Russia: The Dust Has Not Yet Settled

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It may seem that Russia's political scene has finally stabilized. But tensions persist and permeate the highest levels of government and structural economic factors cannot be counted on to favor the Russian establishment.
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Vladimir Putin has returned to office as Russia’s president—a position he has held twice before and is prepared to hold on to for at least another six years. The day after Putin’s inauguration, the Russian parliament made former president Dmitry Medvedev Russia’s prime minister. The political swap announced last September has now been fulfilled, and the ruling party, United Russia, has, for the time being at least, secured its grip on power.

It may seem that Russia’s political scene has now finally stabilized. Following massive demonstrations across the country in the wake of widespread accounts of electoral fraud in December, the legal political opposition in the Duma (the lower chamber of Russia’s parliament) does not appear to be pressing its grievances. The few defeats that the ruling regime has suffered in local elections can be viewed, moreover, as isolated incidents. Most important, there seems to be no room for new political forces to emerge or for more independent-minded political leaders to realistically aspire to Russia’s highest offices.

But the dust has not settled yet in Russia. Political tensions persist and permeate the highest levels of government. There is also the perennial risk that structural economic factors, which have tended to play in the Russian establishment’s favor—namely the Russian economy’s precarious dependence on oil—may cut in the other direction.

Seeds of Unrest

The political environment in Russia is still unstable for a number of reasons: lingering public discontent, lack of progress on real reform, and potential divisions within the Russian establishment itself.

Long after the public’s eruption over voter fraud in December’s parliamentary election, the protest mood in Russia has yet to die down. The most dramatic illustration of this is the protest that was organized in Moscow on May 6, the eve of Putin’s inauguration, attracting tens of thousands in the middle of a public holiday. Even as hundreds of protesters were arrested and detained, and many were injured, Putin’s spokesperson Dmitri Peskov supported a tougher crackdown. A bill just passed by the Duma that significantly increases fines for protesters who participate in a demonstration deemed to disturb public order or violate city rules will raise the stakes even higher.

There has been little progress on reform. For example, a law was passed to reinstate direct elections for regional governors, but before it was enacted, more than twenty new governors were appointed. All gubernatorial candidates, except for those supported by United Russia, will face additional legal barriers, including the so-called “municipal filter” requiring them to obtain the support of 10 percent of the deputies on municipal councils, though in many regions, United Russia controls over 80 percent of the municipal council seats. A reform as self-defeating as this one will hardly appease the political opposition.

Finally, Putin and Medvedev have traded places without a scuffle, but the switch could still be problematic. A key question is how the two leaders will divide their responsibilities. For the last four years, by law, the president was in charge of defense and security issues and foreign policy while the prime minister was responsible for social and economic development. This arrangement worked well, and it would appear logical to preserve it in the new government. But Putin would then have to relinquish control over the budget—a step that he is unlikely to take.

In fact, Putin has already tried to overwrite the old division of labor on at least three occasions. First, his administration suggested transferring control of the Development Bank (Vnesheconombank)—and de facto control over a second budget, as the bank receives a huge capital injection from the government and manages pension savings as well as part of the National Welfare Fund, among other funds—from the prime minister’s to the president’s supervision. Second, he limited the scale of privatization and even declared the inevitability of a new wave of nationalization in the fuel and energy sector. And finally, a loyal supporter, former deputy prime minister Igor Sechin, was appointed CEO of Russia’s largest oil company, Rosneft, which would keep the enterprise outside government control and influence. 1

Putin’s Economic Bet

The odds are that Russia’s economy will remain hostage to the ruling party’s political imperatives and that high oil prices will, once again, be the thread on which the economy hangs. The makeup of the new government is far from complete, but so far the majority of positions, including important positions at the Ministry of Finance and the Ministry of Economics, have been delegated to former deputy ministers. If there is relatively little turnover from the previous government, real reform should not be expected on economic policy.

The new government will, of course, react to problems it cannot avoid dealing with, such as pension reform. However, it will stop short of more far-reaching institutional changes that the Russian economy desperately needs, including liberalizing gas transport, controlling the expenditures of infrastructure monopolies, reducing the barriers to entry in many industries, and liberalizing foreign direct investment inflows. At the same time, there will be more pressure on the budget due to the campaign pledges Putin made to help cement his electoral victory.

The federal budget is heavily conditional on the price of oil. During the first four months of 2012, 52 percent of federal revenues came from export duties on oil, refined oil products, and gas, and a natural resource tax on hydrocarbons. Given that another 12 percent of revenue is generated from the value-added tax and excise taxes on imported goods and thus indirectly depends on oil (as import volume is dependent on export proceeds), two-thirds of the Russian government’s revenue is oil dependent. Without oil and gas revenues, the government would be incurring a deficit equal to 10 percent of GDP (before the global financial crisis, the so-called “no-oil” deficit was about 4 percent of GDP).

The 2012 federal budget was planned on the basis of a $100 per barrel oil price and a deficit equal to 2.5 percent of GDP. If the price of oil rises to $117 per barrel, the budget will be balanced.2 According to the government, the additional expenditures that will result from Putin’s presidential campaign amount to 1.5 percent of GDP. But this assessment is conditional on the successful restructuring of the budget. If that does not happen, then additional expenses could amount to between 1.75 and 1.8 percent of GDP.

Calculations made by the Development Center, a Russian research organization, indicate that meeting all existing budget commitments while maintaining a balanced budget will require the economy to grow by between 3.5 and 4 percent through 2018.The oil price will have to rise by $8 to $9 a barrel every year. And the dollar/ruble exchange rate will need to steadily weaken to 35 rubles/dollar by 2018. To put this in perspective, even a much more relaxed 3 percent fiscal deficit target would require the oil price to rise to as much as $140–145 per barrel.

On the one hand, this scenario is not impossible, considering the heights to which oil prices have climbed in recent years and the soft monetary policy in the United States and eurozone. On the other hand, taking into account radical changes in the gas market and the inevitable growth of oil production in Iraq and likely in Iran in the near future, it is by no means certain that the price of oil will continue to rise.

In short, if Vladimir Putin is counting on the price of oil to remain high, he is building his economic—and perhaps political—plans on a very fragile foundation.

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]. The same is true for Gazprom, Russia’s largest company and the world’s largest natural gas extractor, which is led by Putin supporters.

[2]. This estimate is based on a 30 rubles/dollar exchange rate. Other factors being equal, a one ruble/dollar devaluation of the ruble would increase federal revenues by the equivalent of between 0.27 and 0.28 percent of GDP. An increase in the price of oil by one dollar per barrel would, all else equal, increase federal revenues by the equivalent of 0.13 percent of GDP.

End of document

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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