Ibne Siraj :
Before the Bolshevik revolution, Vladimir Lenin supposedly said “the worse the better.” Essentially what he meant was that the more conditions deteriorated under the Russian Czar (and in its aftermath), the more likely the Bolsheviks would obtain power. In this, Lenin was quite prescient. Today, the Russian economy has fallen into a “worse” phase. The collapse in oil prices, coupled with economic sanctions, has significantly impaired the economic growth. The question is: How bad is it, and what are the future prospects for recovery? In short, the prospects currently look dismal. Even a rapid and sustained resuscitation in energy prices is unlikely to restore growth to levels experienced earlier this decade. One striking fact is that Russian growth started to decline rapidly in 2012, well before oil prices fell or economic sanctions took hold. Growth had plunged to approximately one percent before either phenomenon occurred. Russia’s 4 percent GDP growth rate was largely manufactured by enormous growth in consumer credit, which was not sustainable. The World Bank estimates that, by 2017, Russia’s real GDP will be smaller than it was in 2012.
The Russian economy is seriously dependent on energy. Approximately 70 percent of its exports are hydrocarbons, and 50 percent of government revenue comes directly from the oil sector. Given this addiction, the exchange rate has collapsed to 62 rubles per dollar (as of October 2015), compared with its average of 29 rubles per dollar for the 10-year period preceding last year’s decline. Over the last year, inflation has increased from 7.8 to 15.8 percent.
After being in surplus as recently as 2012, Moscow’s budget deficit is expected to run 4.5% of GDP in 2015. This is an enormous swing over a short period of time. It is learnt that the Russian Finance Ministry plans to pull more than 2 trillion rubles from one of its two sovereign wealth funds to cover the shortfall. Finance Minister Anton Siluanov said Russia could exhaust both its funds in less than two years if it continues to rely on the reserves to balance the budget.
The Russian Central Bank Governor stated that international reserves stood at $370 billion in early October, 2015 down from last year’s high of $510 billion. Meanwhile, consumption spending has fallen at its fastest pace since the 1998 crisis-contracting 7.5 percent in the second quarter. And the poverty rate has risen by two percent in just the last four quarters.
Twenty-two million Russians now live in poverty. While it is true Russia’s population has stabilized in recent years, that’s only because birth rates were relatively high during the 1980s. With birth rates collapsing during the 1990s, Russia’s population decline is set to quickly accelerate soon. The economic sanctions imposed after the invasion of the Crimea peninsula have produced deeper damage than anyone expected. Strict sanctions from many western countries have prevented Russian companies from raising money in Europe and the United States and have also blocked arms trades.
This is how Russia has been trapped into an unsatisfying holding pattern, hoping for oil prices to recover, for the West to fragment and for Ukraine to implode. A little over a year since Moscow grabbed Crimea and instigated the “Russian spring” in a bid to detach the entire east and south of Ukraine, the Kremlin stood out as the master of the situation. By all accounts, Russian rule remains wild in Crimea itself, with the notable exception of the Crimean Tatars, who are not numerous enough to make much of a difference. Russia has carved off a sizable chunk of Donbass, the most industrialized region of Ukraine, and Kyiv stands no chance of ever expelling the Russians from Ukraine militarily.
The west is more or less united, but at a very low common denominator. In the face of massive evidence from Russian sources of Moscow’s direct military involvement, the west cannot even bring itself to provide Ukraine with defensive weapons. Ukrainian army, equipped with their US-provided body armor and night-vision goggles, can be effortlessly blown to bits from a distance by Russian artillery. Military equipment that could save Ukrainian lives is being withheld due to Western hand wringing over irritating Russia.
The West’s punishment of Moscow for failing to implement the Minsk I ceasefire was to reward Russia with even greater concessions in Minsk II. The Russian economy, while still facing an unpleasant recession, seems at least to have stabilized; in any event, its near-term prospects look pretty good compared to Ukraine’s.
Putin continues to enjoy astronomical approval ratings, while support for his Ukrainian counterpart has flagged. Nevertheless, Russia failed to deliver the knockout blow last spring, allowing Kyiv to recover and establish firm control throughout most of the country, even its Russophone portions. Moscow retains the military upper hand as the two countries settle into a protracted stalemate in the Donbass, but the Kremlin’s strategy must take into account a number of factors that bode ill for Russia in the longer run.
Ukraine has stumbled upon a most improbable ally-Saudi Arabia. In a stark example of the law of unintended consequences, the Russian economy has sustained heavy collateral damage from the Saudi campaign against North American shale-oil production (and secondarily, against Iran). The war of attrition in the Donbass is in large measure hostage to the economic war of attrition in the Bakken formation. This situation, unanticipated by Russia (or anyone else, to be fair) when it invaded Ukraine, appears likely to depress energy prices for years to come, sapping the strength of Russia’s economy and hence the country’s ability to wage war. A major cataclysm in the Middle East could turn energy prices around, of course, but it is instructive that oil prices have plummeted even in the face of Islamist depredations in Iraq and chronic chaos in Libya-and the loosening of sanctions on Iran would bring even more oil and gas onto the market.
If the Saudi factor was unforeseeable, the Western response to the invasion of Ukraine appears to represent an actual miscalculation by Moscow.
The Kremlin no doubt expected something akin to the reaction over Georgia in 2008-some harsh Western rhetoric, a few pro forma sanctions, and, six months later, a proffered reset button and the resumption of business as usual. Instead, Western governments have imposed fairly extensive sanctions and have thus far stuck to them. Sanctions against individuals are largely symbolic, but restrictions on lending are a genuine hardship to Russian companies, especially in the current economic downturn.
The drop in the value of trade is indicative of the collapse in economic activity. During the first eight months of 2015, imports declined by 39 percent while exports dropped by almost 30 percent. Looking longer term, without deep and sustained structural economic reforms, Russia, now classified as a high-income country by the World Bank, faces a bleak future.
As for that classic Lenin quote, it sparks the question: Will history repeat itself? Russia had hoped to cut its defense spending-but given its campaign in Syria (and its earlier incursion into Ukraine), that has proved problematic. Vladimir Putin’s poll ratings are still high in Russia. But unless the economic fundamentals improve, such high poll numbers could be short lived.
