Anders Aslund writes: The current oil price will force Russia to cut its imports by half – a move that, together with the continuing rise in inflation, will diminish Russians’ living standards considerably. Add to that ever-worsening corruption and a severe liquidity freeze, and a financial meltdown, accompanied by an 8-10% decline in output, appears likely.
Russia’s ability to negotiate its current predicament hinges on its powerful president, Vladimir Putin. But Putin remains unprepared to act. When he finally does acknowledge reality, he will have little room for maneuver.
Putin could withdraw his troops from eastern Ukraine, thereby spurring the United States and Europe to lift economic sanctions against Russia. But this would amount to admitting defeat.
Short of initiating a major war, Putin has few options for driving up oil prices. Even before the oil-price collapse, crony capitalism had brought growth to a halt – and any serious effort to change the system would destabilize his power base.
In fact, Putin’s leadership approach seems fundamentally incompatible with any solution to Russia’s current economic woes. There is economic expertise among Russian policymakers. Russia’s key economic institutions boast competent managers. The problem is that policymaking is concentrated in the Kremlin, where economic expertise is lacking.
Putin has usurped authority not just from his more knowledgeable colleagues, but also from the prime minister, who has traditionally served as Russia’s chief economic policymaker. Indeed, since Putin returned to the presidency in 2012, Prime Minister Dmitri Medvedev has been all but irrelevant.
In short, Putin – who is no economic expert – makes all major economic policy decisions in Russia.
In the sensitive currency market, unlike in most other countries, the central bank does not retain the exclusive right to intervene. When the ruble tumbled in December, the finance ministry – which holds almost half of Russia’s foreign reserves, $169 billion, in two sovereign-wealth funds – deemed the central bank’s intervention to be insufficient. So it announced that it would sell $7 billion from its reserves to boost the ruble.
When the exchange rate plummeted again, the Kremlin urged the five largest state-owned exporting companies to exchange a portion of their assets into rubles.
Russia’s fiscal situation, determined by Putin’s arbitrary budget management, is hardly better. Putin’s priorities are clear: first come the military, the security apparatus, and the state administration; second are the major infrastructure projects from which he and his cronies make their fortunes; social expenditures (primarily pensions), needed to maintain popular support, come last. Suddenly, oil revenues are no longer sufficient to cover all three.
If Putin wants to save Russia’s economy from disaster, he must shift his priorities. For starters, he must shelve some of the large, long-term infrastructure projects. Though the decision in December to abandon the South Stream gas pipeline is a step in the right direction, it is far from adequate.
Likewise, Putin should follow Finance Minister Anton Siluanov’s sensible recommendation to cut public expenditure, including on social programs and the military, by 10%.
Russia faces serious – and intensifying – financial problems. But its biggest problem remains its leader, who continues to deny reality while pursuing policies and projects that will only make the situation worse.
