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.

Russian Democracy in 2050?

With President Putin’s announcement this Monday that he intends to be the first name on the United Russia party list in this autumn’s parliamentary elections and that he does not exclude the possibility of becoming prime minister after he steps down as head of state, confusion about what is going to happen now is everywhere. To sort out this mess and perform anything more than qualified guesswork with regards to the coming months of Russian domestic politics would demand more insight on what goes on in the long corridors of the Kremlin than most analysts have been able to come by. But while we are at it, it is, however, tempting to take a closer look on the longer perspective of Russian democracy; what will the situation be ten, twenty or even forty years from now?

When looking at Russia one is always reminded of the fact that evolution is not taking place on merely one level. When asked about how Russia is evolving, it is sometimes tempting to slip into the ordinary mood of pessimism, which is always present whenever the fate of this fascinating country is debated. Merely leaving it at that, which is often the case, is a mistake. There is a democratic, or political, evolution that admittedly leaves much to be desired. But there is also an economic evolution that is, I dare to say, astonishing. We must keep that in mind.

According to a report by the Research Institute of the Finnish Economy (ETLA), income levels in Russia will exceed 90% (up from some 37% today) of the levels in EU15 member countries by 2050. (The report can be found at http://domino.sampo.fi/external/sbd/ks.nsf/liitteet/ETLAtutkimus.pdf/$file/ETLAtutkimus.pdf.) Already, the desire for consumption goods among the members of the middle class is enormous. That is not too surprising, considering history. After some seventy years of communism when there was nothing to buy and nearly ten years of economic chaos when there was no money about, the desire to buy stuff will not go away easily. The same goes for the wish to travel and see the world, something that was denied these people during communist reign. There might be setbacks along the road, but there is no doubt about Russians getting richer and their middle class growing bigger.

These improvements are not distributed evenly across the country. There is also a serious demographic issue that has to be dealt with, either through higher birth rates or immigration. Nevertheless, the future looks very bright from an economic point of view and this will have consequences also for the evolution of Russian democracy. We are looking at decades of impressive economic growth and it will simply not go unnoticed.

Up until things started to go their way at about the turn of the century, Russia was in chaos and despair, also known as democracy. While people in the West consider democracy to be a prerequisite for stability, among Russians these expressions are often thought of as opposites. While this is understandable, history has proven to us many times that memory is short. Increasing wealth and a growing middle class should eventually lead to people starting to question their lack of genuine influence, when they can no longer remember the turmoil of Chapter One of A Democratic Russia. Some fifteen years from now, we will see a generation that was not even born then and did not have to live through the pain. Many of these people will be in universities and they will have opinions, take economic well-being for granted and not be satisfied by it. Far from everyone will agree with them, but that is the whole point of democracy.

And yes, there might not be nation-wide support for democratic change. Many people will likely resort to the often expressed opinion that such a vast country cannot be ruled by anyone but a strong, autocratic leader. But then again, such a luxury might not be needed. Power sits in Moscow, where most of the money is and where income levels are the highest. In the Ukraine, things were changed thanks to protests in Kiev, the capital, and against the wishes of the entire eastern part of the country. It is not by coincidence that the Russian authorities are closely watching everything that could turn into a popular movement like the one that stopped Viktor Yanukovitch from obtaining the presidency. They know. Real change might not happen in 2020, perhaps not even in 2030. But eventually, protests will arise and, given the speed of economic growth, it is very likely this will happen sooner rather than later. How the government will react then might provide us with new opportunities to slip into that old pessimism for a while, but we will see. Change has come in even more unexpected countries, such as the Soviet Union.

While we wait, I would not run for office anywhere in Russia. Risks are too high and the chances of succeeding are slim. I would, however, invest some of my money there. 

Not A Very New Russian Government

Last Friday, after an unusually long pause for thinking, the members of the new Russian cabinet were announced. The only thing is, to refer to it as “new” is rather exaggerated. In total three ministers were replaced: German Gref left the chair for economic development, Mikhail Zurabov had to quit as minister for health and social affairs and Vladimir Yakovlev is no longer handling the regional development portfolio. Now, will this in any way have an affect on policies? Let’s have a look at these cases one by one.

Everybody is pretty relieved that Mikhail Zurabov is gone. He was in general believed to be a total disaster at his post and most people are surprised he was even able to remain for so long. His successor is Tatiana Golikova (who is actually married to Viktor Khristenko, the minister for industry and energy), a former deputy finance minister and a skilled economist. Even though most analysts are unsure about how much influence she will be able to exercise, she could not possible be any worse than her predecessor.

The replacement of Vladimir Yakovlev with Dmitri Kozak is interesting. Kozak and Putin go back quite some time and he is the President’s must trusted doer. As the presidential envoy to the Southern Federal District (which includes, among other troublesome places, Chechnya) he is believed to have eased tensions somewhat and helped the federal leadership get rid of some of the worst local leaders (people that were bad even by Russian standards). His appointment is therefore an indication of the president putting more emphasis on regional development. Another sign of this is the fact that his ministry has recently received several billion dollars from the state Investment Fund to spend. 

German Gref, then, was widely acknowledged as being an economic reformist and fiscal conservative. He has been receiving a lot of credit for the ambition to reform Russia’s business life, but did not manage to get it into the World Trade Organization. Trying to do any reforming of Russian business should be tiring to anyone and rumour has it that Gref has been eager to leave for some time. His replacement, Elvira Naibullina, is believed to share his liberal views, but the amount of influence she will be able to exercise is yet to be seen.

With Gref gone, the only one of the three fiscal hawks that have served to preserve the Russian economic wonder through fiscal sanity (the third one being Putin’s former economic advisor Andrei Illarionov, who had to resign a few years ago due to being too outspoken on the Yukos affair) that remains is Aleksei Kudrin, who’s position was strengthened as he was named deputy prime minister in this last reshuffle. However, all alone perhaps, will he be able to withstand the pressure emanating from a new president that, eager to create for himself his own popularity base, might want to spend some of the money these gentlemen have been saving for a rainy day? Let’s keep a lookout.