Can Putin Fix Russia’s Sputtering Economy?

Why Stagnation Is the New Normal

“Blatant disrespect” for Russia’s government can now land you in jail, under a new law the country’s legislature has passed. Worried that Russians are increasingly inclined to criticize the state or protest against it, the government is tightening the screws.

Public support for the Kremlin and for Russian President Vladimir Putin has slumped in recent months. The government’s popularity had spiked after Russia annexed the Ukrainian territory of Crimea in 2014, catapulting Putin’s approval rating to near 80 percent, where it remained for nearly five years. Yet that political magic is wearing thin. Over the past six months, Putin’s rating has crashed. True, the most recent poll by the Levada Center, an independent Russian polling organization, suggests that 64 percent of Russians continue to approve of Putin’s work as president. Yet that is the lowest number since 2013, when Putin returned to the presidency amid anti-regime protests.

THE KREMLIN’S EMPTY PROMISES

Russia’s citizens are gloomy about politics because of the country’s sputtering economy. Russia has had a miserable past five years. In 2014, two external shocks buffeted the country. First, oil prices collapsed, falling from above $100 per barrel in 2014 to barely $30 per barrel in early 2016, slashing Russia’s largest source of export revenue. Second, the United States and Europe imposed tough financial sanctions that forced Russian firms to reduce investment and raised borrowing costs across the economy. As the ruble tanked, investment and consumption also declined.

At the time, Russia’s leaders could, with some justification, blame outside forces for the economic downturn. Russia has no control over oil prices, which are set in a global market. And sanctions were the result of confrontation with the West. If you approved of the annexation of Crimea—as most Russians did—then you could not blame Putin for sanctions. Western financial restrictions were the cost of reasserting Russia’s stature on the world stage.
Now five years have passed since the imposition of the first round of sanctions and the collapse of the price of oil, and for most Russians, things have scarcely improved. Oil prices are roughly twice their 2015 lows. The economy is growing again, albeit slowly. Yet typical Russians don’t feel any better off. In fact, they feel worse off. Adjusting for inflation, household disposable incomes have declined each of the past five years. It’s no wonder that Russians are beginning to ask questions. Each year has been worse than the one before.

The government isn’t helping. Last year, it rammed through a controversial pension reform that will raise the retirement age from 55 to 60 for women and from 60 to 65 for men over the next several decades. With society rapidly aging and its pension system underfunded, the Russian government wasn’t wrong to think that something had to change. Yet most Russians rely primarily on their government pensions for retirement income, so this change will hit hard. And unlike sanctions, pension hikes cannot be blamed on NATO.
 




Women wave Russian flags to mark the fifth anniversary of Russia's annexation of Crimea, in Sevastopol on March 16, 2019. (Getty)

Russians across the country were unhappy with the announced increase in the retirement age. Some even took to the streets, though the number of protesters wasn’t especially large. The Kremlin followed the pension change with a hike in the value-added tax from 18 percent to 20 percent, the cost of which will be promptly passed on to consumers. This, too, will hit household incomes, making Russians feel poorer still.

In his annual address to Russia’s Federal Assembly in late February, Putin assured Russians that he would make things better. He mentioned foreign policy, but the bulk of the speech focused on domestic reforms. More poor families will get aid to support children, he promised. Families with disabled children will receive a few thousand extra rubles per month. Those with multiple children will be given housing subsidies and lower interest rates on mortgages. And any family with three or more kids will get tax cuts on houses and landownership.

It was a speech intended for struggling families, evidence that the Kremlin’s political advisers and spin doctors understand that they need to offer something more than geopolitical confrontation. But if the message was on target, the substance was not. Adding up the pledges in Putin’s speech, Finance Minister Anton Siluanov predicted that the promises would cost 100 billion to 120 billion rubles, or approximately $1.5 billion, per year. Divide that by Russia’s population, approximately 140 million, and Putin’s new handouts amount to slightly more than $10 per person per year. Even in a country such as Russia, where salaries are far lower than in the United States, this is small beans. Contrast the Kremlin’s promise of a $1.5 billion increase in social spending, for example, with the country’s $390 billion in foreign exchange reserves. Or consider the state-owned energy company Gazprom, which reported $15 billion in profits in the first nine months of 2018. Or the 58 Russians who, according to Forbes, each have personal fortunes bigger than the spending boost that Putin promised.

To really understand how underwhelming Putin’s spending promise is, however, compare it with the revenue this year’s tax hike will raise—around $8.9 billion, according to the Finance Ministry. In other words, Russia’s government is decreasing household incomes via a substantial tax hike, giving back a small portion of that revenue through new social spending, and hoping that nobody notices the Kremlin is pocketing the rest.

In any case, whether the Kremlin will follow through on its new spending promises is far from clear. Putin made a similar series of pledges in 2012, around the start of his previous presidential term, when he promised that he would hike salaries but not increase the retirement age. Five years later, many of these vows remained wholly unfulfilled. This time, fulfilling promises will be even harder. Russia’s provincial governments, which are often charged with implementing social programs, are in many cases now heavily indebted after five years of economic stagnation.

The Kremlin knows, of course, that its promises aren’t that impressive. But Russia’s elite believes it has little room for maneuver as the country’s confrontation with the West intensifies. Most of Russia’s leaders believe that the United States plans to increase its financial pressure. The U.S. Senate is considering a bill that would sanction the issuance of new Russian sovereign debt, which in practice would limit Russia’s capacity to run a large budget deficit. Russia has long prepared for this type of foreign pressure with austere fiscal policies. But without a growing economy, the populace will find government austerity more painful than before.

The only other option for the Kremlin is to improve the business climate in ways that attract more Russian and foreign investors. Such moves, however, would also threaten the Kremlin’s ability to control Russian domestic politics. In many cases, the Russian government views foreign investors as a threat. One major American investor in Russia, Michael Calvey, was imprisoned in February on dubious charges. And improving the environment for domestic investors means reducing the power of the monopolistic state-owned firms—firms through which the Kremlin can exert power at home.

A STALE ECONOMY IS A STABLE ECONOMY

Given these constraints, Russia’s government believes its best option is to hunker down. The Kremlin knew that tax hikes and pension cuts would make people unhappy. But amid a financial war with the West, Russian leaders ask, what choice does their country have?

Expect more promises from the state, therefore, but don’t expect much to change. The Kremlin’s style of rule at home and confrontation with the West abroad have boxed it in. Over the next five years, Russia’s economy will barely grow, the country’s government forecasts predict. Given such dismal projections, in the absence of a new foreign crisis to rally around, Russians will probably judge the Kremlin’s policies to be stale. But stale can be stable, even if Putin’s approval rating slips further. New legislation tightening penalties for speech critical of the government is raising the cost of dissent. The risk of fines or arrest will dissuade most people from protesting against the dismal economic outlook. Russians are sadly used to economic stagnation and ineffective government—and they are unlikely to be offered an alternative anytime soon.

This article was originally published on ForeignAffairs.com.
 


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