Russian Economic Crisis Requires Political Solutions

September 25, 2013
With every day lost not only the Russian economy, but the entire state are facing a deepening crisis. Photo: Е. Разумный/для ВЕДОМОСТЕЙ

The world is still in the process of recovering from the economic crisis of 2008. However, if one looks at various macro indicators, the external factors are creating an economic environment that should have set Russia up for strong growth. However, the Russian economy is actually shrinking, and a growing number of economists believe that Russia is on the verge of another recession. Sergei Aleksashenko, a prominent economist, believes that Vladimir Putin is to blame, and below he eloquently explains how the mechanisms that Putin has put in place are dragging the Russian economy towards crisis.

Vedomosti is is Russia’s largest economic publication, and is a joint venture between an independent Russian media group and several Western economic news juggernauts, the Wall Street Journal and the Financial Times. – Ed.

This publication is based on the article “Crisis Management: Policy Inaction” published in the “Vedomosti” newspaper on 09.23.2013, № 174 (3436).

Vladimir Putin does not like to admit his mistakes. Perhaps he genuinely believes in his infallibility and unique abilities. But all politicians make mistakes. Sometimes they result from incomplete information necessary for decision making. Sometimes they are the result of overestimation of his own abilities and underestimating the opponents.

Another weakness of Vladimir Putin’s policy is its slow response to negative developments. It was also observed in the case of the “Kursk,” during the 2008 crisis, and in many other situations. It seems that in the near future we will see something like that again. “Thank God, this is still not a crisis,” Putin said at a meeting to discuss budgetary issues for the next year.

I am really not happy with the performance of the Federal State Statistics Service (Rosstat): too many oddities and inconsistencies in the data, archaic indicators, inherited from the Soviet era, and the absence of an adequate interface to retrieve data from its website. But, as the saying goes, “where can I get you other writers?” Moreover, I often have to defend the Rosstat, especially in discussions about the rate of inflation, because so far no one can do the agency’s work.

Anyway, two weeks ago Rosstat reported that in the second quarter of this year the Russian economy performed worse than in the first. Yes, the GDP declined by only 0.27%, which is slightly more than 1% in annual terms (I already hear the cries of experts who would argue that, seasonal adjustment according to Rosstat is not good, but see opinion regarding our Rosstat above). But do not forget, after all, that in the first quarter of this year the Russian economy performed worse than in the previous one, that is, in the fourth quarter of last year. Then the GDP declined by 0.25% (1 % in annual terms).

Thus, the decline in GDP in Russia has continued for two straight quarters, and it is… by international standards, an indicator of a recession, a downturn. But just a year ago, in the third quarter of 2012, GDP grew at a rate of 5 % per annum! It’s quite likely that, for example, in the third quarter Russian economy will recover and show some growth, if only because of a good harvest. But a recovery from recession requires two consecutive quarters of growth, and so far there are no prerequisites for this. Moreover, all macro indicators show a decline, not a recovery.

In my view, such a dramatic change in the dynamics of the Russian economy is nothing but a crisis. That is despite the fact that the external situation is more than favorable (no matter how much our officials argue for the opposite): oil prices have already exceeded $110 per barrel, export volumes are at an average post-crisis level, spreads on Russian government bonds (yield gap with U.S. Treasury bonds) are also close to historical levels. The neighboring Kazakhstan, whose economy depends on commodity prices and foreign markets no less ( if not more) than that of Russia, steadily grows at a rate above 5%. This means it’s not about the external environment.

President Putin believes that the problem of economic growth is a problem of economic authorities. The Ministry of Finance, the Ministry of Economy, the Central Bank. It is up to them to figure out what to do for the economy to stop declining and to start recovering. So, that’s what they are trying to do. For several months now. They even approved some kind of a plan to this effect at a cabinet meeting, but the economy continues to slow down.

In my opinion, the explanation of the situation is quite simple: the crisis that is gaining momentum in Russia is nothing like the crises of 2008 or 1998. Most likely, if we look for historical similarities, in its nature it’s very close to the last Soviet crisis of 1989-1991. At that time the mechanisms for managing a planned economy began losing their relevance one by one, but in the end the Soviet leadership never dared a radical shift towards a new economic mechanism, a transition to a market economy.

What we see in Russia nowadays is a similar process: economic growth engines that have been driving our economy forward for the last 10 years (rising oil prices, the flow of foreign loans), no longer have a visible impact on the economic dynamics. Although oil prices are high, and foreign loans continue to flow into Russia, they cannot stop the Russian economy from sliding into the abyss of a recession.

But what is stopping them? Or let’s pose the usual question: “Who is to blame?” The answer can be easily found in the latest rankings of the relative competitiveness of countries prepared by the World Economic Forum. Of the 148 countries covered by this study, Russia is:

  • 133rd place: protection of property rights;
  • 109th: level of corruption;
  • 113th: level of embezzlement;
  • 119th: independence of the judiciary;
  • 120th: burden of government regulation;
  • 118th: the ability of the legal system to resolve disputes;
  • 120th: the ability of the legal system to resolve disputes with regulators;
  • 122nd: reliance on law enforcement;
  • 125th: the impact of fiscal policy on the propensity to invest;
  • 112th: the country’s ability to retain talent.

Many of our officials felt better when they found out that in a year Russia moved up in this ranking from 67th to 64th place. At the same time they do not want to talk about the fact that among the BRICS countries Russia is in last place. And if you adjust Russia’s rating by the size of its market (7th place), the absence of malaria (1st place) and the rail network inherited from the Soviet Union (31th place), then our country will roll back in the WEF ratings another half-dozen places.

It becomes obvious why capital flees from Russia: the owner of the capital has no reason to believe that the investment made in our country can bring an adequate return. But the capital flight and investment decline are the two sides of the same coin. And without investment an economy cannot grow. So it is not growing.

Is there a way out of this crisis? This crisis will be much more complex, because you cannot solve these problems simply by injecting the economy with budget money, that, by the way, is running out. The crisis will also be more protracted, because Russia’s problems are institutional by nature, and any changes in the quality of institutions require a lot of time.

But it is clear where to start: with the recognition that the economic crisis 2013, just like the economic crisis of 1990, cannot be overcome by economic decisions. Any decisions that the Russian authorities need to make are political by nature: reforming the law enforcement and the judicial system, changing government-business relations, loosening the government grip on the competitive sectors of the economy and a significant reduction of the bureaucratic burden on business, the most resolute struggle against corruption, embezzlement and racketeering. And those decisions Vladimir Putin has to first discuss not with the economic bloc, but with the power ministers who are close to him in the spirit. And that means you need to start with yourself, changing your outlook on life.

Will our President be able to do it? I do not know. So far it’s not very hard to believe, looking at the determination and ferocity with which he struggles with dissent and political opponents. But if he does not, he will go down in the history books not as a man who raised Russia from its knees, but as a politician who threw our country to the margins of civilization.

Vladimir Putin himself will define his place in history, and he will inevitably have to do so in the near future – economic flywheels are too heavy and slow to stop: a decade might not be enough to change the business climate in the country and expand economic trends. If a politician does not make decisions, it is also a decision of sorts – the decision to do nothing. The fact that the main cause of the current crisis is the weakness (if not permanent destruction) of the state institutions, has been stated long ago, there’s nothing new about it.

A disturbing symptom is that the President does not want to hear it. Look at the texts of his speeches, you will find neither any of these problems nor suggestions for dealing with them. And it’s not really important why he acts this way: he might be afraid, does not want to recognize the realities of today, or he just makes decisions with a delay. With every day lost not only the Russian economy, but the entire state are facing a deepening crisis. The indecision of Mikhail Gorbachev, who was not able to embrace market reforms, cost Russia very dearly. I’m afraid that the price that Russia will have to pay for the inaction by Vladimir Putin will be significantly higher.

The author is the Director of Macroeconomic Research at the Higher School of Economics.