It is in serious trouble, but is the Russian economy unsustainable? Western sanctions have restricted Russian companies’ access to international financial markets, but it is the state’s policies and priorities that are tanking its economic performance.
Recent statistical releases show the Russian economy unsustainable without reform
Recent statistical releases show that the gross domestic product (GDP) fell 4.3 per cent April 2015 by comparison to the same month in 2014, and the state development bank’s chief economist averred, “The crisis has still not passed its lowest point.” This figure was massaged by drawing on reserve funds from past oil and gas sales abroad, forced currency repatriation, and various statistical tricks.
At the same time, capital flight from the country is estimated this year at rise to $110 billion, a figure that will probably rise, following a record flight of over $150 billion last year, which was three times the figure in 2013.
The Russian economy shrank 2.5 per cent in the first four months of 2015, which means that the standard estimate of a 3.3 per cent contraction for the whole year is likely an underestimate. The contraction from month to month this year has only been accelerating, contradicting the official preductions of leading Russian officials.
Domestic policies, not Western sanctions, are making the Russian economy unsustainable
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Meanwhile, the state budget is increasing its military spending. The problem with military spending for a sick economy is that there is no return on investment. You can produce tanks and fighters, but tanks and fighters do not produce anything else; indeed, all they can do is destroy. In its domestic environment of economic contraction, Russia is spending nearly 10 per cent of GDP on the military. The new T-14 Armata tank that famously stalled and broke down on Red Square in the rehearsal for the May 9 Victory Day parade costs $8 million each, and Russia wants to produce 2,300 of them by 2020 to replace the only T-72s and T-90s.
Western sanctions as as a response to the seizure of Crimea and invasion of eastern Ukraine are not helping, of course, but they are not the cause of the problems. Rather, this is the failure to follow through on the economic reform program proposed by Dmitry Medvedev at the end of the last decade, when he was president before handing that office back to Vladimir Putin. Medvedev was criticized the country’s over-reliance on energy and raw materials exports,
The Medvedev reforms: a missed opportunity for Russian economic sustainability
Putin’s re-ascendancy over Medvedev was perhaps inevitable, insofar as Imperial Russian and Soviet history has never favored the existence of two centers of political power, from the opposition in the 1680s between the Regency of Sophia and the adolescent Peter I (“The Great”) all the way through the opposition between Communist Party general secretary Leonid Brezhnev and prime minister Alexei Kosygin in the late 1960s after they and their co-conspirators overthrew Khrushchev. Indeed, the “dual-power”conflict between president Boris Yeltsin and the Russian Duma in the early 1990s was also unsustainable and culminated in a military attack upon the Russian parliament.
Perhaps the closest parallel, however, is the Brezhnev-Kosygin conflict. Kosygin was also an economic reformer, but his proposals, which were modest to begin with, were gnawed to pieces by the Soviet bureaucracy even before they got to the point of being formally proposed. As it was acknowledged 20 years later, the problems of the Soviet economy only grew worse until Soviet president Mikhail Gorbachev’s attempts at reform illustrated that those problems could not be solved while keeping the country together in one piece. It is an open question whether the Russian Federation will survive in one piece until the year 2040, even if its disintegration is a slower process not marked by the spectacular political explosion that ended the Soviet Union’s life in 1991.