Putin does not think about the economy

The economic sanctions are only a tertiary cause of Russia's trouble with economic growth. The recession is in full swing, but Vladimir Putin will not reform the economy – argues Sergei Guriev, former President of Moscow's New Economic School.
Putin does not think about the economy

Sergei Guriev

CE Financial Observer: According to the forecasts, in 2015 Russia’s GDP will decrease by 3.3%. Is this a result of the economic sanctions?

Sergei Guriev: Not exclusively and not primarily. There are three main reasons for the decrease. The first reason is the presence of institutional factors: a generally very weak investment climate, state interventionism and corruption. These phenomena had been destroying our economy even before 2014. The second reason is the drop in the of oil prices, on which Russia is to a large extent dependent.

Even the flexible Russian ruble does not help here and cannot mitigate the effects of the crash. The sanctions rank only third in terms of importance. They exacerbate the negative effects of the two previous factors, making it harder for our government and state-owned companies to obtain loans and finance their needs. As a result, even though our sovereign debt is not high, and the fiscal situation is much better than in Greece, we have to apply forced budget austerity.

Can we already talk of an economic collapse in Russia?

It is not that bad. It was worse, for example, in 2009, when out GDP fell by 8 percent, or in the 1990s,  when it declined at a double-digit pace. Nonetheless, the situation is painful, because real incomes, consumption, and the standard of living are all falling and there are no prospects for improvement. The most optimistic forecasts are projecting a maximum growth rate of 2% in the coming years. In 2012, when Vladimir Putin actively returned to the political scene, the Kremlin promised to raise wages and pensions in the budget sector. Back then, however, a 5% GDP growth was projected for the following years. Reality has verified these expectations. This means that all these promises will inevitably prove to be empty. This is bad news for the Kremlin, because it will result in declining support.

Some have argued that the low prices of oil are a result of political machinations directed against Russia, and thus a behind-the-scenes element of sanctions imposed by the West. Is this possible?

It is hard to debunk conspiracy theories, and an infinite number of them could be developed. I personally believe that the oil price movements can be perfectly explained by purely market-related factors, for example, by the shale revolution in the United States, which has increased the supply of oil or by Iran’s entry into the market. We know, however, that the narrative of oil prices falling as a result of a conspiracy, is convenient for the Russian propaganda. Yet, the Kremlin itself does not believe it and is becoming increasingly aware of the seriousness of its budget problems. They will, out of necessity, limit its ambitions in foreign policy. Military expenditures are still high this year, but they will have to be cut next year.

Could it be said, therefore, that sanctions against Russia are less effective in hampering its imperial ambitions than its real internal problems?

Not exactly. When Putin annexed Crimea, he assumed that the international community would not protest, or at least not take any real action. Sanctions, however, were ultimately introduced, and as I have already said, acutely exacerbated Russia’s economic problems. Even in the spring of 2014, Putin was still suggesting that the Republic of Novorossia was emerging in the East of Ukraine, which likely meant that he wanted to repeat the Crimea scenario.

In my opinion, the imposition of sanctions on Russia following the annexation of Crimea curtailed his ambitions. War continues in Donetsk and Lugansk, but the strategic centers such as Kharkov, Odessa, Zaporizhia and Dnepropetrovsk are still in Ukraine. Putin’s eagerness for conquest has weakened.

What in your opinion is the source of Putins popularity in Russia?

The explanation that first comes to mind is that compared with the Boris Yeltsin era, in spite of everything, the life of ordinary Russians has simply been better during Putin’s reign. For them Putin is, above all, someone who brought Russia back on track economically and reduced unemployment. This was the case, but only up to a certain point. Until 2008, Putin’s popularity was certainly based on genuine economic growth experienced by the society as a whole.

However, then came the crisis and Putin understood that he could no longer play this card. He also did not want to carry out pro-growth economic reforms, because he feared they would strengthen the middle class, which would ultimately turn against him. This would be a shot in the foot. He chose the path of increased government expenditures, strengthening of state-owned companies and lack of reforms. As a result, economic growth has not returned to its previous level and Putin still needs a way to drum up public support. He has decided to utilize the post-imperial nostalgia, which is still alive and strong among the Russians. The annexation of Crimea has been a perfect tool for that.

Is economy not important for Putin?

No. Putin has been treating it instrumentally. He is not giving it much thought at present.

And yet information has emerged that the special economic zones were created in Russian cities with no income tax for companies, which were supposed to revitalize the local industry. Is this a sign that Putin is thinking about economy after all?

Economic sanctions are preventing Russia from importing foreign technology, capital and equipment, so by definition, the internal market and Russian companies have to be more active. Furthermore, Russians cannot afford imported goods, so more space is created for domestic companies. On the other hand, the price of credit has increased, which hampers the development of these companies. It is hard to tell what will happen. I think that Putin entrusts a lot of the less important economic decisions to others. Hence these special economic zones.

Do we know who are Putins economic advisers ?

I think that his advisors are mainly people from the secret services [laughter]. Fortunately, Putin also pays attention to the opinions of the Finance Minister Anton Siluanov or the head of the Central Bank Elvira Nabiullina. They espouse sensible economic views and advocate modern monetary policies, such as the flexible exchange rate or inflation targeting policy. Thanks to them, no crazy measures such as control of capital flows, or fixing of the ruble exchange rate were introduced. Unfortunately, Putin stops listening to reasonable people if it becomes politically inconvenient for him. This was the case with the introduction of embargo on foreign food – a  strange, absurd economic policy based on the logic of „cutting off the nose to spite the face”, which is nonetheless popular and politically expedient.

Does Putin not have a strong ideological foundation for his economic policy?

No. He subordinates it to the current situation in the foreign relations. If Putin moves in the international arena provide him with domestic support, and for the time being they are providing this support, he will not bother about the economy.

So there will be no reforms in the near future?  

No. While Putin promised a whole package of deep reforms in 2012, he had no interest in implementing them. Our economy requires a reduction of bureaucracy, appreciation of small and medium-sized enterprises and wide-scale privatization. We are currently too heavily reliant on revenues from the fossil fuel industries, which is particularly visible in the composition of our exports and of the state budget revenues, which makes us highly sensitive to price movements on the world markets.

What would have to happen for Putin to begin treating economy as an end in itself rather than a means to an end?

I have no idea, I do not see any chance for that at the moment. When his popularity starts falling and the post-imperial nostalgia stops working in his favour, he will resort to the tightening of authoritarian methods and not to reforms.

My friend, who is working in a large multinational company in Moscow, says that Putin is already going in this direction. He is trying to control, for example, who can go abroad and for what reason.

That is correct. In the past three years, Russians have been deprived of a large part of their freedoms and controls have been tightened at various levels. We have the censorship of the media, and media companies cannot be owned by foreigners, the main opposition leader was convicted twice, and his brother is now in jail. Boris Nemtsov was murdered, you cannot run in elections, independent observers are beaten by unknown perpetrators. We have a full authoritarian regime.

You have also fallen its victim. You left Russia when they began linking you to the Yukos case and attention was drawn to your involvement in the opposition movement.

The Yukos case is absurd. It has been going on since 2003, even though the law prohibits court cases to last for more than 10 years. If I returned to Russia, I would be detained under the pretext of questioning in this matter.

Interview by Sebastian Stodolak

Sergei Gurieva Russian economist, specializing in political economy, he studies the phenomenon of oligarchy and the impact of corruption on the economic life. Guriev also published works on public finances and debt. A former rector of the New Economic School in Moscow, fled Russia in 2013, when the government prosecutors became interested in his anti-Kremlin opinions and support for the opposition. Guriev is a regular participant in the meetings of the Bilderberg Group.

Sergei Guriev

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