The economic crisis and its political consequences for Russia

The rumours about the death of this blog are hugely exaggerated, although updates have admittedly not been done with much frequency lately. Running a blog of this kind takes a great deal of effort and unfortunately this author has not felt it to be within his powers to regularly sit down to produce a written analysis of anything. Encouraging comments and demands from a few regular readers have, though, finally provided him with something of an incentive. Readers shouldn’t expect this blog to be updated with the same frequency as when it was started, but at least shouldn’t feel that there is no reason to stop by now and then. Deal?

What better could one do on New Year’s Eve than take a quick look on what might be expected in the year 2009? The present economic downturn is likely to have large consequences for Russia, despite earlier claims to the contrary made by the political leadership. Already, the central bank has spent more than a quarter of its currency reserve just to prop up the rouble, and still during December it has had to silently make it slip by one percentage point eight times. Talk about a larger devaluation to come is about and a Russia analyst at one of the major investment banks, with whom this author had a chat, confirmed this perspective as very likely. There could be a 30% devaluation soon, which would obviously hurt both the Russian public and the business community, which in some notable cases has taken large loans in foreign currencies. The capital flight is in fact on the scale of the 1998 rouble crisis, according to an analyst at an asset manager specialising in the region. 

Another major issue is of course the crash of the oil price. With Russian oil trading at $32 a barrel it isn’t enough to support the federal budget, which for 2009 is based on an oil price of $95 a barrel.  The result will be a deficit of $52 billion to $86.5 billion, or up to 6% of GDP. In the short run such a deficit can be sustained by milking the stabilisation fund set up by the government to take care of excess oil revenues in the past; this fund, though, only holds $132.6 billion, so if worst comes to worst, it would not last even two years. Even if initially spending won’t be cut, an inflation rate that, even without the currency continuously being devalued, has never entered the area of single digits is likely to be felt. The car industry’s crisis is also likely to affect Russia directly, considering that several foreign manufactures have set up facilities in the country. It seems we have a recipe for both increased unemployment and diminished spending power.

This is a troublesome situation for those in power. The popularity of the sitting political leadership is based upon living standards having improved considerably since the chaos and misery of the Yeltsin era. That official propaganda has moved on from Soviet-style “telling people what to think” to “telling people what they want to hear” isn’t the same as saying Russians are fools, conveniently in the hands of their masters. On the contrary, they can be very eager to express their opinion, when they find current developments to be unpleasing. It has been seen lately in Vladivostok with its inhabitants protesting against meddling in their much beloved second-hand car imports from Japan. In 2006, pensioners took to the streets of Moscow to object to a decision aimed at replacing privileges such as free medication and public transport with monetary cheques. Despite the government’s effort to curb these hot feelings through the use of news coverage of how well the new system worked throughout the country, the ground was indeed trembling under then Prime Minister Fradkov. In the end they had to walk away from the reform. There is therefore absolutely no reason to suspect the Russian public to react differently this time, when their economic well-being is under threat. The difference is in the sheer amount of people affected, because this time we are not talking about a community of pensioners and war veterans. This time we are looking at an enraged population and a government that has so far failed spectacularly at reforming an ailing business environment and burdensome economic system when it had the opportunity to do so.

Now, the most interesting question seems to be how this will affect the issue of when (rather than if) Prime Minister Putin aims to retake the presidency from his protégé. It is the prime minister who is in charge of economic policy, thus a likely failure in this area would fall upon Putin’s shoulders. This could seriously hurt his reputation and credibility as national leader. With President Medvedev resigning from his office, citing the need for a more experienced hand at the wheel in this time of crisis, such a development could easily be avoided. As prime minister, Putin would in that case automatically assume the responsibilities of acting president in the same way he did when Boris Yeltsin stepped down on New Year’s Eve 1999. Russia was then facing a different crisis, one of terrorism and national humiliation. Putin was then able to restore the confidence of the Russian public and self-esteem of the country, earning him a truly remarkable level of popularity. If history were to repeat itself, now would be a good time, some might think.