Perspective on current Russia

Wednesday, 5 February 2020

Perspective on current Russia

February 03, 2020

by Alexey Mineev (Проект Кино telegram in Russian) for the Saker’s blog.

“It is the economy, stupid.” It is the corruption, stupid.

The reason that President Putin just undertook the major government shake-up axing PM Medvedev, his economy handling deputies and the minister, as well as several underperforming ministers, is undoubtedly the government’s failure to invigorate economic growth in last years. The plague of the country’s poverty is only the consequence of the government’s impotence in turning around the prolonged under-par economic growth.

Russia’s business environment has indeed made considerable progress evidenced by the World Bank’s ease of doing business rankings. In 2019 Russia made the 28th place, rising from #124 back in 2010.

Inflation went down from 6+% to lower than the targeted 4% level.

However, surprisingly the real growth did not pick up. Instead, the economy slowed down from longer-term annualized 2% real GDP growth to around 1% level.

Although one might attribute the economy’s underperformance to the Western sanctions, this is hardly the primary reason.

Admittingly, Russia had to pay dearly for the reuniting with Crimea. The Rouble lost 50% of its value at the end of 2014. However, inflation did not spike accordingly. It remained lower than 13% annually in both 2014 and 2015. The explanation is that newly built domestic manufacturing had already been in place, ready to meet the increased demand for the locally produced goods driven by the cutting down on expensive imported ones. Here comes the failure. Instead of building upon the improved ease of doing business and capitalizing on the advantage in the form of weak local currency for local manufacturing, Russia continued growing tepidly – lower than 2% annually.

Besides, the highly touted 26 T RUB. (~0.4 T USD) National Projects program turned out to be just minor if any help to the economy in 2019. The government had developed the six-year plan 2019 – 2024 to meet the economic targets, envisioned by President Putin in his annual address to the Federal Assembly in May 2018. The 2024 objectives are as follows:

Stable population growth (As of December 2019, in 2020-2035 annualized 0.5% decrease as low case and still negative 0.2% for mid case in the Russian population is officially forecasted. The high case is estimated as +0.1% annualized growth);
Increased life expectancy to 78 years from the current 74 years (As of December 2019 for 2024 low, mid, high cases officially are: 47.1, 75.5, 76.8 — still short of the target);
A meaningful increase in real income and pensions (basically, the failure of the 20-year term of President Putin);
Decrease twofold in the poverty level;
Improved housing for 5 million households annually;
Accelerated technological innovation;
Digitalization of the economy and social services;
Making #5 largest world economy and keeping inflation at lower than the 4% level;
Creating the export-oriented sectors in the selected core industries of the economy by ensuring the availability and use of modern technology and top-notch professionals.

2019 was the first year of National Projects. The economy is not picking up.

No wonder, though. Because the federal budget remains flattish in real terms over ten years, indeed, we can hardly talk about any meaningful growth driven by government spending.

To this end, in December 2019, Alexey Kudrin, Head of Accounts Chamber of the Russian Federation – government-sponsored auditor of the countrywide finances accountable to the Federal Assembly of Russia, eloquently articulated: “The execution of National Projects is not going to translate to the meeting of the national targets.” This clearly is indicative of a significant disconnect between, on the one hand, the 3+% target real GDP growth and the 25% off the GPD level for capital investments and, on the other, the current level of the budgeted government spending. This disconnect is the real cause of the replacement of the economic block of the Russian Federation government.

The negative slope of IHS’s Purchasing Managers Index (Manufacturing) over the last two years currently diving deep below the 50% level could also evidence the seemingly unreasonably swollen expectation of the effect on the economy from the National Projects effort.

The above discussion of the travails of the Russian economy by no means tells us about any upcoming recession. A lot of factors will likely be shoring up the GDP growth just above the 2% level:

Ongoing infrastructure development countrywide;
Inflation in check, improved access to finance;
Likely improvement of meeting the budget spending targets (a current issue), and the implementation of KPI-based performance accountability for governors;
Ample room for an increase in federal budget spending to meet the additional social measures promised by President Putin in the last address to the Federal Assembly on January-15th 2020;
The expected extra effort to revitalize large-scale corporate investment programs (“the list of Belousov” — in the name of the newly appointed first deputy PM Belousov) through custom-tailored government support.

The above analysis leads up to the conclusion that there must be something more than the purely economic factors that have been in play all-time long, making Russia undergo clearly under-par growth last ten years.

The impotent government had been kicking the can down the road too long, doing little to fight corruption. In the meantime, the elites also grew impotent delivering scarcity of meaningful accomplishments in their homeland to be really proud of but enjoying hundreds of million dollars worth yachts, contently presuming that their money was good enough for the West. The abundance of second citizenship or green card among not only business elites but across all elites, including the top government officers, has become a national threat. However, geopolitics took over in 2014. In West’s books, Russia crossed the red line with the reuniting with Crimea and the military involvement supporting the rebels in Eastern Ukraine. The Russian elites were caught off guard. It is really excruciating now for the government to play a catch-up game wrestling the entrenched corruption.

The January 2020 reshuffling of Russia’s government has a clear economic underlying rationale — to turn around the years-long underperformance of the economy. However, looking forward, the country faces the problem that dwarfs the challenge of the ongoing structural economic revamp, which so far gains little traction with investors and entrepreneurs investments-wise.

It is corruption and the lacking-in of law enforcement that, in the long term, drag the economy down, providing breeding soil for groupthink in government ranks, self-censorship in media, brain drain, and messed up social values rather than just taking away from investments.

One might think that the change of Russia’s tack is part of the 2024 presidential election game. While this is undoubtedly the case, this all is merely part of ongoing Russia’s wakening and finally dealing with the economic policy execution issues.

More importantly, though, it is the end of the government’s impotence. Targeting 3+% GDP growth, the government is in dire need to strike a long-term deal with Russian businesspeople, making them start investing to reach the 25% off GDP target for capital investments. The government is to offer a substantial increase in government spending, effectively guaranteeing the investment returns.

In the way stands Russian-style “business as usual”- embezzlement. It will be dealt with, as this is a must. Yet, this is not enough. The eradication of corruption is the most significant moving part in the longer-term country’s fate-defining question about whether Russia manages to defend its sovereignty or, otherwise, Russia is bound to be subdued by the technologically more developed part of the world.