The Russian Bear: Big, Brutal, and in Distress

March 23, 2015

Saturday marked the first anniversary of Russia’s parliament ratifying a treaty that designated Crimea part of the Russian Federation. While seizing Crimea has deepened Russia’s isolation on the global stage, President Putin remains defiant. At a concert next to the Kremlin last week celebrating what is euphemistically called “reunification” with Crimea, Putin declared that Russia will overcome “the problems and obstacles that others try to create for us from outside. Such attempts are doomed to fail in general when it comes to Russia.”

Putin did not pinpoint those “problems and obstacles,” but it’s safe to wager that high on that list is the country’s ailing economy. Consider the following dismal data:

• Gross domestic product grew by just 0.6 percent last year, and this year, says the country’s central bank, GDP will contract 4 percent, assuming oil prices stay where they are. If oil prices fall to the $40-45 range, the contraction could be closer to 6 percent.
• Inflation reached nearly 8 percent last year and, on an annualized basis, it notched 17 percent in February.
• The ruble over the past year has lost about half its value relative to the dollar. In December, this tumble sparked a run on stores like Ikea, as shoppers scrambled to buy goods before they became more expensive.
• The salaries of the Kremlin’s civil servants are being slashed 10 percent; the number of civil servants is being reduced across agencies anywhere from 5-20 percent; and total federal spending is being cut 10 percent.

The Crimean Anschluss led the United States, the European Union, and others to impose a range of sanctions against Russia. Yes, these sanctions have cut Russia off from international capital markets. But the “outside” forces Putin blames for Russia’s troubles are mostly a myth. Russia’s biggest burden is something no single actor can control: oil prices. According to the U.S. Energy Information Administration, in 2013 half of Russia’s federal budget revenue came from taxes and customs duties tied to oil and natural gas, and 68 percent of the country’s export revenues came from its sale of oil and natural gas.

Plunging oil prices have left Russia squeezed for fiscal revenue: today the country faces an estimated $240-billion budget shortfall. The government recently announced it would withdraw more than $50 billion from its “reserve fund” (in effect, a sovereign wealth fund).  This draw is more than half the total value of the fund—and is six times more than what was originally announced just two months ago. The country’s finance minister has sheepishly conceded that, “The current year will be challenging for the Russian economy.”

These near-term troubles are reinforcing long-building forces already foreshadowing Russia’s long-term decline. Male life expectancy today is only 64 (for women it is 76). The country’s fertility rate of 1.6 childbirths per woman of childbearing age is one of the lower rates in the world and is well below the replacement rate. The country’s total population of about 144 million already fell by five percent over the past generation. Putin said last week that the Crimea issue “was not simply about land, of which we have no shortage as it is.” He’s right about that: the country is spread across nine time zones. But it may well be about people as well.

Russia also faces pervasive corruption. At a rank of 136 (out of 174) in the 2014 Transparency International corruption index, it is one of the lowest-rated developed economies on the planet. Thuggery seems to have infected Russia at the highest levels, from the recent murder on an open street of opposition figure (and Putin critic) Boris Nemtsov to the extraordinary campaign waged against financier Bill Browder (which he has documented in a new book and has written about here). Is anyone surprised that foreign direct investment inflows fell below zero in the third quarter last year? As part of the outflow of foreign capital, technology, and know-how that could help arrest the country’s economic slide, last week U.S. automaker General Motors announced plans to shutter its sole remaining plant in Russia (at a cost of $600 million).

The annexing of Crimea is, of course, the prime example of the Russian government’s thuggery. Given the token resistance Putin has encountered from other nations, there is good reason to fear he will try to capture more territory in Ukraine (as is already underway) and other nations, such as the Baltics, where he can undoubtedly claim that ethnic Russians are under siege. Russia’s belligerence is already spreading into other foreign-policy areas.  It has violated a key nuclear weapons treaty, leading U.S. defense secretary Ashton Carter to declare last month that one option for the U.S. to pursue is “countervailing strike capabilities.”

Reining in Russian revanchism will be complicated by Europe’s dependence on its natural gas. Russia supplies more than 40 percent of total gas demand in Germany, more than 60 percent in Poland and Greece, and more than 90 percent in Finland, Estonia, and Bulgaria. Perhaps most daunting of all, Putin seems immune to diplomatic and economic pressure. He stands as a stark reminder that even in today’s modern wired world, the age-old threat of autocracy still stalks the globe.

Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.