The year 2020 ended for the Russian authorities with noticeable but non-critical problems. As the mortality statistics show, the coronavirus pandemic has cost the country at least 358,000 additional deaths, and the consequences of the demographic failure will be felt for at least another decade, even according to official estimates.

The authorities were almost certainly aware of the real state of affairs throughout the past year, but still categorically refused to introduce large-scale measures to support consumer demand—in contrast what the governments of all leading countries had done. As a result, the volume of funds injected into the Russian economy ranged between 1.25 percent and 4.5 percent of GDP, according to various estimates, which made it possible for the government to keep financial reserves intact. The National Wealth Fund’s reserves barely changed. While formally they grew by 74.2 percent over the year—up to 13.5 trillion rubles, the uptick was, in fact, due to clever accounting and the crediting of funds accumulated back in 2019. Gold and foreign exchange reserves increased slightly—to $597.4 billion against $556 billion in early 2020. The ruble exchange rate reacted moderately to the pandemic and the oil price slump, dropping from 61.9 to 73.9 rubles per dollar, or by 16.2 percent. Previously, when Russian GDP declined, the ruble devalued more sharply: in 2014, for example, it collapsed by 41.8 percent.

All this was the result of the extremely cautious economic policy pursued by the Russian authorities. The reason for this was, in my opinion, the 2009 experience, when the government injected huge funds into the economy (about 13.9 percentof GDP, according to a former first deputy head of the Accounts Chamber[1]) and even ensured a moderate increase in household incomes amid the crisis, but paid for it with more than half of the state reserves, which recovered only after ten years (in dollar terms).

This pandemic-hit time, Vladimir Putin, fearing unforeseen problems, did not dare to tap the reserves, and the Russian economy was forced to scramble out on its own, which it did quite successfully. The decline in GDP by the end of 2020 in Russia was one of the smallest of the G20 countries—3.1 percent versus 3.5 percent in the US, 5 percent in Germany, 5.5 percent in Japan, and 10.3 percent in the UK. According to the government’s plans for 2021 and subsequent years, the already traditional policy will remain unchanged: the main means of covering the budget deficit will be public debt growth (personally, I completely agree that this is a rational solution). For an inflexible economy, such as Russia’s, saving the reserves is a key tool to maintain confidence among investors and businesses, and demonstrate that the authorities are able to control the national currency’s exchange rate, ensure budget spending, and deal with general crises.

Could the Kremlin have responded to the return of Alexei Navalny to Russia differently than by sending him to jail? In my opinion, no. Recently, Russian authorities have been unable to ensure significant economic growth or noticeable foreign policy gains, and thus are effectively forced to respond to perceived risks of destabilization with tough repressive measures. Such a response, however, is rooted in the idea that the regime enjoys near-unlimited reserves of public trust and patience—not unlike the foreign exchange reserves of the Ministry of Finance or the Bank of Russia. Given that, the differences in the Kremlin’s approach to these matters—wasting public trust reserves while saving financial ones—are more than surprising.

Navalny’s actions—exposing his poisoners, boldly returning to Moscow, releasing an investigative film about Putin’s palace—make him a star on Russia’s dim political horizon. All the same, the Kremlin’s “targeted” response to the oppositionist (replacing the suspended sentence with a real one and cracking down on protests in his support) should have been more than sufficient. A number of Russians may sympathize with the opposition, but over the past years we have seen how egregious cases of lawlessness in the country have received little or no public reaction. Examples include the conviction of 66-year-old resident of Novosibirsk Yuri Savelyev, a Jehovah’s Witness, to six years in prison (part 1, article 282.2 of the Criminal Code, “Organizing activities of an extremist organization”), the imprisonment of over 30people for reposting messages online (article 282, “Incitement to hatred or enmity”), guilty verdicts for “distorting history” (article 354.1, “Rehabilitation of Nazism”), as well as some terrible personal tragedies among those who dare to dissent—in particular, the self-immolation of Irina Slavina, a journalist from Nizhny Novgorod. Against this backdrop, one would assume that sending Navalny to prison should not lead to any dramatic consequences for the Kremlin. Suffice it to recall that the initial uproar over the 2012 persecution of the Left Front leader Sergei Udaltsov led nowhere, as he has now completely disappeared from politics, having spent 4.5 years in a colony. 

However, for inexplicable reasons, the Kremlin reacted almost paranoiacally—from the demonstrative brutality toward the detained at the protests on January 23 and 31, to the libel charge against Navalny, to the imposition of near martial law in St. Petersburg on February 6, to the hysterical efforts by Roskomnadzor to force media outlets to take down articles about the rally in support of Navalny on February 14, as well as the mobilization of pro-Kremlin “politicians” and “culture figures,” who published false and unethical articles and manifestos. All this suggests that the Russian government, which appears so thorough and careful in the economic sphere, is suddenly out of control when it comes to the realm of politics.

This dissonance, in my opinion, can only be explained by the quality of management and the ability to formulate tasks and the means to achieve them by different groups in Putin’s circle—and most likely by the president himself. Not considering himself an expert in economics, Putin historically trusts economists (and not necessarily liberal ones), partly weighs their arguments, partly delegates to them some decision-making authority. In the political sphere, most decisions are apparently made either personally by Putin or by his closest associates, who perceive the Russian public as devoid of reason and conscience, ripe for mistreatment in any which way they like.

As a result of the Kremlin’s inadequate and harsh reaction, even people willing to believe the fraud charges against Navalny may question the legitimacy of the absurd libel case brought against him by WWII veteran Ignat Artemenko. Those who wave off mass detentions of youth during protests may balk when the authorities prohibit using flashlights on Valentine’s Day or denying voting rights to the spouses and relatives of persons declared “foreign agents.”

Over the years, the Kremlin has been building a “managed democracy” based on the illusion of legality and rationality in political life. A “managed economy” was created in parallel, with state corporations and budget flow regulation serving as its central elements. Today, it is clear that the “managed economy” has learned how to cope with external shocks quite successfully. Even if it does not ensure rapid growth and development, it guarantees the stability and survival of the system almost without tapping financial reserves. On the contrary, when a relatively insignificant risk emerges in politics (150,000-200,000 people took part in the January protests in support of Navalny across the country, on a par with the turnout at the March or June 2017 demonstrations), the regime begins to burn frantically through trust resources accumulated over previous decades. As a result, in recent months, Putin’s rating has dropped significantly among all age groups.

I have written many times and am ready to repeat again that I do not see how any serious risk to the Russian autocratic system can emerge from the economy. The decline in living standards must be much more severe to provoke massive protests; the perception of rising prices or poverty is now fundamentally different from that of the “economy of scarcity” in Soviet times; too much in the economy today can be explained by evident external factors to turn the public against the authorities. The Kremlin has effectively eliminated threats on the economic front by positioning Russia as a country integrated into the global economic system and having installed professional teams in the Ministry of Finance, the Bank of Russia, and the Accounts Chamber. At the same time, in politics, the Kremlin has become the very source of instability it fears so much. By postulating Russia’s complete “sovereignty,” refusing to account for global trends in law and social policies, and relying on cowardly and incompetent personnel, the Kremlin desacralizes power and rapidly drains the remaining public trust.

All this means that in the coming years, analyses of the Russian regime’s prospects should not account for economic and financial trends, but rather focus on political and legal issues. Loss of public confidence in the Kremlin’s policies will happen much faster and be much more crucial than declining financial reserves or any other economic problems and hardships.

References:

[1] Goreglyad, V. Global crisis and the paradigms of state financial regulation (in Russian: «Мировой кризис и парадигмы государственного финансового регулирования»). Moscow, 2013. P. 206.

* Vladislav Inozemtsev holds a PhD in economics and is the director of the Centre for Research on Post-Industrial Societies.