A popular belief among the political observers skeptical of Russia’s stability is that if oil prices fall below 60 USD per barrel and remain there for more than a year, Putin’s regime will fall. However, IMR's economic advisor Igor Booth argues that the Russian government has a significant arsenal for fighting the potential economic crisis, no matter how serious it becomes. Only a small number of critical mistakes in economic policy could destabilize the country sufficiently to force the regime out of power.
A Safe Haven
The Russian opposition movement strategy rests on the assumption that a second wave of the world economic crisis will trigger protests outside of Moscow and help oust the ruling party. This is how it happens in Western democracies. Spain, Great Britain, Italy, and France have all recently seen governments fail due to economic turbulence.
However, within the rigid Russian political system, the country’s poor economic performance is insufficient to bring about regime change. A full-scale economic catastrophe would be required to make the Russian people oust Putin: a catastrophe resembling what happened in the 1990s, when paychecks weren’t issued for months, schools went without heat through the freezing winters, and the railroads were completely paralyzed.Are there any signs that such a catastrophe is imminent?
Inflation and unemployment, two economic variables directly influencing the public mood have never been lower. Unemployment is only 5.4%, while inflation is at a record low with 6% over the last year. Accelerated growth of pensions and salaries has halved poverty rates in Russia. Although a GDP growth of just over 4% isn’t very impressive, according to the IMF forecast, Russia might outperform Brazil, another large, resource-rich, semi-developed nation. The Russian budget is balanced; the country’s debt totals a mere 42 billion USD while the rainy-day fund has accumulated over 60 billion USD. The Russian banking system is far from collapse; central bank reserves in euros, dollars, and gold are among the largest in the world.
There is no direct threat of destructive economic policies in the future. Indeed, the Russian government is packed with highly-qualified economists, as is the newly-established presidential economic council.
All things considered, Russia looks like a safe haven in the unstable global economy. However, investors happen not to share this point of view, and capital continues to flow out of Russia while investments stagnate.
The Crisis Scenario
The new wave of the economic crisis will slow down Russian consumers and have a serious impact on exports and freeze investments. Consumer spending is the major force driving the current economic growth in Russia. Higher consumer credit interest rates, flat real wages, and shrinking savings affected by devaluation will all make people reluctant to spend more. A drop in the price of natural resources would shut down the Russian mining industry. Oil production might fall because of insufficient investment in developing new fields. Altogether, these factors will lead to sluggish economic growth—or none at all.
The Russian banking system is far from collapse; central bank reserves in euros, dollars, and gold are among the largest in the world.
The major trigger for a crisis in Russia would most likely be falling oil prices. However, the area most affected will be the market for less profitable export goods: coal, aluminum, steel, metals, fertilizers and wood. Dozens of regions dependent on these industries will face two-digit unemployment rates. The federal government will be forced to bail out many economically specialized cities in order to prevent spontaneous eruptions of social unrest.
The decrease in oil prices will mainly affect the federal budget. The Ministry of Finance is prepared for this scenario. Several weeks ago, the much-discussed “budget rule” was finally adopted. Now, instead of balancing the budget based on forecasted oil prices, the government will use the average over the course of the past three years. The resulting estimate for 2013-2015 will be about 10% lower than current oil prices. This will make the Russian budget more capable of coping with revenue shortages. Any deficit could be financed by the government’s rainy-day fund or loans.
However, oil prices above $90 dollars per barrel are not guaranteed. During the previous economic crisis, at a certain point, oil prices dipped below 40 USD. To address this threat, the Ministry of Finance is working on a crisis budget, balanced at year-average oil price of 60 USD per barrel.
Regardless, exercises in balancing the budget are not enough to revive the economy. In order to gain a competitive edge, the Russian economy needs structural reforms. In the wake of the recent elections, the Russian government doesn’t have a popular mandate for reforms. Putin’s major campaign promise was stability” Most likely, his government will avoid any reforms that could hurt his core electorate. Unable to initiate change, the government will have to stick to economic tricks that create the illusion of stability but increase long-term economic risks.
