A whiff of panic in the Kremlin as Russia’s economy sinks further

February 4, 2016
Russian President Vladimir Putin leaves after his annual end-of-year news conference in Moscow, Russia, December 17, 2015. REUTERS/Sergei Karpukhin

Russian President Vladimir Putin leaves after his annual end-of-year news conference in Moscow, December 17, 2015. REUTERS/Sergei Karpukhin

Only one month in and 2016 has already delivered a series of devastating economic blows to Russia. As the price of oil and the value of the ruble plummet, so, too, does the standard of living of the average Russian citizen. Russia’s central bank has been widely praised for not spending the country’s hard-currency reserves to support the ruble — an admittedly losing proposition — yet it has done so on the backs of the Russian people.

The public has responded stoically and largely without panic, even as they see their middle-class aspirations crash. But a whiff of desperation can now be sensed, and it is the Kremlin that appears the most perplexed about what the next steps it should take.

President Vladimir Putin has gone so far as to blame Soviet Union founder Vladimir Lenin for Russia’s current difficulties. Historical scapegoats, however, do not relieve Putin and his government of responsibility for Russia’s financial mess. As the economic temperature rises, Moscow will likely find itself under increased pressure to re-examine both its domestic policies and its foreign adventures.

Russian President Vladimir Putin speaks during his annual end-of-year news conference in Moscow, Russia, December 17, 2015. REUTERS/Maxim Zmeyev

Vladimir Putin during his annual end-of-year news conference in Moscow, December 17, 2015. REUTERS/Maxim Zmeyev

Signs of panic and dysfunction are everywhere. Finance Minister Anton Siluanov has demanded yet another round of 10 percent budget cuts. (A similar reduction occurred in 2015). Otherwise, Siluanov warns, Russia faces a repeat of the 1998-99 financial crash and possible default — not exactly reassuring words from the man in charge of Russia’s economic policy.

The 2016 budget, meanwhile, already included catastrophic reductions in education, health care and social spending. How will the Russian public react to additional cuts? No one knows. To raise revenues, the Kremlin is considering selling off shares in large state companies, including Rosneft, Sberbank and Aeroflot, while still maintaining majority control. Moscow has long vowed never to sell these shares in a depressed market, but that is exactly what would happen under current economic conditions.

The relevant government ministries, however, do not appear to have cleared these privatizations with Putin. He just demanded that the purchasers of these assets must be subject to Russian law — not offshore entities. This sharply reduces an already limited pool of potential buyers.

Putin also said there would be no fire sale of state assets. Therefore, not only has Putin and his government most likely lost a much-needed infusion of cash, they also have looked divided and unsure of themselves in the process.

Several Russian government ministries are also busy preparing an anti-crisis plan to bolster certain national industries, which almost sounds encouraging until one considers the fate of the 2015 anti-crisis plan. Only 17 of the 60 programs were fully implemented last year, according to Russia’s Audit Chamber, leaving billions of rubles unspent.

There is little reason to believe that the 2016 stimulus plan — with less money available — will fare any better than its predecessor in reviving the Russian economy.

The private sector remains in no position to pick up the slack. At a recent forum, inauspiciously titled “Small Business: A National Idea?”, Putin answered the question with a resounding no. He provided small businesses no new tax breaks or any relief from crippling double-digit interest rates. He pointed them instead to regional governments for support, many of which are on the brink of default themselves, so in no position to lower taxes.

The Russian government really has no good economic options other than hope. This prompted German Gref, Putin’s former minister for economic development who is now head of Sberbank, to announce that Russia will continue to fall behind its global economic competitors if the country does not introduce major structural reforms. Gref’s warning, and accompanying sound of alarm, was startling: “[W]e have found ourselves in the ranks of countries that are losing, downshifter countries.”

Russia's President Vladimir Putin takes part in a training session with members of the Russian national judo team in Sochi, Russia, January 8, 2016. REUTERS/Alexey Nikolsky/Sputnik/Kremlin ATTENTION EDITORS - THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. IT IS DISTRIBUTED, EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS.

President Vladimir Putin in a training session with members of the Russian national judo team in Sochi, Russia, January 8, 2016. REUTERS/Alexey Nikolsky/Sputnik/Kremlin

What the Russian elite fears most is that the economic problems will spill over into politics. Sergei Naryshkin, the speaker of the Russian parliament, issued a less-than-subtle warning to Duma deputies who will be facing re-election in September 2016. He cautioned that the elections should not serve as a “detonator for a social explosion.” In other words, candidates should not compete by criticizing the state, and political debate cannot serve as a safety valve to lower social tensions.

Whether panic leads to a change of government, growing protests, an economic meltdown or political crackdown remains unknown. So far, the Russian people have acted more calmly than their leaders. The elite’s growing anxiety, however, is beginning to move from the domestic to the international arena.

Russia is now considering suspending its loans to foreign countries. Moreover, according to the Financial Times, in December Putin allegedly asked Syrian President Bashar al-Assad to step down. This move was in contradiction to all his statements of public support.

But perhaps most significantly, a January 2016 brainstorming session between Assistant Secretary of State Victoria Nuland and the Kremlin’s PR guru, Vladislav Surkov, discussed possible solutions in Ukraine. Surkov’s participation was particularly telling because he is the one who ultimately will have to spin any strategic retreat in Ukraine to Russia’s advantage.

Both Secretary of State John Kerry and French Economy Minister Emmanuel Macron have hinted that sanctions against Russia could be lifted in the next few months if the Minsk 2 agreements are fully implemented. Sanctions relief would be the first step in Moscow’s economic rehabilitation, though major growth would still remain a long way off.

The negotiations over Ukraine are no sure thing. The United States, the European Union and Russia will have to do both hand-holding and arm-twisting to bring the respective parties to the table. If no deal is reached, however, and the economy continues to tank, Putin will have to stop the emergent signs of panic from spreading.

If the government loses its head in this crisis, the Russian people are bound to follow. That is Putin’s worst-case scenario.

33 comments

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No mention of the Budapest Memorandum
https://en.wikipedia.org/wiki/Budapest_M emorandum_on_Security_Assurances

signed by Russia and USA where we would all guarantee Ukraine’s borders in exchange for Ukraine foolishly giving up her 3rd largest in world nuclear armory.

Until Russia retreats from Crimea the USA should support Chechens as well as Ukraine with lethal aide. We promised support to Ukraine and have done nearly nothing to bring don Czar Putin.

Brava to Merkel. Shame on Obama. Defeat to Putin.

Posted by dwilmot | Report as abusive

Russia is just a mess, both economically and morally. You have to feel sorry for the average Russian, but at the same time they happily swallow Putin’s propaganda. I believe Stalin is making a comeback there, which speaks volumes.

It’s Russia’s neighbors I feel most sorry for. They have to endure a selfish bully of a nation being next door.

Posted by JackHerer | Report as abusive

Propaganda article…west needs to grow up..they have been trying this for too long now, its no longer even funny.

Posted by Adi_Sanghi | Report as abusive

Russia is falling, Russia is falling!!!!
Tell me something I have not already heard from Washington’s propaganda machine……..

Posted by No_apartheid | Report as abusive

And that’s why the London real estate market is on fire. The rats have gnawed the last of the flesh from the dead animal and have now been invited by the Tories to dine on middle class Brits.

Posted by elcantwell | Report as abusive

I wouldn’t worry about Russia – their defense budget is just at $50B/yr unlike our cumulative $1T/yr with $19T debt making debt-to-gdp ratio over 100%. Just another US defense troll article on Russia bashing.

Posted by Mottjr | Report as abusive

Russia is a perfect example of what a country run by a chest pounding blowhard looks like. Putin is a perfect example of the kind of leader Trump or Cruz would be.
America has the strongest military and the strongest economy in the world. We CAN screw that up by having our heads where the sun don’t shine when we step in the voting booth.
Vote every republican out of every office every chance you get.

Posted by Whipsplash | Report as abusive

It’s not IF the Russians are coming… for Ukraine (read: Europe) they’re already there.

Posted by UauS | Report as abusive

Blah, Blah, Blah

More anti-Putin propaganda.
I am Russian, and there is no panic.

Dream on!!

Posted by Noestablishment | Report as abusive

No worries! Putin will just ride his Harley bare-chested in the Moscow snow and that will make everything just fine.

Posted by bryan047 | Report as abusive

I have never read PRO Russian article in Reuters, seams like Putin is an escape goat for all problems in the world.

Posted by free_man | Report as abusive

I would like to report an abuse of reason : this article

Posted by ippias | Report as abusive

Putin is incompetent. He has driven Russia right into the toilet.

Russia’s economy is now smaller than that of Italy. Italy!

GDP per capita in Russia (under Putin’s mismanagement) has slipped to levels below Greece and Czech republic. Putin is literally turning Russia into a 3rd world country. Maybe that’s why republicans like him so much? He acts like GW Bush?

Haha. What a loser.

Posted by Solidar | Report as abusive

Would be nice if countries around the world could have their own basic economies free of the crudgel that is wall street and the state dept. But then again if every country around the globe posessed 5-6000 operational nukes, a dozen carrier battle groups, a fleet of ballistic missile subs, and their own NSA, and a global reserve currency – god knows how many trillions in debt – we really wouldn’t be having this conversation, would we.

It doesn’t feel mighty, strong or brave to root for the global hegemon, in fact slightly nauseating.

Posted by Laster | Report as abusive

There appears to be two schools of thought on this when the subject arises: Poor Mr. Putin, everybody hates him and this is untrue propaganda. The other side tends to hate Putin very personally. I believe this obscures the situation… the focusing on the cult of personality. I believe we are being misdirected; successfully.

Posted by Radfo | Report as abusive

And what about the Eurasian Union?

Posted by Cyberblunt | Report as abusive

Is he riding or fish kissing shirtless again?

Posted by Amwatching2c | Report as abusive

Russia is in trouble like most developing Energy and Commodity based economies. They were not successful in diversifying their economy. They are also losing skilled population to the world. Unfortunately, they have a lot of corruption and as a result has not been to develop a successful economy.

Posted by JustFactSir | Report as abusive

@Mottjr

Your comments about Russia’s relative defense spending are off-base. Their defense spending as a percentage of their GDP is about 4.5%, whereas in the USA, defense spending as a percentage of GDP is 3.5%. What your numbers really do, is highlight how tiny Russia’s overall economy is when compared to that of the USA. Also, the only reason Russia’s debt to GDP ratio is lower than that of the USA, is that they defaulted on their debt in 1998, which resulted in several years of 60-120% inflation rate. The average inflation rate in the Russian federation since that time has been around 12% since that time.

Posted by maddog2 | Report as abusive

Other than Russia haing a monthly multi billion $ trade ‘SURPLUS’ & repaying $ debt..So Russia defaults… who will suffer?
I’d suggest Russia’s creditors!.. US Banks… they now hold russian assets that have halved in $ terms.. if there was even the slightest possibility of them seizing assets!
If a foreign institution made a move to posses any Russian asset, the Russians could turn round say the company was being investigated for tax evasion, money laundering or whatever and company assets were frozen until investigations completed! Of course informing creditors that their money was safe during this time… but unfortunately inaccessible for the foreseeable future!!
US banks have $9.8 trillion in foreign debt outstanding?
another sub prime debacle in the offing??

Posted by doin_nuthin | Report as abusive

”Until Russia retreats from Crimea the USA should support Chechens as well as Ukraine with lethal aide. ”

Posted by dwilmot
Somehow I recall the Russians informing the USA of potential Chechen terrorists.. the usa ignored the Russian warning and the result was the Boston Bombing and now dwilmot suggests the usa supports chechens WITH LETHAL AID! OK!!

Posted by doin_nuthin | Report as abusive

History always repeats itself in Russia. Ever since Moscow was a village the Russians have ridden across the steppes in search of plunder. When the invaders have squeezed every last drop of booty from the surrounding lands they retreat to Moscow. After years of eating cabbage and potatoes and drinking vodka, they yearn for some fresh vegetable, fruits, and the riches that their neighbors have toiled to create; so they ride out again across the steppes…

The Crimea, Ukraine, and now Syria are just the start. There is only one way to stop this cycle forever.

Posted by seattlite2 | Report as abusive

Well first of all unless Assad goes there is no end to the Syrian war . And even getting all the warring parties to agree to talk peace in itself is an almost impossible task, since Muslim divisions run so deep . And there should be no sanctions lifted, until Putin has pulled out of the Ukraine, and returned the Crimea to the Ukraine. We are in a position to plunge Russia into a deeper recession than 1998 and 1999. The Russian citizen has got to see, that the fake democracy that is operating in Russia today has led to the crash of their economy,and draw their own conclusions as to who is behind their downfall.

Posted by columbare1 | Report as abusive

There is a serious shortage of money to support a large number of nations, including all of the great powers, in the manner to which they have become accustomed. It is unlikely that a hoped-for surge in oil prices will solve the problem. Generally accepted accounting procedures would reveal that the U.S. and other nations are bankrupt and living off of bogus bookkeeping methods. Whether this will make nations hesitant to engage in sabre rattling and foreign adventures is problematic. One can only hope.

Posted by 0800 | Report as abusive

If two years of recession is the price of defending Mother Russia from the hybrid war waged against her by the entire NATO-GCC complex (and their proxies) then the Russians will happily pay that price.

The low oil price cannot be maintained for much longer, since marginal producers (mostly in North America, as well as western majors around the globe) won’t be able to remotely maintain production.

The war in Syria is going beautifully, with Western outlets in successive hysterical fits over their “concerns” over “civilians” and “refugees”. The article claiming that Putin asked Assad to step down is beyond inane. Russia would rather have a nuclear war than letting NATO-GCC topple Assad.

The benefits that Russia would accrue with a victory over NATO-GCC in Syria are gargantuan. Securing a tight grip over the European gas market, plus a powerful foothold in the Middle East, stretching from Syria to Iran. With Europe’s indigenous production of gas already in terminal decline, the turn of the tide is getting closer and closer.

Posted by dalitis | Report as abusive

Investors are pulling out of Russia. For a reason.

Putin is swatting at flies and taking his hands off the wheel. He is a baby.

Posted by Solidar | Report as abusive

I like their odds, if this were a simple matter of economics and balance of payments.

Posted by Laster | Report as abusive

The problem is deeper then what is reported. If they continue to do multi-year agreements at these low prices Russia will be not be able to get out of this hole they are in even if a recover occurs that oil is already promised to China. the oil that is excess can be sold at a higher price but there is more competition as the price increases.

Posted by zim.wolfe | Report as abusive

Maybe Putin and his oligarch cronies could float the country a low interest loan? Think of the irony of them loaning all that looted wealth back to the Russian state.

Posted by Doug3732 | Report as abusive

DSVF

Posted by slavaukarini | Report as abusive

Putin is irrelevant. He had a chance to make Russia great.

Instead, he has tanked the economy and engaged in petty border skirmishes with places like Ukraine. And for what? He wants Chernobyl back?

Irrelevant. Incompetent. Fading.

Posted by Solidar | Report as abusive

Putin is the king of Chaos. Everywhere he goes he leaves dysfunction or death or destruction behind him.
A pathetic little man who no one will stand up to because he has nukes.
I feel bad for the Russian people who continue to suffer the corruption and greed of these monsters who end up as their leaders.

Posted by alexlaverick | Report as abusive

Time Cures All Loons

The generals claim things are grave,
The Mideast and Ukraine we must save,
But soon we’ll be scootin,
Around Vladimir Putin,
Like the czars he’ll just spin in his grave.

Posted by PalmerGranite | Report as abusive