Geopolitical Gifts Mask an Economic Dilemma for Putin

by Justin Burke

As Russia prepares to celebrate Orthodox Christmas, Russian leader Vladimir Putin has many reasons to be pleased this holiday season. Russia, after all, has received an abundance of geopolitical gifts over the past year. But for all the bounty that Putin reaped, Ded Moroz did not deliver the New Year’s present that the Russian leader really needed – a vibrant economy.

In foreign affairs, Putin certainly had a very good year in 2016. Most notably, the Brexit vote and Donald Trump’s election as US president sowed uncertainty in the West, paving the way for Russia to assert its political interests and social agenda on a global scale. Things went so well that even Estonia – a Baltic state and NATO member that traditionally views Russia as a bogeyman – installed a coalition government in late November led by a Moscow-friendly prime minister.

The string of geopolitical successes, which includes Russia’s Syria gambit and a rapprochement with Turkey, makes it clear that Putin’s personal brand of illiberalism, dubbed sovereign democracy, is ascendant. Meanwhile, Western liberalism appears tired and in disarray, unable to adapt fast enough to the Digital Age, in which any dumbass with a smartphone can spread hate, lies and confusion.

But all is not well with Russia. Behind the façade of renewed greatness, there is a very soft underbelly – one that Putin has been ignoring during all his presidential terms and his stint as prime minister. While Putin’s Kremlin has focused in recent years on projecting Russian power abroad and advancing its concept of “traditional,” i.e. anti-liberal values, the Russian economy has been tanking.

The disturbing economic reality is that Russia is more dependent on the export of natural resources than ever before in the post-Soviet age. Despite lagging prices, Russia in 2016 produced a record amount of oil (11.21 million barrels per day) and exported a record amount of natural gas (614.5 million cubic meters per day). At the same time, Russia’s industrial base is floundering, having difficulty producing goods, other than arms, that can compete in the global marketplace.

In other words, Russia has an economy these days that more resembles a colony than an imperial power.

Putin seems preoccupied with restoring Russia to what he sees as its rightful role as a global force, but his reluctance to carry out structural reforms at home is throttling the economy and having damaging social repercussions. He is pushing a growing number of Russians to the brink, or over the edge, of the poverty line.

State-controlled Russian media in recent weeks have tried to paint a rosy macroeconomic picture, with an array of experts contending that the worst of Russia’s economic woes, brought on by the crash of energy prices, are over. They go on to predict Russia will experience slight growth in 2017. “A positive trend has emerged,” Putin announced during his annual television address in late December.

According to the official TASS news agency, which cited Finance Ministry and Central Bank estimates for 2017, the Russian economy should grow at about a 1 percent rate, while inflation should slow to a 4 percent rate. The budget deficit for 2017 is projected to be about 3.2 percent of GDP, based on an average annual price of Urals crude oil of $40 per barrel.

Setting aside all this macro happy speak, the view from street level remains grim. The most alarming statistic, or at least what should be alarming for the Russian government, is the fact that Russians’ disposable income has declined for 25 straight months, shrinking by about 16 percent during the period. By comparison, during the Great Recession in the United States during the late 2000s, the longest stretch of declining disposable income lasted for seven straight months.

In November, the World Bank reported that 14.6 percent of Russia’s population (about 21.4 million people) had incomes below the national poverty line, as of the end of the first half of 2016. The report added, however, that the share of Russia’s population hovering dangerously close to the poverty line had reached 51 percent. Many had lost the “shared prosperity gains of recent years,” the World Bank report stated. Russia presently defines its poverty line as those earning less than 9,889 rubles per month (about $160).

Poverty statistics do not tell the whole story. The suffering is far more widespread. According to a report in November by Russia’s leading national research university, the Higher School of Economics, 41 percent of individuals surveyed reported not having enough money to afford food and clothes. Overall, 73 percent of the respondents reported having to cut spending on essential goods and services due to financial problems.

For most Russians, the economic picture is unlikely to get much better anytime soon. Russia’s Ministry of Economic Development forecast in November that disposable income would grow by 0.2 percent in 2017 and 0.5 percent in 2018. But even this measly growth prediction must be taken with a grain of salt. The ministry, after all, has a horrendous track record when it comes to forecasting: it predicted that disposable income in 2016 would decline at a 0.7 annual rate, when the actual annual rate turned out to be 5.6 percent.

In a bizarre twist, Putin seems to be banking on the United States, or more accurately the incoming Trump administration, to help rescue the Kremlin. In his annual New Year’s address, Putin expressed hope that bilateral relations could reach “a whole new level.”

“Acting in a constructive and pragmatic manner, [we] will be able to take real steps to restore the mechanisms of bilateral cooperation in various areas,” Putin said. If you take a moment to decode that statement, the translation would be: I expect the Trump administration will lift sanctions on Russia, and let me do as I please when it comes to Russian internal affairs, and not create any foreign policy headaches for me.

Putin clearly hopes to get a helping hand from Team Trump. Yet as a majority of American voters have already found out to their dismay, Trump is an expert at confounding expectations. Counting on Trump to act in a consistent and reliable manner is like expecting the Pope to convert to Islam.

Putin and his minions also seem to be optimistic that the price of oil will rise and stabilize, and thus give the state’s coffers a welcome infusion. But such optimism rests on a shaky foundation. Uncertainty is the byword – at least in the near and medium term.

And even if high energy prices, and a pliant Trump administration, do provide a boost to Russia’s financial fortunes, the ones who will gorge are the crony capitalists and the kleptocrats who serve as the foot-soldiers of the sovereign-democrat-in-chief. The masses will not get much nourishment from the leftovers.

The only solution to the challenge is structural reform. If Russia is ever to reach solid financial ground, and foster widespread prosperity, the economy needs to diversify to reduce its vulnerability to swings in energy and commodity prices, and the country’s labor market and welfare system need to be overhauled. Most importantly, property rights need to be secure: in particular, entrepreneurs and investors have to have confidence in the rule of law and believe that Russia’s judicial system can act as an independent arbiter of disputes.

The problem for Putin is that liberalizing the economy is at odds with his illiberal agenda. Structural reform would entail relinquishing a significant degree of political control over the economy, but any self-respecting sovereign democrat is constitutionally incapable of letting go. From Putin’s perspective, sovereign democracy should never be confused with the concept of popular sovereignty.

So what does it all mean? The Russian population’s capacity for suffering is the stuff of legend. And since Putin is the master of Russia’s media landscape, and has a vast state security system at his disposal, the danger to his rule from widespread popular discontent would seem minimal – at least when compared to what the situation would be if Russia had a genuine form of representative government.

But history shows that Russian suffering does have limits: in the early 1920s, for example, Lenin felt compelled to abandon War Communism and introduce the New Economic Policy. If living standards in the Putin era continue on their downward spiral, or even just stagnate, the population could lose faith in sovereign democracy, just like what happened in the early 1990s, when the chaos that accompanied the Soviet Union’s implosion shattered popular illusions about Western-style democracy.

Something to consider is that even sovereign democratic systems must hold elections, and Russia’s next presidential vote is scheduled for 2018. While the vote itself will not be free or fair, the process will provide an opportunity for the venting of any pent-up frustrations. Putin would do well to start addressing the question of the population’s plummeting living standards soon; otherwise, Russia could experience the kind of political surprise that rocked both the United States and the European Union in 2016.

That is not to say Putin, or his assignee, could be voted out of office in an election – such a preposterous notion does not compute in a sovereign democracy.

Yet there are other possibilities. While a successful revolution from below seems far-fetched, it is worth noting that over the course of the last three centuries of Russian history, two Romanov monarchs and two communist general secretaries have been taken down in palace coups.

If Putin is intent on maintaining the upper hand, both at home and abroad, he needs to remember the maxim minted by the American political strategist James Carville: “It’s the economy, stupid.”