Economic stagnation widens gap between Russian authorities and people

May 25 2018

The panel discussion included experts:

Vladimir Milov, opposition politician, economist, and energy expert and a Free Russia Foundation expert;

Anders Åslund, Senior Fellow, Eurasia Center, Atlantic Council ;

Alina Polyakova, David M. Rubenstein Fellow – Foreign Policy, Brookings Institution; Adjunct Professor of European Studies, Johns Hopkins School of Advanced International Studies.

Moderated by: Ambassador John Herbst, Director, Eurasia Center, Atlantic Council

Inadequate system and stagnation

“Russia is going through the biggest economic crisis since the collapse of the Soviet Union,” said Vladimir Milov yet “the government has no plan on how to address this.”  Living standards in Russia have decreased significantly since 2014 and the economy is dominated by ineffective state monopolies, a low level of entrepreneurship, weak growth levels and an absence of foreign investment, said Milov.

That the system is unsustainable was already clear in 2013 – a year before the war in Ukraine and political sanctions – when economic growth was just about 1 percent despite quite high oil prices at the time, said Milov.  “We built a paternalistic economy of redistribution rather than an economy that encourages private initiative, investment, innovation and increased productivity,” said Milov.

“The inadequacy of the system is understood by pretty much everybody, including a lot of people surrounding Vladimir Putin,” said Milov. Yet there is now “too much power centered around this particular figure,” who is not interested in real economic reforms.

Alina Polyakova said that despite the recent “lofty promises” of the Kremlin to focus on domestic and economic issues, it is unlikely that economic reforms are to be carried out since it “would undermine the regime itself.” “I think there is a linchpin here – for the regime to stay in power, for the Kremlin elite to stay in power, they have to maintain this patrimonial paternal system they have established,” said Polyakova. “If you think about self-preservation, which is the number one priority of Putin’s regime at this moment and for the foreseeable future, why would you do that [pursue economic reforms]?”

Anders Aslund also ruled out the possibility of any significant economic reforms in the near future. With an average of 1 percent growth over the last nine years, Putin didn’t have an economic plan before the elections, mainly running on the issue of Crimea, now in its fourth year of annexation, and after the elections he issued just “one tiny decree” with vague promises of improving the economy, with no concrete numbers, said Aslund.

Russia suffers from a steady capital flight of $30-40 billion a year – about 3% of GDP, with approximately $10-20 billion taken offshore, mainly illegally, by Putin’s cronies, according to Aslund. Russia has very little investment considering the level of its economic development, he said. Many innovators are leaving the country and the sanctions discourage Westerners from lending to Russia, whereas the country’s defense spending has increased from 3.3% of GDP in 2008 to 5.3% in 2017, and this in an economy with almost no economic growth, said Aslund.

And if one looks at the composition of the new government, which is headed by the same prime minister, who is himself suspected of corruption, and surrounded by technocrats mainly from the same inner circles, it is clear that “this is going nowhere,” said Aslund.

He added, “What we can say for sure is that there will be no reforms because Russia is a kleptocracy and it works for its rulers – it doesn’t work for its population.”

Priorities: geopolitics not living standards

While the government is occupied with geopolitics, ordinary Russians are faced with declining living standards. “We have a really huge gap between authorities and the population,” said Milov.

The majority of people support Putin’s current foreign policy initiatives – largely due to pervasive propaganda – but it is not on the list of their priorities, said Milov.  People want the government to re-focus on domestic, social and economic issues, yet this not a priority for the government.

State TV continues to talk about Ukraine, Syria and Trump, said Milov. It says that people “have to suffer” because Russia is doing great geopolitically; people “should be patient” and in some time “things are going to get back to normal by themselves,” said Milov.

People are not given the real economic picture and perspectives, and the voice of the opposition is also unable to reach the majority of the population, said Milov.  Yet people do feel there is a problem

“because of their [empty] pockets” and the opposition is working hard to reach out to them. There is a need to explain to people the link between Russia’s foreign policy and declining living standards.

Milov said that the government has been successful in spreading the message that any alternative to Putin would create “total chaos.”  Also, given the historical experience, Russian people are skeptical of radical changes and are afraid of the unknown, said Milov.

“It is quite difficult to try to change the situation, but it is also very possible and this is something that the opposition has been doing,” said Milov.

Alina Polyakova said that the regime seems to be “nervous and anxious” regarding “its own ability to maintain control,” with the population “becoming more disillusioned with the system.” The previous social contract between the government and people – to provide economic growth in exchange for political rights – seems to have been re-written since 2012 into a new form which stresses Russia’s role as a “great power” and the Russian “people have to pay for this.”  Yet is questionable how long this new contract will be sustainable, said Polyakova.

It is also essential, said Polyakova, to directly link Putin with the government in the eyes of the Russian people. Despite the low level of trust the Russian people have in the government, Putin’s approval ratings remain high as if Putin were somehow “above” the government.

Anders Aslund said that although the regime doesn’t look sustainable, one has to be cautious in assessing the future since Soviet history shows the regime “can last for many years.”

What the West can do though, said Aslund, is to continue to reveal Russian kleptocrats and their hidden money abroad. The West should continue adopting legislation that would reveal the beneficial owners of the anonymous companies offshore that are together estimated to be hiding up to $1 trillion of Russian money.

by Valeria Jegisman

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