Vladislav Inozemtsev *: Russian Economic Strategy: Steps Necessary and Probable.


Vladimir Putin won the election on 18 March, which was quite predictable - and I believe that he will not stop at this: there is such a scale of patriotic frenzy and admiration for imperial rhetoric in the present-day Russia that there are no obstacles for the current "national leader" to continue to remain in power of the head of the state, regardless of how the post he holds is to be called. However, it should be stressed that in addition to purely political exaltation, V.Putin's regime is largely supported by the economic achievements of the Russian government, which, perhaps, are not its exceptional merit, but nevertheless are identified with the current leadership of the country by the overwhelming majority of its inhabitants .

The Russian economy today is quite successful and stable in several aspects. First, it is the economy combining oligarchic and government-owned companies that dominate the basic industries, with fully market-oriented and competitive companies operating at the "average" and "lowest" levels, in services, trade and many industries; this gives the economy flexibility and protects it from shocks such as those associated with a fall in oil prices or the introduction of Western sanctions. Second, we see that all the arguments about the "inevitability" of the collapse of energy prices are not yet confirmed by real trends; there are reasons to believe that the declining dependence of Western countries on oil and gas will not become a source of lower prices for them, but a prerequisite for their growth, since the latter will cease to be considered disastrous for developed economies and will retard growth in the newly industrialized countries. Third, the events of 2008-2016 in the Russian economy showed that the deterioration of the external economic environment may be damped by the depreciation of the ruble, which does not lead to a significant increase in inflation; this moment is extremely important, since it allows the authorities, de facto collecting up to 40% of the federal budget revenues in hard currency (through binding to the rate of export and import duties), to fulfill their obligations to citizens in full (today the average price of oil in rubles is about 4,800 rubles per ton, while it did not exceed 3,460 rubles per ton at the peak of average annual prices in 2013. Thus, I would say that the Russian authorities, as of spring, 2018, have no significant reason to expect major economic difficulties in the coming years - and those for whom Russia is an economic, geopolitical, and military threat have no reason to hope that the country will "wallow" in its own problems.

Concerning the bundle of economy and politics, I would, first of all, mention that the policy of V.Putin aimed at strengthening confrontation with the outside world, coupled with massive Kremlin propaganda, gives a good effect: after more than ten years of accelerated growth of well-being, the people are ready to reconcile themselves to the fact that "enemies" put Russia in such conditions, which do not give hope for the continuation of the previous growth. At the same time, the standard of living today is strikingly different from the beginning of the 2000s: the nominal wage in the hard currency equivalent exceeds the indicator of 2000 by more than 8 times; while a large number of goods and services have fallen in price not only relatively, but absolutely, which has changed the patterns of consumerism and even more emphasizes the differences between the current "successful" times from the "dashing" 1990s. It should be especially pointed out that the reduction in real incomes of Russians for 2014-2017 did not exceed 15%, and it cannot be considered "sufficient" for mass disillusionment of the population in authorities (according to my "value judgments", the drop in the standard of living should be at least 40 % of the levels fixed before the crisis of 2008-2009 for economic problems to become the driver of a political crisis). The dominant mood of an average urban dweller on the eve of the re-election of Vladimir Putin was determined by his/her hopes not for the continuation of growth, but only for "not getting worse" - and the current regime can fully preserve the current level of life (2018 budget earnings significantly exceed the forecast indicators, the reserve funds will be replenished, serious measures of saving on social programmes will not be required from the government).

In this regard, I should stress one important circumstance. Today, many opponents of the Putin regime in Russia and analysts in other countries are constantly trying to connect the economic difficulties experienced by the Russian model (and not to see them is impossible - the total economic growth did not exceed 3% from 2008 to 2017) with close political upheavals. I consistently criticize this approach, considering it unconvincing for at least two reasons. On the one hand, the lack of growth in Russia has been going on for about 10 years, and if it really was the basis for political destabilization, it would have happened long ago. On the other, the history of the post-Soviet countries clearly shows that the triggers of political changes are not economic difficulties, but erroneous situational actions by politicians that make the population feel deceived (in Ukraine, I dare say, 2004, preceding the Orange Revolution, was the most successful in the economic aspect [GDP growth amounted to 12.1%], in Armenia, the recent change of power occurred at the peak of economic growth in recent years [GDP increased by 7.5% in 2017]), so that there is no correlation between the economic crisis and the political instability. Therefore, I want to emphasize once again: one should not hope that in a relatively foreseeable perspective, Russia's economic problems will break the political trends that have developed in the country.

 The conclusions should be made from the above mentioned about both the economic tasks of the Putin regime for the coming years, and probability of new reforms in Russia.

Modern Russia, in my opinion, has completely lost the strategic vision of its economic development. The most important task of V.Putin is maintaining the status quo, which allows to exploit the Russian resource base, directing the funds received both to strengthen the bureaucratic structure that has been formed, and to enrich himself and his immediate environment. Most of the promises made at the highest level are not met and will not be fulfilled (the president postponed the terms of "Russia's entry into the world's top five economies six times", the intention to transform the ruble into one of hard currencies, the hopes for technological breakthroughs, the growth of the economy has practically stopped, etc.) - but this indicates not only the weakness of Russia, but also the strength of Vladimir Putin: he manages to maintain an extremely high level of support without ensuring the economic development of the country. In my opinion, the entire policy of the Russian ruling class after the annexation of the Crimea indicates that ambitious economic goals are completely forgotten: the authorities set the task of preserving what has been achieved - and this is correct, since this task is quite achievable even without overstraining the forces. Certain problems can arise in such a situation, not as a result of the discontent of the population, but as a consequence of the "ferment" in the middle echelons of the nomenclature, whose incomes can no longer grow rapidly; however, such fermenting will undoubtedly be suppressed by the law enforcing structures (preventive measures of this kind in the form of "controlled struggle against corruption" have been noticeable in recent times more clearly). Taking into account that the main systemic challenges to the Russian economy - from the evident technological backlog from the West to the growth of infrastructural problems and the reduction in oil production - lie outside the traditional "planning horizon" for the Kremlin for 5-6 years, there can be no doubt that "economic drift" which Russia has laid down, is" solid and lasting".

It must be borne in mind that such a situation, I repeat again, does not and cannot cause serious irritation of the people for one more reason. The Russian taxation system not only assumes a low income tax (13%) and high indirect taxes - it also skillfully and very distinctively shares tax flows. The personal income tax (which, for instance, is the main source of revenues to the federal budget in the USA, providing 41-43% of its revenues) in Russia is channeled to the regional budgets, while the basis for replenishing the federal budget is the mineral extraction tax and customs duties. This is of great political importance, since the central government essentially positions itself as "giving" rather than "taking away": as a result, the population perceives their incomes not as much as earned, but as granted by the state. In many respects this is what determines the sacredness of the Russian authorities and the feeling formed in the people that "it is quite impossible for us without the state." This feature of the Russian taxation system and its political consequences should, in my opinion, be taken into account in any analysis of the "link" between the economy and politics in the Russian Federation.

Accordingly, the prospects for serious reforms undertaken to accelerate the Russian economy, look at least unobvious today.

Since the spring of 2017, the Kremlin has initiated what many experts have perceived as an economic discussion on the main measures to be taken after 2018 (it has been assumed that some reforms [in particular, that of the pension system] would not be accepted by the population with enthusiasm, and therefore they should be held after V. Putin's re-election). The beginning of the discussion gave rise to expectations of the return of certain strategic approaches - however, as the election approached, it became increasingly clear that no programme would be made public. And so it happened; moreover, if in 2012 voters were attracted by a "Putin's plan" (which, however, was formally never presented), in 2018 no one even pretended that such a plan existed. The reform programmes submitted to V. Putin by the former Minister of Finance A. Kudrin and the working group of the conservative "Stolypin Club" were "taken into consideration", but nothing more. Neither the president's address to the Federal Assembly of 1 March, 2018, nor the "decrees of 7 May" added certainty.

 I believe that the tactics of the Kremlin today reflect those moments that I have already stressed: there is no need for economic reforms in Russia. They could be manifested in the event that the revenues of the treasury were substantially lower than the requirements for financing vital expenses; then the authorities were forced to make economic changes that broadened the rights of entrepreneurs and citizens, allowing them to be more economically active and provide themselves with much less state involvement (as happened in the 1990s). However, in 2018 the Russian federal budget will be offset with a surplus for the first time in seven years; nationalization of business in the past three or four years is unprecedented; the increase in the well-being of citizens has every chance to manifest itself this year. Therefore, the government does not need to develop bank lending and issuance now, as the experts of the Stolypin Club advised them, nor to accelerate the pension reform, which A.Kudrin has constantly spoke about in recent years. The logic of the actions of Putin's elite suggests that if any drastic actions in the economy can be avoided, they must be avoided to the very last opportunity - this is precisely the content of Putin's stability, which may seem to reproduce itself. To a large extent, the confirmation of this assumption has been also the formation of a "new" government headed by Dm.Medvedev, in which the changes are purely ceremonial. This Cabinet, in my opinion, will fulfill its duties until the Duma election in 2021 - that is, until the moment when V. Putin needs to decide exactly how he intends to remain in power after 2024 (if he decides to change Constitution or shift "power centres" from the president to the government, initiatives of this kind should be approved by the current parliament - but after 2021 the Russian system of power is likely to enter the reformatting period). Taking into consideration the stability of the external economic environment, the significant accumulated reserves, the balance of forces of various groups of influence around V.Putin, it is difficult for me to assume that the first three years of his new term will be the time of economic reforms.

Certainly the view from Kyiv - and I have to face this almost always - requires special attention to the question of whether the Russian economic system can be destabilized from the outside. In principle, such an opportunity exists, but it is rather difficult to imagine how it can be implemented in practice.

Today, Russia economically does not threaten the West in any way, remaining a supplier of raw materials and energy resources. The main instruments for undermining Russia's economic stability could be sanctions that imply an embargo on the purchase of oil or gas; a ban on the ownership of Russian financial instruments (bonds or shares of all or only government-related issuers); the termination of transactions with the largest Russian corporations. The probability of any of these steps, in my opinion, is approaching zero. Even chemical attacks in Britain do not lead to the possibility that its government refuses to cooperate with Russian oil companies (Rosneft's dividends still make up a large part of the profits of British Petroleum); Germany expects to become a pan-European hub for reselling Russian gas with the introduction of a new branch of the Nord Stream; US sanctions against several oligarchs are gradually beginning to alter and will end, most likely, in forcing the Russian side to formally change the owners of the companies they have touched. The turmoil at the markets, provoked by such actions and sometimes regarded almost as the "beginning of the end" of the Russian economy, turns out to be transitory (as it was in April, when in just a few days the ruble rate fell by almost 10%, and quotes at stock markets fell by 12-20%, but by mid-May most of the losses were won back).

The situation in this area is determined, in my opinion, by two circumstances. On the one hand, the Western countries have never intended to truly break off economic ties with Russia - the sanctions imposed in response to the annexation of the Crimea and the occupation of part of the Eastern regions of Ukraine seem to me to be the least possible response of the West to an act of outspoken aggression. At the same time, most of them were initially formal and partly meaningless: the ban on the supply of equipment for oil production in permafrost zones and on the Arctic shelf might not be introduced: at prices below $ 80 / barrel, all such projects are unprofitable, and the equipment still would not be procured. Therefore, if Russia did not give permanently more and more new reasons to talk about it as a violator of all norms, even these restrictions would have been lifted long ago. On the other hand, the governments of the European countries and the United States realize that more stringent sanctions against Russia can provoke unpredictable reaction of the Kremlin - and in every case when the issue of "restraining" Russia begins to be discussed, the "party of peace " gets the upper hand, believing that not all bridges have been burnt and that Russia is better not to" be angered" (the arguments are numerous - one can even hear arguments that the economic collapse of Russia is not profitable for the West, since the uncontrollability of such a territory is more dangerous than the current situation).

 In other words, practically all players are interested in preserving the status quo in the relations between Russia and the world today, - and this is an additional argument in favour of the fact that the Russian economy will be able to provide economic reasons for the problemless new term of V.Putin's presidency almost without changes and shocks.

 I can only reiterate what I have been saying since 2012: V.Putin's regime in Russia is very sound and stable; it managed to survive both the political protests of 2011-2012, and the halt of economic growth after 2014, and a short period of extremely low oil prices, and the severance of many economic ties with its closest partners. The price of this stability is "non-development" - the state of a kind of anabiosis, in which the Russian economy is immersed today, balancing "about zero" and incapable of innovation. However, this state is not a consequence of random factors - it now looks artificially created by the Kremlin politicians. An unchanging Russia, afraid of the West, striving not to focus on modern consumption standards and shunning the elements of the rule of law - this is the ideal to which V.Putin and his entourage have sought for the past few years. On the one hand, such a conclusion looks encouraging: there is no need to talk about any reduction of the gap in Russia's economic lag from the West. On the other, one cannot help but see a reason for concern - Russia's neighbours, for whom a "direct and obvious threat" comes from Moscow, should not be harassed by hopes that the country can follow the example of the Soviet Union and break up under the influence of economic and political contradictions. Putin's Russia, by all accounts, cannot be destroyed: the people constantly declare the identity of the leader and the country. This period in Russian history can only be survived - but you need to have an enviable longevity, which we can only wish everyone ...


* Information about the Author:

Vladislav Inozemtsev - Doctor of Economics, Director, Centre for Post-Industrial Studies (Moscow, Russia) and Senior Visiting Researcher, Institute for Advanced Studies, Polish Academy of Sciences (Warsaw, Poland).

 The article is based on the presentation at the International Conference "Presidential Election in Russia: Findings and Forecasts."

20.05.2018 20:00:00