Putin’s Russia: Economy Takes a Turn for Worse?

When I left Moscow after completing my second assignment in the Embassy at the end of 1989, I never imagined that I was leaving the Union of Soviet Socialist Republics for the last time. My next visit to Moscow was in 1993 when I saw an entirely different country. Russia is unpredictable.

It was on a New Year’s Eve in 1999 that then president Boris Yeltsin dropped a bombshell in his customary midnight address to the nation by announcing that he was stepping down and telling his newly appointed prime minister Vladimir Putin to “take care of Russia”.

In his national address that same night, Putin said, “Dreams come true on New Year’s Eve. Especially, this New Year’s Eve.” Putin’s rating at that point was just 2%, but it rose to over 50% by March when the presidential election was held, which he went on to win in what turned out to be Russia’s last fair and free election. Through the years in power since then, Putin’s popularity kept rising and by 2014, after his move to annex Crimea, it touched dizzying heights — over 90%. Putin is indeed a paradox — a charismatic politician whose popularity must be the envy of his peers anywhere in the world, and yet, presiding over an authoritarian regime. The Russia he inherited from Yeltsin and the Russia that he turned it into are unrecognisable from each other. Without doubt, Putin has restored to Russia some of the geopolitical might wielded by the former Soviet Union. Russia has returned as a major power in the Middle East where Putin is today a kingmaker, and a similar feat may repeat in Africa.

Putin has deepened Russia’s ties with China to a historical level. He has revived Soviet-era ties with Cuba, Syria, Egypt, Libya and Vietnam, made new friendships with Turkey, Iran and Venezuela, and even turned around some old antagonistic relations into promising friendships, such as with Saudi Arabia, UAE, South Korea or Singapore.

Putin noted with pride recently that Russia’s Cold War era adversaries are now trying to catch up with its inventory of newly-developed advanced weapons. “The Soviet Union played catch-up,” Putin told top military brass at a meeting in Moscow. “Today, we have a situation that is unique in modern history: they’re trying to catch up to us.” The American side admits that it is the new reality.

Putin has fulfilled his pledge to the voters in the 2000 election to strengthen the Russian state, and renew its military and arms industry. No one talks anymore of threats to Russia’s territorial integrity. Russia’s far-flung regions do not dream publicly of independence amid the disintegration of the central state. There is broad global and domestic consensus that Russia is much stronger today than it was in 2000.

The International Monetary Fund (IMF) has lauded Putin’s fiscal prudence, noting that his government has one of the healthiest balance sheets in the world. Russia is running a budget surplus, its foreign debts are negligible and it holds one of the largest reserves of foreign currency and gold. And the barricades that Putin has built to guard Russia’s economy from the vagaries of the US dollar-dominated financial system are impregnable.

Nonetheless, Putin is completing 20 years in power against a backdrop of growing dissatisfaction. Putin’s approval rating has dropped below 70%. Simply put, he could not fulfil his oft-repeated pledge to deliver a major economic breakthrough for the population. Real income has been falling — by as much as 10% in the past five years alone. According to a poll last month, more than half of Russian youth aged between 18 and 24 want to emigrate.

Putin’s stated intention in 2000 to “catch up with Portugal” became something of a catchphrase. In 2013, per capita in Russia came close to Portugal’s but growth has since faltered. Putin aimed at transforming Russia from simply an exporter of raw materials to one more broadly based on high-tech products and services. But that objective remains elusive. That in turn makes the economy vulnerable to fluctuations in world market prices.

The country’s economic model has become the main problem. The rigid and top-down system of governance that Putin installed is unsuitable for such a vast country that spans not less than 11 time zones. It stymies entrepreneurial skill and creativity and innovation, although Russia’s human resources are truly extraordinary. Its arms industry, where as in the Soviet era, testifies to the latent genius of the Russian people which remains untapped. All in all, constrictions and inefficiencies cramp the performance of the economy built on “state capitalism”.

Russia’s growth this year is expected to be just above 1% and prospects of future expansion do not look good. While the global economy as a whole is growing at about 3.5%, the IMF expects Russia’s share of global output to almost halve to 1.7% in 2024 from 3% in 2013. 

Continuing along the present path of stagnation will have political consequences. True, Russians really have never had it so good. In the provincial cities and towns, the Putin era produced vast improvements in incomes, housing, the infrastructure and the consumer sphere. But living standards have stalled, most markedly in Moscow and Saint Petersburg, where inequality in wealth also happens to be the sharpest. The two great metropolises have witnessed overtly political protests in the recent years over the rigged parliamentary elections in 2011, against Putin’s “tandem” with Dmitry Medvedev to run for the presidency in 2012, and against the perceived manipulation of Moscow elections in 2019. Fortunately for the Kremlin, these protests have not so far coalesced into a national movement.

However, without doubt, if one were to compare Russia today with 2000, when Putin came to power, things look good. That is why most older Russians who lived through the traumatic Yeltsin years following the collapse of the Soviet Union in 1991 consider Putin a saviour for reversing the collapse and restoring law and order.

But if one were to look at Russia’s future over the next 10-15 years, the anaemic economy cannot fulfil the nation’s aspirations in terms of a higher standard of living. While Putin’s approval ratings remain high, the popularity of the “ruling party”, United Russia, has plummeted and the president has prudently kept it at a distance.

The dilemma of the ruling elite is going to be how to perpetuate Russia’s “managed democracy” after 2024 when Putin completes his term. “Putinism” demands that Putin remains at the helm. This is where Russia compares poorly with a flourishing democracy such as Germany where Angela Merkel came to power as Chancellor n 2005.

German Chancellor Angela Merkel enters the stage of the World Economic Forum, Davos, Switzerland, January 23, 2019.

Merkel shepherded the country through a great deal of turbulence, while Germany was still “digesting the aftermath” of the fall of the Berlin Wall in 1989. The “Empress of Europe” announced in October that she would not be seeking re-election as leader of her party or as chancellor in the 2021 national election. Germany has never seen such prosperity as under her stewardship. But there is nothing of that angst that is gripping the Russian elite over the spectre of a Kremlin without Putin as “tsar”. If Merkel will be missed, it will be for her rationality and calm.