Russia's Economy Slides into Long-Term Stagnation

February 16, 2016 2:45 PM

Russia is entering a period of long-term stagnation with little relief in sight.

A report by the Russian Ministry of Finance calculates that without structural reforms the economy will expand at a measly 0.8 percent annual growth rate in 2016–30. The brunt of this stagnation is felt by pensioners and government employees.

In 2014 and 2015 alone, the Russian economy contracted around a cumulative 6 percent because of Western sanctions and the falling price of oil. This  was supposed to be the year of renewed growth. The continuing downturn in oil prices and the country's freshly-imposed economic sanctions on Turkey have reversed this expectation. The government now forecasts the economy will shrink another 0.4 to 0.8 percent in 2016.

Why the sudden alarm bells in Moscow? The main reason for unveiling this pessimistic projection is to temper social tensions that are starting to rise. Real income is falling significantly for pensioners and government employees—by about 9 percent in 2015 and by another estimated 4 to 7 percent in 2016.1 For the middle class, the reduction in imports due to sanctions on European and Turkish goods means fewer choices and higher prices. Real incomes for that group may shrink by as much as 35 percent during 2014–16.2 If one takes into account the reduced opportunity to vacation abroad because of the devaluation of the ruble and the ban on travel to Turkey, the downgrade in the standard of living for the middle class is even steeper.

The Ministry of Finance's report does not spell out the structural reforms necessary to overcome economic paralysis. These have, however, been enumerated recently by Herman Gref, head of the largest Russian bank.3 The former minister of finance Alexei Kudrin also detailed them at the 2016 Davos Forum in Switzerland.4 Key reforms include reducing the government's reliance on oil revenues and cutting back on social programs. Yet there is no sign that the government intends to follow a reform path. Instead, Russia intends to use its reserve fund to maintain certain social expenditures throughout 2016, at the risk of depleting the fund by year end.

Such short-sighted behavior makes some sense against the backdrop of upcoming parliamentary elections in September 2016. During the last elections in 2011, President Vladimir Putin's party, United Russia, lost its absolute majority, winning 49 percent of the vote. The worsening economic and social conditions may further reduce United Russia's hold on parliament, rendering it more dependent on the communist and nationalist parties—hence the reliance on fiscal stimulus and the absence of reforms before the elections. In the meantime, the Russian government will be praying for higher oil prices.

Notes

1. Philip Sterkin, Alexandra Prokopenko, and Olga Kuvshinova, "Russia Is Expected to Stagnate for 15 Years," Vedomosti, February 15, 2016.

2. Natalia Orlova, "The Population Practically Has Paid for the Crisis," Slon, February 8, 2016.

3. Neil Buckley and Martin Arnold, "Herman Gref, Sberbank's Modernizing Sanctions Survivor," Financial Times, January 31, 2016.

4. Himanshu Goenka, "Davos 2016: Russia Seeks Internal Reforms to Offset Sanctions and Fall in Oil Prices," International Business Times, January 22, 2016.