Vladimir Putin’s Russia is treading water in a sea of red ink

March 19, 2015
Russia's President Vladimir Putin is seen through the glass of C-Explorer 5 submersible after a dive in the Baltic Sea

Russia’s President Vladimir Putin (L) is seen through the glass of C-Explorer 5 submersible after a dive in the Gulf of Finland in the Baltic Sea, July 15, 2013. REUTERS/Aleksey Nikolskyi/RIA Novosti/Kremlin

As President Vladimir Putin looks out on to the world stage, he should be relishing Russia’s renewed status as a global player.

But when Putin looks homeward, he sees a different reality. Three months into 2015, Russia’s economic forecast ranges from gloomy  to catastrophic. Yet in contrast to his aggressive response in Ukraine, Putin has been the picture of inaction domestically. He has intervened in the financial markets but not on Main Street, avoiding any hint of structural reforms.

Russian domestic and foreign policy are intimately connected, however. And the troubled domestic front is now catching up to Putin and limiting his regional and global aspirations.

Russian President Putin attends a meeting with members of the government in Moscow

Russian President Vladimir Putin attends a meeting with members of the government at the Kremlin in Moscow, March 4, 2015. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

Putin’s economic plan essentially boils down to preserving the state sector, with all its inefficiencies, and shrinking it by just 10 percent. The across-the-board budget cuts have been felt by all state agencies except defense. Even Russia’s vaunted internal security services now have to make due with fewer resources, despite the real prospect of increased social unrest.

So there will be no large stimulus package coming from the Russian state. Instead, a $35-billion anti-crisis program has been established. So far, though, Moscow has been extremely reluctant to spend the money. Even Putin has admitted that the program exists only on paper.

The decline in public spending and accompanying decrease in the real wages of state employees has had a domino effect on private business. Every day brings new reports of cutbacks, closures and layoffs, especially in the retail and service sectors.

When sales will revive is anyone’s guess. The Russian consumer is essentially tapped out. Indeed, between budget cuts, inflation and a declining ruble, it has been estimated by one Russian bank that by the end of 2015, Russians will be spending approximately half their disposable income on food.

All this highlights the underlying structural problems with the Russian economy and Putin’s reluctance to address them. In February, Putin gathered his top economic advisers, plus former Finance Minister Alexei Kudrin, to discuss potential reforms in state administration, law enforcement and the pension system (Russian men retire at 60; women at 55).

Including Kudrin at this meeting hinted a possible renewed focus on the domestic front, even a possible turn in a liberal direction. Yet no concrete proposals emerged, and rather than clean up government, Putin signed a law on Mar. 10 reducing penalties for corruption.

Russia's Prime Minister Putin and Gazprom CEO Miller attend a gas pipeline opening ceremony in Russia's far eastern city of Vladivostok

Russian Prime Minister Vladimir Putin (R) and Gazprom CEO Alexei Miller attend a gas pipeline opening ceremony in Vladivostok, September 8, 2011. REUTERS/Alexsey Druginyn/RIA Novosti/Pool

Neither the domestic consumer nor the foreign investor are about to come riding to the rescue of the Russian economy. But in trying to preserve his system of state capitalism and central control, Putin is busy spending the country’s hard currency reserves, which have decreased from $490 billion to $360 billion over the past year.

And new demands keep pouring in: $50 billion has been allocated from the emergency reserve fund to plug Russia’s 2015 budget deficit, with additional payments likely required in 2016; Rosneft, the major oil producer, wants $21 billion, and Gazprom, Russia’s natural gas production company, just asked for $3.2 billion. The entire banking sector also remains fragile.

Meanwhile, Crimea requires significant resources. And no one has yet volunteered to pay the considerable debts of Russia’s regional governments, largely ignored in the Kremlin’s anti-crisis planning.

In this sea of red ink, the only possible salvation is an increase in energy prices. When and how fast this can occur, however, remains anyone’s guess. Putin most likely can survive this economic downturn — he still faces no real political opposition. But without any fundamental structural reforms, he will arrive at the same stagnant (albeit smaller) economy that Russia started with before this crisis.

There is also one last bill to be paid: Ukraine. The fighting in eastern Ukraine may have diminished, but the final implementation of the Minsk II accord is a long way off. Kiev seems in no hurry to decentralize power to the regions and again start transferring state salaries and pensions to Donetsk and Lugansk. The payments have been suspended as long as these territories are outside the control of the Ukrainian government.

Russian Foreign Minister Sergei Lavrov now demands that the West consider sanctions on Ukraine for failing to implement Minsk II. One can appreciate his apprehension, however, because if Kiev won’t pay for eastern Ukraine, Moscow will have to. That means paying for a sitting army and separate regimes in both enclaves — neither of which has shown much interest in governing.

Putin can pursue the path of negotiations while probing for other weaknesses, among the nations that issued the sanctions, for example, or inside the European Union. Yet without any new dramatic foreign policy successes, Russia will increasingly be defined by its underperforming economy.

This growing sense of economic unease is reflected in national opinion polls.  In a recently announced survey, 82 percent of all Russians viewed inflation as the No. 1 problem facing the country. Some 55 percent indicated that the Russian government was not doing enough to address inflation and falling incomes.

The annexation of Crimea clearly distracted people from their economic problems. The “liberation” of Debaltseve did not. Putin can no longer push his domestic challenges to the side. Instead, they are increasingly becoming his greatest source of vulnerability.

18 comments

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“In this sea of red ink, ”

Russian debt to GDP is around 15%

Have you looked at the US debt to GDP lately?

Posted by SirGalahadT | Report as abusive

The author always has been writing articles critical of Russia.
I have a suggestion for you Mr. Pomeranz, why don’t you focus on the sea of problems we face right here in the good old US of A????????????

Posted by No_apartheid | Report as abusive

Retiring at 60 is only a dream for most American workers, many of whom work well after 65.

The exception of course are federal employees and many state employees who often retire at 55 and even earlier. This is because they accumulate retirement pensions that are 40% greater than private citizens, coupled with over twice the years of service.

Posted by neilc23 | Report as abusive

“So there will be no large stimulus package coming from the Russian state”

As dismal as Putin is, this is probably the only policy of his I agree with.

Posted by evilhippo | Report as abusive

“why don’t you focus on the sea of problems we face right here in the good old US of A?”

Why does everything have to be about America?

I have often said the difference between British arrogance and American arrogance is that the Brits think they run the world, whereas the American think they *are* the world.

Posted by evilhippo | Report as abusive

All left from Europe will be federalized Germany.

Posted by Macedonian | Report as abusive

Looks like Brain Drain; whatever is not already dead or in jail.

Posted by CharlesRKiss | Report as abusive

Sanctions should be ratcheted up without too much noise and remain in full force until Putin is removed from office, hopefully by Russians. Russians need to feel the pain so as to influence Putin’s standing but there should be a promise of rebuilding relationships once there is a change of leadership. Also we need to send weapons to Ukraine. There should be a condition that artillery not be used so that citizen’s would not be impacted so badly. Ukraine has that responsibility to its non combat citizens

Posted by thoma | Report as abusive

The West holds all the cards to stop Russian aggression against Ukraine.

Serious sanctions instead of the puny ones currently applied. And secondly, giving Ukraine defensive military assistance.

If only the U.S. and Europe had the foresight and backbone.

Posted by havryliv | Report as abusive

“Have you looked at the US debt to GDP lately?”

The US and Russian economies are structured completely differently. For one thing, the US economy is by far more diversified, hence less affected by fluctuating gas prices. The size of Russia’s economy is similar to that of Italy or Brazil, so comparing the economies is quite difficult. Larger economies can have larger debt to GDP ratios.

Posted by vincasvilnius | Report as abusive

Typical anti-Russian article propaganda article. No doubt they are going through tough times but these stories are so one sided and being posted on a daily and weekly basis. The US is $18 trillion in debt and keep raising the debt ceiling but I don’t see too many stories on that – and that’s a WAY more serious problem. I have an idea, how about posting a positive story about Russia for once. There’s lots of positive stories out there. We don’t need to keep demonizing Putin all the time. It’s getting really old.

Posted by Useakme45 | Report as abusive

Another article that is just blatant propaganda. The comment by Thoma re the Russian people removing Putin just shows how the anti Putin propaganda is working in the US. The Russian people trust him more than any other leader for an awful long time. But more importantly do they really believe that removing Putin would change the stance of the real power behind the throne in Russia anymore than in America. Figure heads are figure heads the world over.

Posted by Moties001 | Report as abusive

Russia is in decline. Largest country in the world by area, and their economy is now smaller than Italy’s. The GDP per capita in Russia has slipped to a level below that of Czech Republic or Slovenia. This is a according to World Bank 2014 data. Investors are pulling out.

Posted by AlkalineState | Report as abusive

Such propaganda article has no place in todays world of connectivity.People who read Reuters atleast are not that ignorant.The know facts and figures also.Look at comments here!

Posted by gentalman | Report as abusive

I hope Western readers review the comments. If you do, then can see the Putin propaganda machine at work. It’s fascinating to me to see the posts below. English speaking Russians must be a growth industry in Russia at the moment. Too bad for them though. Russia was on such a good track, painful yes, but they were heading toward freedom, representative government, and codification of all the inalienable rights we in the West take for granted. Imagine now the carnage and pain the Russian people will endure to undue all the bad acts of Putin and his corrupt oligarchs. It just makes you sad for the Russian people, very sad.

Posted by SeattleOracle | Report as abusive

Military adventurism is costly. All those soldiers want to eat but produce nothing. And the low oil price hurts countries that produce little to export except oil and gas. Russia’s GDP is the smallest of the four BRIC developing nations, smaller even than Italy’s.

The Soviets were not defeated in war, they just collapsed because they built up the military and neglected the economy. Trained by the Soviets, Putin repeats the same mistakes.

Posted by pbgd | Report as abusive

Putin is not a business-friendly President. Obama has led his economy upward since Bush. Putin has led his economy downward.

Posted by AlkalineState | Report as abusive

lol so Russia spent $35b on its economy…..uhm how much has the reserve bank spent propping up the USA economy again….?

Posted by deancollinsnyc | Report as abusive