Russia: The More Things Change, the More They Stay the Same

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Putin's economic agenda offers only more of the same heavy-handed policies that have failed to modernize Russia and made the country more vulnerable to external shocks.
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The Russian presidential election is over. Vladimir Putin will return to his office in the Kremlin on May 7. The longtime Russian leader’s victory was predicted; no politician in the country was capable of presenting a real challenge. But the number of votes received by the controversial candidate Mikhail Prokhorov has demonstrated that there is significant public demand not just for new faces in Russian politics, but also for a more liberal platform.

Putin’s economic agenda will struggle to build a more modern Russia. It offers only more of the same heavy-handed economic policies that have failed to help Russia progress and have made the country more vulnerable to external shocks. It is, moreover, no way to revive an economy once again on the brink of stagnation, with little to counter a decline but the prospect of rising oil prices.

Can Putin be Predicted?

Putin’s economic policy is hard to pin down this far in advance. It will heavily depend on who is in the new government and the new presidential administration, how ideologically similar these people are in their views, how coordinated their work is, and how effectively they are able to reconcile Putin’s often controversial and inconsistent views of the economic problems that Russia faces. For now, no one, including the incoming president and prime minister, can be sure of the answers to these questions.

A big clue about future policy can be found, however, in an article that Putin wrote on the eve of the election. While such an article, especially in Russia, should be taken with a large grain of salt, it does provide some insight into Putin’s views on the appropriate economic model for Russia. In particular, one can infer the following policy messages:

  • The state should, and will, play a critical role in economic processes; it is impossible to trust the “invisible hand” or market incentives.
     
  • State-controlled companies should be the engine for Russia’s modernization. Though Putin knows that these companies are corrupt, he believes that they will somehow become transparent and internationally competitive in the future.
     
  • So-called “handy management” methods will be widely applied. This phrase is used in Russia to describe the government’s case-by-case approach to economic decisions under Putin, which is favored over adherence to rules.
     
  • Though private business is critical for Russia’s economy, one should not expect systematic improvements in the business climate.
     
  • Pensions and salaries for public employees will continue to rise without economic justification (that is, without the rapid growth of the economy or an increase in labor productivity). This policy will help maintain popular support for the current political regime, and Putin will keep it at any cost.
     
  • The federal budget will be kept in balance. This is a political priority, not an economic one, as raising funds in foreign markets could lead to the loss of national sovereignty (Greece is the relevant example here).

An economic policy that is based on such principles inevitably leaves Russia at the mercy of the price of oil. Putin himself estimated that fulfilling his pre-election pledges will cost 1.5 percent of GDP annually, suggesting that—with the existing tax system, no further increase in spending, and a balanced budget—the oil price will need to increase by $17–20 per barrel annually.

Such a scenario may not be completely unrealistic, given very soft monetary policy in both the United States and the eurozone. On the other hand, an economic program that hinges on the price of oil can hardly lead to the modernization of the Russian economy or improve its competitiveness.

Will the Opposition Fade?

Though modernization has been a watchword in recent months, as expected, Putin was announced the winner of the recent presidential election after receiving nearly 64 percent of the vote. While Putin was the only politician capable of carrying a majority of the vote, it is hard to argue that his victory was the result of a clean contest.

The deck was stacked against genuine opposition even before the election began. Any would-be independent candidate is required by law to collect no fewer than two million signatures in his or her favor—across 50 regions of the country, within three weeks around the New Year holidays. Even if the candidate manages to do this, Russia’s Central Election Committee may bar him or her from participating in elections, as happened in 2008 with Mikhail Kasyanov and in 2012 with Grigory Yavlinsky. Independent candidates also have far fewer opportunities to engage voters during the election campaign. For example, Putin received 50 percent more air time on federal television channels than the other four candidates combined.

This manipulation, however, did not preclude fraud. During the election itself, independent election observers documented numerous instances of voter coercion and fraud that are estimated to have affected no less than 10 percent of the vote. 1 According to the latest polls, only 44 percent of Russians believe that votes were counted properly.

But even if a free and fair election had been possible, it is not clear that the protest movement would have been able to coalesce around a single politician. Grigory Yavlinsky could potentially have become such a unifying candidate, but perhaps for this reason he was not allowed to participate in the election. Mikhail Prokhorov was another possibility, but his sluggishness to court the protest vote strengthened the suspicion that his candidacy was initiated by the Kremlin. Still, the estimated 8 percent vote Prokhorov received—which shot up to 20 percent and 15 percent in Moscow and St. Petersburg, respectively—reflects the protest mood and represents the best performance of any right-liberal politician since 1999.

It is difficult to predict how the protest movement will affect Russia’s political process. On the one hand, many experts expect the opposition to fade since it has not been able to come up with new slogans and targets since the election. On the other hand, after the demonstrations in December, the Russian authorities submitted bills to the parliament intended to slowly (and somewhat inconsistently) liberalize political life in Russia. If those laws go into effect in late April or early May, as expected, the opposition may have a chance to actively participate in official political life, and the country’s political landscape could be transformed.

Gloomy January

Though political change may be on the horizon, the economic data point to near-stagnation once more. Since December, most macroeconomic indicators, seasonally adjusted, have taken a turn for the worse, except for industry which grew by 1 percent year-over-year in January. 2

According to the Russian Ministry of Economic Development’s estimate, year-over-year GDP growth in January was 3.9 percent, having fallen by 0.1 percent from December 2011 (seasonally adjusted). It is possible to attribute this decline—at least partially—to cold weather, which meant less construction (5 percent less, seasonally adjusted, over December), but weather conditions cannot be behind the decline in all other indicators as well.

Investment is especially worrisome. Growth of 15.6 percent year-over-year in January will only impress those who have forgotten how extraordinarily low investment was in January 2011 due to an increase in payroll taxes. According to the Development Center, a Russian research organization, year-over-year investment decreased by 1 percent over December, though the Ministry of Economic Development pointed to a much more severe decline: -9.9 percent. 3 Of course, January data are not sufficient to draw conclusions; quarterly reports on large and medium enterprise investment, which will be released in April, will provide a sounder basis for assessing the trend.

Consumer demand played a major role in reviving GDP in the fourth quarter of 2011. In January, however, real household incomes (seasonally adjusted) fell by 1 percent and retail trade turnover declined by 0.5 percent. Federal spending, which grew by more than 50 percent year-over-year to finance electoral promises made by Putin, also helped boost GDP growth in January. If spending had increased by only 7 percent, as it did in December, GDP growth would have slowed even further.

The Russian economy is once more—for the third time since the end of the 2008–09 global financial crisis—on the brink of stagnation. The deterioration of all macroeconomic indicators in January could indeed presage a recession, which would only be countered by rising oil prices. The new Russian government will therefore face a choice: either add to the economy’s troubles or steer it in a different, more promising direction.

Sergei Aleksashenko, former deputy minister of finance of the Russian Federation and former deputy governor of the Russian central bank, is a scholar-in-residence in the Carnegie Moscow Center’s Economic Policy Program.

[1] For example, in many regions, public employees were asked to obtain absentee voter certificates and vote under supervision at designated voting stations. At many stations, moreover, independent election observers were removed or even beaten by police.

[2] There was especially significant acceleration in manufacturing and electric power production (the latter due to the cold weather); sales grew by 1.8 and 1.7 percent, respectively. Sales in extracting industries, however, only grew by 0.1 percent.

[3] Based on private discussions, it seems that ministerial data are more relevant, as the revised data for investment in 2011, which was used by the ministry, are not publicly available yet.

End of document

About the Russia and Eurasia Program

The Carnegie Russia and Eurasia Program has, since the end of the Cold War, led the field of Eurasian security, including strategic nuclear weapons and nonproliferation, development, economic and social issues, governance, and the rule of law.

 

About the International Economics Program

The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, drawing out their policy implications. The current focus of the program is the global financial crisis and its related policy issues. The program also examines the ramifications of the rising weight of developing countries in the global economy among other areas of research.

 

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Source http://carnegie.ru/2012/03/15/russia-more-things-change-more-they-stay-same/ajbk

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