Growth unlikely in the weak Russian economy

Mar 07 2018

On Tuesday, March 6, the Atlantic Council, a Washington-based think-tank, organized a panel discussion on the state of the Russian economy. Panelists discussed sanctions, a perceived brain drain and the absence of meaningful reforms in President Putin’s recent annual address.

The experts speaking at Tuesday’s event included:

Dr. Sergey Aleksashenko, a Senior Fellow, Global Economy and Development, Brookings Institution and Free Russia Foundation expert

Dr. Anders Åslund, a Senior Fellow, Eurasia Center, Atlantic Council

Ms. Elizaveta Osetinskaya, Fellow, Investigative Reporting Program, Graduate School of Journalism, University of California, Berkeley; Founder, The Bell

The discussion began with an overview of the state of the Russian economy by Aleksashenko, who outlined the short and long-term factors that are predicted to limit economic growth to the 1.5-2 percent range over the coming six-year political horizon. The Russian Central Bank has successfully curbed inflation, but in order to do this, it has had to raise interest rates to very high levels, making credit very expensive for businesses and thus leading to weaker growth.

Meanwhile, the Ministry of Finance is seeking to rein in its budget deficit – despite very low national debt – while not raising taxes, as promised by Putin. This is expected to lead to spending cuts, lower investment, frozen wages and pensions, and lower living standards.

In the banking sector, a crisis among banks has prompted the state to take over, with nine out of Russia’s 10 biggest banks currently in state ownership. This means banks “will sooner rely on political motivations rather than economic”, said Aleksashenko .

In addition to these macroeconomic factors, Aleksashenko said stagnation is the result of a poor investment climate depicted by the poor protection of property rights, a lack of rule of law and the clampdown on free media. Thus, businesses are not inclined to invest and this is something that neither the Ministry of Finance nor the central bank can solve.

“This is a political agenda that is in the hands of the president”, said Aleksashenko, adding that supporting rule of law would lead to Putin’s party losing its majority in the parliament. “I don’t foresee him making any progress in the next six years,” he said.

Aleksashenko also mentioned sanctions and demographics as long-term factors of weak growth. The former could lead to a growing technology gap between Russia and the West and the latter – with a shrinking labor force and an increasing number of pensioners – will add pressure on the pension system and the budget, further reducing investment.

The war over living standards

Commenting on Putin’s recent annual address to the Russian parliament, Aslund of the Atlantic Council noted that the words – reforms, sanctions, and Ukraine – were all missing from the speech. “What Putin told us is that he is not going to do reforms whatsoever for his next six-year term”, said Aslund.

Aslund outlined a number of factors harming the Russian economy: Putin’s control of the state, the FSB and the court system, cronyism and the use of state corporations for “personal benefit”.

He pointed to the $26 billion fortune amassed by Gennady Timchenko, Arkady and Boris Rotenberg and Yuri Kovalchuk. Aslund estimated that $40-50 billion leaves Russia annually and Russian individuals keep between $800 billion and $1.3 trillion abroad.

“As long as Russia doesn’t have property rights, about 4-5% of GDP leaves the country each year”, said Aslund. And there is little incentive for Putin and the elites to ensure property rights in Russia if they have property rights abroad, he said, adding that large sums of money are being kept in luxury properties in Miami, New York, and London.

Meanwhile, Aslund said, war has become a distraction for citizens suffering from the declining living standards in Russia. “Russia cannot afford serious wars”, said Aslund, adding that in the era of hybrid wars, there is less need for direct military expenditures. The panelists agreed that if Putin had to choose between military spending and higher living standards, he would choose the first.

On the bright side, Osetinskaya of UC Berkeley said that the technology sector has developed rapidly and despite some negative trends, there is a growing number of entrepreneurs who open small and medium-sized businesses. However, there is also a large brain drain, with many educated people leaving Russia due to a lack of opportunities. “The government and the state don’t address their needs”, said Osetinskaya.

Another trend is that small and medium-sized businesses have sought investment opportunities abroad, whereas the oligarchs’ fortunes are flowing back into Russia due to the sanctions, said Osetinskaya.

by Valeria Jegisman

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