of GDP (France has 2 per cent) and the military boasts 800,000 personnel.

Does that mean the lessons from the Soviet era were well learnt and that economic development was secured first in order to serve geopolitical power? Russia’s economic trajectory shows a starker picture. First, growth in the Putin era was actually catching up from the 1990s crisis: Russia came back to 1990 level in 2005 only. Second, Russia’s wealth derives from a rent economy based on fossil fuel exports. In 2012 they represented 12 per cent of the GDP and an impressive 52 per cent of the federal budgetary income. Such an overdependence comes with many drawbacks. The energy bonanza was not used to bring back the whole economy on a sound growth path and correct its imbalances. Inflation has not been curbed (from an average of 10 per cent yearly in the 2000s), given the weight of imports and currency flows. Corruption discourages much needed investments, and for a significant reason: Russia stands in the 136th position of corruption on a list of 174 countries drawn up by Transparency International. The banking system remains underdeveloped, doubling the pain of chronic underinvestment. In a word, the golden decade of the 2000s stands as a lost decade too, as far as modernising the productive system is concerned.

Recent trends confirm these weaknesses. With oil prices divided by three since 2014, federal budgets based on a 100 US dollars tag show their faults. Financial sanctions following the Ukrainian crisis served as a reminder of how dependent the economy is on importing the vast majority of consumption goods and attracting Western investments. Capital flight has degraded the balance of payments and has fuelled a monetary instability that the Central Bank has only mastered by severely tightening credit up.

In 2016, without a radical change in Ukrainian policy and oil prices, Russia is bound to another year of recession. Hindered by the global economic situation and by a domestic economy which has still not diversified, its political ambitions may well stumble on unforgiving economic realities. The curse which led the Soviet Union to defeat during the Cold War may well strike modern day Russia again.

 

 

 

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