The Economic Cost of Putin’s Miscalculations

 

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Article by: Dirk Mattheisen

In an interview this week with the German magazine Bild, Present Putin repeated his assertion that the economic crisis in Russia has peaked and that there were early signs of recovery.  Echoing Putin, Russian news services, such as Sputnik, have trumpeted that the World Bank is projecting that Russia will return to growth in 2017.

Indeed, the World Bank’s Global Economic Prospects released this week projects Russia will grow 1.3 percent in 2017 and 1.5 percent thereafter.  Reason to celebrate given Putin’s claim in Bild that Russia’s problems are the result of a US-led international anti-Russian conspiracy to dominate the world (why the US isn’t leading an international anti-Chinese conspiracy if it is seeking world domination is not clear).

At first blush, the return to positive growth, even as late as 2017, is welcome news.  However, the World Bank report makes clear that Russia has a bigger problem to solve than growth.

The report confirms a decline in Russian GDP of -3.8 percent in 2015 and projects a further, smaller decline of -0.7 percent in 2016, a more pessimistic scenario than its last report in June 2015.  In fact, in an earlier note I had argued that the World Bank and IMF’s numbers were too optimistic.  Since then, the steep fall in oil prices and the decline in Chinese demand for basic materials, such as oil and steel, major Russian exports, will only make the World Bank numbers harder for Russia to achieve.  Accepting the World Bank’s numbers, though, confirms a disturbing fact.  Even with a return to growth Russia will continue to fall behind.

According to the World Bank, Russia will have the slowest growing economy in the Europe and Central Asia region, except Belarus.  The “Developing Europe and Central Asia (ECA)” region is projected to grow 3.0 percent in 2016 and 3.5 percent in 2017 and 2018.  That is two-and-a-third-times faster than Russia.  The Central Asian economies are expected to achieve growth rates of over 3 and up to 9 percent (Turkmenistan is projected to grow at 8.9 percent annually).   The “recently transitioned to high-income” countries, other than Russia, including countries such as Hungary, Poland, Czech Republic and Croatia, are expected to reach growth rates up to 2-3 times faster than Russia (Poland is projected to reach 3.5 percent growth and, the slowest after Russia, Slovenia, 2.0 percent growth).

Even Ukraine—which is already returning to growth—will outpace Russia, despite the loss of Crimea and the ongoing Russia-led conflict in eastern Ukraine.  Ukraine is projected to grow 1.0 percent in 2016, against Russia’s -0.7 percent, and 2.0% thereafter, somewhat exceeding Russia’s meager growth prospects.  Only Belarus fairs as badly as Russia with growth of 1.0 percent in 2016 and 2017.

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Compare Russia’s projected growth rate now to the World Bank’s projection of only 6 months ago.  At that time the World Bank expected Russia to grow by 0.7 and 2.5 percent in 2016 and 2017, respectively.  Numbers the World Bank now views as too optimistic.  The World Bank attributes the poor growth prospects for Russia to low oil prices and to sanctions, which even Putin now admits in Bild to have had a severe impact on the Russian economy.  However, the World Bank, and others, make the point that even if oil prices were to increase and sanctions to end, the Russian economy will lag without reforms to improve governance, labor and capital markets, and social welfare.

At the risk of oversimplifying, oil is a problem, but Putin’s economic policies and political miscalculations have cost Russia dearly in terms of economic growth foregone, declining welfare of the Russian people, and diminished economic prospects for the future.  Russia cannot sustain economic growth through bad policies and conflict with neighboring states.  The economic blowback is strangling Russia.

Countries have survived worse economic downturns than Russia’s.  It takes economic management that is forward looking and a society that is resilient and hopeful.  The fear is that Russia has neither.

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Comments

  1. Avatar OlenaG says:

    And Morgan Stanley among others are now forecasting $10 USD per barrel oil. How much more financial pain can Russians endure before they realize Putin is their down fall and stop blaming the West? I won’t hold by breath as the West has been used as the excuse for all of their problems for all of my 64 years of life. Russians and Russia are a disease, and like cancer, need to be eradicated to ensure the preservation of the host known as humanity. Doubt me then digest this…Putin is behaving just like Stalin did from 1924 to 1939. Since Lenin, almost 100 years now, Russia has failed to move forward, to join the rest of humanity.

    1. Avatar Dirk Smith says:

      You are exactly right. Muscovy remains the root cause of evil in our world.

    2. Avatar Czech Mate says:

      sadly, I think you are right. The only mid-term solution I see is isolation of RuSSia by its own will, with civilised Europe ending by the eastern borders of Ukraine.

      They had enough time and enough tries to reverse their tragic past yet almost every time stood by the aggression of their criminal regimes. Which leads to conclusion that it is not a coincidence.

      The change can only come from within and we can bet it’s gonna take generations but despite all this I wish them good luck, on their own…

    3. Avatar Quartermaster says:

      The truly sad aspect to this is that the Putin is taking Russia down the same road that destroyed the Soviet Union.
      It has been said that Putin did not create a Kleptocracy, he inherited one. Perhaps so, but he certainly has maintained the kleptocracy and has profited from it himself.