Welcome to our column, Russia Update, where we will be closely following day-to-day developments in Russia, including the Russian government’s foreign and domestic policies.
The previous issue is here.
Recent Analysis and Translations:
– Getting The News From Chechnya â The Crackdown On Free Press You May Have Missed
– Aurangzeb, Putin, Realism and a Lesson from History
– Why the World Should Care About the Assassination of Boris Nemtsov
– How Boris Nemtsov Was Murdered: Investigation by Novaya Gazeta
– How Stalin Returned to Russian Contemporary Life – Meduza
The World Bank has just downgraded the Russian economic outlook for 2016/2017, with best-case scenarios showing slow growth on the heels of the worst recession in decades. How is the Russian economy really doing? Let’s take a quick look at the current state of its key indicators.
First up – the price of oil. Since the Russian economy, and the Russian government budget, are so closely linked to the price of energy, this is a crucial number. The Kremlin made the 2016 budget with the expectation that a barrel of Brent Crude oil would be $50. It has been well below that mark all year. Experts had predicted that if oil could breech $40 a barrel then it would rally, but that has failed to materialize. Oil was priced highest in late March, but since it hit its peak at $41.79 on March 22, it has dropped. All week it’s been in the mid $37 range, though right now it is rallying on news that US refineries are increasing production which has caused US stockpiles to drop from their eigh-year record highs.
As of writing this, Bloomberg is pricing Brent Crude at $39.75:
Even if oil rebounds and can stay at $40, that’s 20% cheaper than the Kremlin was counting on, and still far better than where it has been all year. In other words, lurking somewhere within the Kremlin’s budget is a massive shortfall, and we have yet to see corresponding budget cuts.
Natural gas, another important Russian product, is surfing historic lows. It’s currently priced lower than it has been for more than eighteen years, and is almost at the lowest point it has been in 2016, which it hit in the first week in March:
All of this, of course, impacts Russia’s currency, the ruble. The ruble is not currently facing the same wild fluctuations that created a currency crisis in late 2015 and early 2016. But the currency is settled in just a few steps above the basement.
Today, the ruble led emerging currencies in a rally as oil has spiked, but the ruble is still lagging behind crude oil. Bloomberg reports:
The Russian currency has lagged Brent’s recovery, gaining 16.5 percent against the dollar since Jan. 20 when Brent hit a 2003 low, compared with a jump of almost 43 percent for oil for the same period.
The yield on five-year government bonds rose one basis point to 9.31 percent. The Finance Ministry on Wednesday sold 17.4 billion rubles of September 2031 fixed-rate local currency bonds out of 20 billion rubles offered and also sold 10 billion rubles of January 2025 floating-rate notes.
The Micex Index gained 0.2 percent to 1,860.17, while the dollar-denominated RTS gauge added 1.9 percent to 862.60.
The ruble’s performance against the dollar over the last month (decreases on this chart mean stronger performance against the dollar):
Russian Recession To Continue For At Least One More Year
The upshot of all of this is that Russia’s economy might be worse off than some experts feared. The World Bank has just cut Russia’s GDP estimates for the year, based on December 2015’s data. RTT reports:
In the latest Russia Economic Report, the Washington-based lender forecast the region to contract 1.9 percent this year, before growth resumes at a modest rate of 1.1 percent in 2017. In 2015, real GDP shrank 3.7 percent.
In a report released last December, the bank had projected 0.7 percent contraction this year and 1.3 percent growth for 2017.
What’s crucial to understand is that even if sanctions against Russia are lifted early, the recession will continue. Bloomberg reports:
The removal of economic penalties would increase investment and boost consumer confidence and demand, according to the World Bank. Still, it says the benefits would wear off after next year, with growth predicted at 1.7 percent in 2018 if sanctions are lifted early. That compares with 1.8 percent under the baseline scenario, according to the report. GDP contracted 3.7 percent in 2015.
The stranglehold of economic penalties is unlikely to ease up soon. Only 13 percent of analysts surveyed by Bloomberg expect the U.S. to relax its sanctions in the next 12 months, while 57 percent predict the EU will begin to loosen its restrictions.
The government has blamed sanctions, lower commodity prices and the standoff over Ukraine for helping push the economy into its first recession since 2009. Geopolitical tensions have also added to the ruble’s weakness. The Russian currency has lost more than 7 percent against the dollar in the past six months, the third-worst performer among its more than 24 emerging-market peers tracked by Bloomberg.
Russia's economic recovery will take longer than previously forecast, and an early end of sanctions would provide only a "limited and short-lived" boost to growth, according to the World Bank. "Due to a continually adverse external environment, Russia's journey to recovery will be long and difficult," the Washington-based lender said in a report on Wednesday.
The result — a massive increase in poverty in Russia which had been moving in the opposite direction. Reuters reports that poverty levels are likely to return to 2007 levels or worse, the worst decrease in two decades:
The number of poor people in Russia will rise to more than 20 million out of a population of over 140 million, the World Bank said, the largest increase in poverty since the 1998-99 crisis that included a sovereign debt default.
The World Bank sees private consumption falling by 3 percent in 2016 in Russia after a decline of over 9 percent in 2015, a far sharper slump than during the 2008-09 global financial crisis.
“This is a new adjustment to the (economic) shock,” Matytsin said, saying households had cut back most on durable goods such as cars and domestic appliances.
The World Bank now sees private consumption recovering only very modestly and stabilising at growth levels of around 2 percent from 2018. Before the latest economic downturn, private consumption in Russia had been rising at around 6 percent each year, Hansl said.
There is one point that few analysts have made, though. The Kremlin has made budget cuts, but none that explain how Russia will recover from the current lack of oil and gas income. If government spending cuts are worse than the Kremlin is letting on, that could trigger more problems.
It’s also doubtful that the Kremlin is telling the truth about the real costs of its involvement in Syria and Ukraine, another indication that the budget crisis may be worse than it currently appears.
And then there are the Panama Papers. News of financial malfeasance may have little impact on Russia’s power elite, but if Western countries crack down on the movement of hidden oversees money, Russia could see the fallout of that regulation.
— James Miller
“The serviceman of the troops of the national guard has the right not to war of his intent to use physical forces, special means or firearms, if the delay in their use creates an immediate threat to the citizen’s life and health or the serviceman of the troops of the national guard or may involve other severe consequences.”
In fact, the currently-existing Internal Troops have these powers already and use them, notably during “counter-terrorist operations” (CTOs) in the North Caucasus.
Each year, there are hundreds of incidents where such forces surround the homes or cars of persons suspected of connection to Islamist terrorist groups and frequently shoot them to death. Last year, these numbers of such extrajudicial killings fell from the annual 250-300 or so to half that amount, which analysts explained was due to a policy of covertly allowing Islamists to leave Russia and fight with ISIS in Syria and Iraq. Recently, Putin declared that “2,000” of such fighters from Russia had been killed on the battlefield.
Peskov said the new troops were designed to improve effectiveness in “maintaining security and defending the civil rights and liberties in Russia.”
Commentators such as Vedomosti editors have said the new configuration of the old silovoki, or armed forces and law-enforcement, was about subordinating possible internal enemies in the government as well as external enemies in the opposition, and about eliminating redundancy.
— Catherine A. Fitzpatrick
A Russian prosecutor has begun an inspection of the Anti-Corruption Foundation run by opposition leader Alexey Navalny, Novaya Gazeta reports.
Translation: It’s funny, the prosecutor’s office is demanding “documents in the Russian language”. As if we may have them in Latin.
A letter arrived dated today with the signature of the deputy prosecutor of the city of Moscow requesting information about the FBK’s sources of funds and property, records of all financial transactions and expense reports.
The inspection was launched at the request of Kantemir Khurtayev, chairman of the All-Russian Inter-Ethnic Union of Youth, a conservative, pro-Kremlin group.
There has been some speculation that the unplanned inspection is official retaliation for Navalny’s extensive coverage of the Panama Papers, but in fact the complaint was filed last month by the youth group, and concerned an article in the Washington Post published March 7, “Are Russia’s Muslims Seething About Putin Bombings in Syria?”
The article was written by Egor Lazarev, a PhD candidate at the department of political science at Columbia University, working on a dissertation about Russian law and sharia and customary law in Chechnya, and Anna Biryukova, head of the sociology department at the Anti-Corruption Foundation.
They found that more Muslims opposed the war than non-Muslims in Russia, but not by a large percent, and they didn’t see the war as a sectarian one, i.e., Putin attempting to help an Alawite regime crush Sunni rebels. About 40% said they didn’t know what the war was about, although 25% of Tatar Muslims said they thought it was to oppose terrorism.
Navalny himself told Novaya Gazeta that he believes the inspection is related to the Washington Post article. He issued a statement about his foundation’s accounts (translation by The Interpreter):
“I hasten to disappoint both the prosecutor’s office and the Dagestanti United Russia members: the only source of funding for the FBK are donations from citizens of Russia. Several thousand people transfer their money to us, and that is directly refeflected in our accounting.”
His reference is to the political relationship of the Inter-Ethnic Union of Youth to the Dagestani branch of the ruling United Party.
According to the FBK’s financial report, it received 28.5 million rubles ($417,692) in 2014. The largest expense items were office rent (7.4 million rubles per year or $108,670) and payroll (4.8 million or $70,489). The report for 2015 will be published soon.
FBK staff took part in pickets near the State Duma urging the investigation of offshore companies and impeachment of Putin. Police detained several, including the executive dirctor, Roman Ruban and the staff lawyer, Vitaly Serukanov.
Translation: Here I am trying to learn the reason for the detention. And they don’t say. And they still don’t say.
This latest prosecutor’s inspection is only one of a string of attempts in recent years by Russian authorities to harass Navalny and his colleagues for their exposures of corruption among top officials. He is currently serving suspended sentences in cases believed to have been fabricated in retaliation for his anti-corruption work: the Kirovles case involving lumber sales and another case involving a mail order business with his brother related to the French company Yves Rocher, for which his brother sentenced to 3.5 years of forced labor. Yves Rocher had no claims against the Navalny brothers, and the court did not accept exonerating evidence in the lumber case and another case involving alleged “art theft” involving a staff member’s gift to Navalny of a street artist’s sketch.
— Catherine A. Fitzpatrick
— Catherine A. Fitzpatrick