Russian Economy on the Backfoot—Challenges for Putin

by R.G. Gidadhubli

On May 17, 2019 Rossat (Russian Statistic Service) reported that Russia’s gross domestic product (GDP) rose just 0.5 per cent in the first three months of 2019 as compared to the same period of 2018. This is far lower than the prediction of 1.5 per cent by the Central Bank of Russia. In fact the Russian economic growth had been facing a declining trend during the years 2015 and 2016 reflecting negative growth even as there was slight recovery and positive growth of 1.2 in 2017 and below one per cent in 2018. Hence the Economics Ministry was projecting the Russian economic growth of 1.3 per cent for the full year in 2019, which now seems to be a challenge. At any rate this decline should be a matter of concern to the Russian policy-makers considering the background of a strong Budget surplus as opined by Dmitry Dolgin, an economist at the ING in Moscow.

Hence it is worth examining as to what are the reasons for this declining trend.

Firstly, as per official sources, Russia’s Economic Ministry has contended that this decline could be due to the weakness of the domestic demand coming on the back of a higher tax burden following the hike of VAT from 18 to 20 per cent. Apart from that there are basic factors causing decline in the domestic consumer demand in Russia. In fact there is virtual stagnation and the total population in the country remains at 144 million during the last five years as per official sources.

Moreover, the share of the old-age population above 55 years has been increasing while there is a sharp decline in the birth rate. This has also resulted in the shortage of the working-age group of the population. Hence in 2018 the Russian Government adopted the policy of increasing the retirement age from 60 to 65 years for men and from 55 to 60 years for women. There has been widespread agitation against this policy in Russia and Putin’s popularity has declined even as he was elected as the President for six years by an overwhe-lming majority. Hence to counter this, the Putin regime has adopted the policy of providing well-paid pensions to avoid popular discontent and increasing investments in healthcare and education which might boost long-term economic growth. Around 93 per cent of the Russian retirees live off their pensions, and their costs strain the Budget. However, Putin has used them as a political tool to remain in power.

Secondly, the Russian economy has been affected by the poor investment climate which has resulted in slow-down in growth of industrial production, retail sales, construction output, and agricultural production. In fact Russia’s poor investment climate has been compounded by the outflow of capital during the last two decades by few Russian billionaires including Mikhail Khodorkovsky.

Thirdly, Russian economic growth has been overdependent upon the energy sector and export of oil and natural gas earning petro-dollars. Crude oil and petroleum products and natural gas comprise roughly 58 per cent of Russia’s total exports. This overdependence has its consequences. For instance, decline in oil prices during the last few years has adversely affected the Russian economy. Crude oil prices globally have declined from $ 105 per barrel during 2010-2013 to below $ 65-70 per barrel since 2014.

Fourthly, economic sanctions imposed by the USA and West European countries on Russia for its alleged annexation of Crimea in 2014 has adversely affected Russia’s exports and imports as also investment by the West. The overall exports of Russia have fallen from $ 522 billion in 2013 to $ 353 billion in 2017. Total imports have also declined from $ 341 billion in 2013 to $ 238 billion in 2017. Exports to Europe represent over 60 per cent of the total exports and hence economic sanctions have adversely hit the Russian economy. Decline in economic growth has also resulted in the rouble losing its value by 46 per cent against the US dollar since 2014. This is evident from the fact that as per official sources the exchange rate of the rouble against the dollar has fallen drastically from about 32 roubles per dollar in 2013 to 58 roubles per dollar in 2019. As a result Putin has adopted a ‘Look-East’ policy focusing on enhancing economic ties with China.

Lastly, during the last about two decades Vladimir Putin has adopted the policy of increasing the role of the state in controlling the economy and improving its functioning. This is corroborated by Russian analysts Natasha Doff and Evgenia Pismennaya who have contended that under the leadership of Putin, the Russian Government is trying to regulate the economic system that has transcended to a whole new level. This is all the more evident from the fact that the state companies make up more than half of each of the four major sectors in the Russian economy, namely — Energy, Transport, Mining and Finance. For instance, as opined by some analysts, Russia’s Energy giants Gazprom and Rosneft account for 14 per cent of the GDP and state-run banks control 66 per cent of the banking system up from 59 per cent in 2018.

This could be one reason for decline in foreign investment in Russia. Apart from that the impact of the state’s growing role has hurt economic growth prospects by depressing productivity, innovation and the growth of small- and medium-sized businesses. As a result Russia has not emerged as a growing and competitive market economy. There is urgent need for Russia to adopt a policy of diversification, moder-nisation, innovation and creating a favourable investment climate by attracting foreign capital.

Thus while the Russian President, Vladimir Putin, has succeeded in retaining the status of Russia in the global political scenario, his policies have not enabled him to showcase Russia as a powerful competitive economy. Holding political power of the country for the last over two decades, ensuring economic growth is a major challenge for Putin in the years to come.

Dr R.G. Gidadhubli is a Professor and former Director, Center for Central Eurasian Studies, University of Mumbai.