The Economic Cost of Putin’s Miscalculations

 

Economy

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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