In Digest, Russia

By Fred Weir, Moscow correspondent, Christian Science Monitor, Dec. 15, 2014

Moscow — Russia’s petroleum-dependent economy is facing a perfect storm of bad news, brought on plunging global crude prices and an ever-tightening set of Western sanctions imposed over the Kremlin’s Ukraine policy. The Kremlin, which failed to diversify the economy fast enough during the fat years, now faces the urgent task of carrying out painful economic restructuring and public belt-tightening at the same time. If it doesn’t, it risks losing the political and social stability that have been the hallmarks of the Vladimir Putin era. How bad is Russia’s economic plight?

Pretty bad. The Russian ruble, which traded at just over 30 to a US dollar at the beginning of this year, now hovers near 60. That tracks the downward global price of oil, which has slumped from around $115 per barrel as recently as June, to just $62 last week. Inflation is taking off, with rapidly rising prices for imports, which include a lot of food, clothing and other daily items. The Moscow stock market is plunging, and capital flight appears set to break all records this year.

A declining currency often boosts a country’s exports by making locally-produced goods cheaper for foreign buyers, but Russia has few competitive export industries outside of arms and oil. And Western sanctions have squeezed the ability of Russian banks and businesses to borrow cash abroad, and many must now pay back dollar-denominated loans without the ability to get new loans. Economists now predict Russia will go into recession early next year. Recommended: Sochi, Soviets, and tsars: How much do you know about Russia? Does this hurt Putin?

So far, no. Polls suggest Putin’s popularity remains at all-time highs of over 80 percent. Russians, perhaps hardened by many past crises, show little inclination to panic or protest. And they generally appear to agree with Putin’s actions, such as annexing Crimea and supporting east Ukrainian separatists. Test your knowledge Sochi, Soviets, and tsars: How much do you know about Russia? In Pictures Social mobility in the BRICS! Video Congress Levies Harsher Russia Sanctions

But that is based on his record of turning Russia’s economy around and lifting millions of people out of poverty during the first decade of his rule. It remains to be seen how much economic pain they may be willing to endure rather than give in to the West.

Still, Russians are no strangers to economic crisis, having seen repeated crashes in the 1990s and a short but extremely deep recession in the wake of the Wall Street collapse in 2008. Is there any good news?

Russia still has the world’s sixth-largest foreign currency reserves, around $400 billion, which could insulate it from a lot of financial hardship. Russia’s Central Bank has reportedly stopped spending its precious dollars to prop up the ruble, which means it still has plenty of resources to bail out struggling Russian banks.

There are signs that Russia’s long-stagnant agricultural and manufacturing sectors are beginning to pick up, and are already replacing some imports that have been priced or sanctioned out of the Russian market. Russian arms exports are reportedly booming.

Though traditionally strong trade with Europe and Ukraine is flagging amid the crisis, Putin has boosted Russian morale and perhaps improved the country’s future prospects by moving to nail down new markets in China, India, and Turkey. Also, thanks to the plunging ruble, the Russian government’s budget is overflowing this year – because it takes in more than half its revenue in dollars, through oil duties, and spends in the local currency. Can Russia climb out of the crisis?

Probably not without deep economic reforms. Russia’s addiction to oil revenues has to be broken, and that requires sweeping economic diversification. Putin recently outlined incentives to boost Russia’s long-neglected small business sector, and said the government would fight corruption and slash red tape.

That may be a start, but Russia’s big business “oligarchs” – many of them Kremlin cronies – have little interest in seeing their monopoly positions broken and new competitors emerging in a more liberal economy. A rising small business class might take to the streets, as middle class Russians did in 2011, to press for greater democracy and government accountability. That could imperil Putin’s system of authoritarian rule, in which he enjoys near absolute power and keeps the population loyal through state patronage. What does this mean for the West?

Russia is by far the largest country by land-area, and it holds a vast share of the world’s natural resources. Until recently, it was an expanding market frontier for Western corporations in everything from financial services, to auto sales, to oil exploration. When Russia was the core of the old Soviet Union, animated by a hostile ideology, it held the West in an uneasy and costly state of cold war for many decades. Politics and economics remain closely intertwined in Russia. As the Kremlin turns away from integration with a censorious West, seeking different economic strategies and non-Western allies, there is a genuine risk that history might repeat itself.

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See also:
Russian arms sales soar on domestic spending, Agence France presse , Dec 15, 2014
STOCKHOLM: Sales by Russian arms manufacturers continue to expand thanks to Moscow’s investments despite a downturn in global defence spending, a Stockholm-based think-tank [Stockholm International Peace Research Institute] said Monday…

[Russian company] Almaz-Antey is now the 12th-largest arms manufacturer in the world, getting closer to the top 10, “which has been exclusively populated by arms producers from the U.S. or Western Europe since the end of the Cold War,” SIPRI said…

Despite the decrease, the US still dominates the list with six companies in the top 10.


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