Russia’s reckoning

May 7, 2013

Russia is now in a hard, even dangerous, place. A series of shocks are coming, and it is not well placed to weather them. It has, to be sure, little debt: Vladimir Putin’s administration is proud that the state has borrowed little and has built up a multibillion-ruble national reserve fund. Yet even that is ending, and the basics of the economy are weak. The former Marxists among Russia’s ruling class will know that the economic base determines the political and social superstructure. It is not looking good for them.

What’s worse, Russia isn’t a major player in the global economy. According to Eurostat figures, it has 2.4 percent of world gross domestic product, slightly under that of India; and 2.6 percent of world trade, slightly more than India has. It’s important, especially to Europe, in one significant economic aspect: It ships very large amounts of energy: 63 percent of European Union imports from Russia is oil, a further 9 percent is natural gas, with a further 3 per cent for coal. Icy Russia heats Europe. In return, Russia has, for the past decade, been enriched, as a once impoverished nation, which defaulted in 1998, surged to a lifestyle that supports a burgeoning middle class.

But oil and natural gas prices are falling now, and don’t look like they will rise again soon: “Over the coming few years,” writes Forbes commentator Bill Conerly, “look for oil prices to decline at least below $80 a barrel and quite possibly more” because of increased production. Gas prices are worse: The once-mighty Gazprom, which had dictated prices and terms to those it supplied, has been forced to discount and saw its profits fall last year by $6.5 billion, or 15 percent. The warnings, inside and out of the country, that it was dangerously dependent on fossil fuels for its newfound wealth and strength are coming home to roost. Russia may face recession.

This wasn’t supposed to happen. Modernization was the watchword of Dmitry Medvedev’s one-term presidency, but it remained largely rhetoric. During a public Q+A session with Putin, former Finance Minister Alexei Kudrin, who has “flirted with the opposition” recently, said that the government had adopted “half measures and half reforms” and that it “did not have a program” to wean the country off oil and gas dependency. The powerful Deputy Prime Minister Vladislav Surkov, in London last week, told an audience at the London School of Economics that “so far Russia hasn’t made any money on something new, on something that’s been invented. No one’s become a millionaire on an idea. We need at least one success.” But the incentives, support and clean courts that entrepreneurs need to “become a millionaire on an idea” don’t exist.

The political climate continues to darken. In that same phone-in, the editor of the radio station Ekho Moskvy, Alexei Venediktov, said he detected a “whiff of Stalinism” in the air. His concern, and that of many in the presently quiescent opposition, is the trial of lawyer and activist Alexei Navalny, the closest the opposition has to a leader. Charged last month in the city of Kirov with corporate embezzlement, Navalny pleaded not guilty. He has thrown down a gauntlet to Putin, saying he intends to stand for the presidency, and if elected, would strive to throw Putin and his associates into prison. If convicted, he will face up to 10 years in prison himself. At the same time, raids on Russian – and some foreign – NGOs continue, with documents seized by the tax police under last year’s law that classifies all Russian institutions that receive money from foreign sources as “foreign agents.”

Modern Russia is wholly bereft of any “soft power.” In the communist days, especially during the high repressive period of Stalin, it elicited admiration from many left-leaning (not just communist) individuals in the West, including influential figures like the U.S. economist Harry Dexter Whiter, who passed secrets to the Russians through the then-communist (and later repentant) Whittaker Chambers.

Now, in a world shorn of naiveté about authoritarian leaders, Putin gets low marks from all concerned with human rights. Just look to Syria, where Russia’s stubborn support stems from the belief that President Bashir al-Assad may prevail over the insurgent groups, and a reluctance to lose Russia’s only remaining base on the Mediterranean. However justified some Russians may feel in that posture, it attracts widespread distaste, not exactly redeemed by admiration for the country’s musicians. Though Putin has embraced world-famous conductor Valery Gergiev warmly – the affection seems reciprocal – it’s a slim base for international approval. Putin must make a success of the Sochi Winter Olympics next year, without cracking down on dissidents and protestors (as the Chinese did in the 2008 Olympics) – or he faces further obloquy.

Corruption, which Putin now officially battles, announcing the arrest of a corrupt official at least every week, is deeply corrosive – and few seem to believe the anti-corruption campaign to be genuine. A new report from the UK’s Henry Jackson Society by the Conservative Minister of Parliament Dominic Raab argues that:

Corruption is the glue that holds together an unwieldy, vertically integrated system of power through elaborate, mostly unofficial, patronage. This phenomenon extends from the most senior officials and political allies within state-owned oil and gas companies like Gazprom and Rosneft, to the lower-level officials soliciting bribes to process permits for small business-owners.

The largest irony for the Russian president is that his greatest construction, the new Russian middle class, is at best skeptical of him and often hostile. His support hasn’t fallen to the low levels endured by some of Europe’s leaders – but polls show most people want him to leave office when his third term ends, in 2018. This middle class, many themselves tainted by corruption, nevertheless have become much more cosmopolitan, fearful for an economic-cum-political clash and dissatisfied by policies that now seem to be failing.

In the next few years, expect Russia to give the West a hard time – because it will have an increasingly tough time with itself.

PHOTO: Russian President Vladimir Putin (L) and Mariinsky Theatre’s artistic director Valery Gergiev visit the new stage of the theatre before the Grand gala concert in St. Petersburg, May 2, 2013.  REUTERS/Alexei Nikolskyi/RIA Novosti/Pool


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Another elitist article by John Lloyd. What about America’s problems?? What about our ballonning deficits and national debt? What about our permanently unemployed?

But the nerve that Mr. Lloyd has about mentioning Syria!!! We, the USA, are the worlds biggest state sponser of terrorism. We are supporting terrorists in Syria, even as some in the UN are finding out that our beloved ‘rebels’ used sarin gas. And we support Isreal in every single Palestinian child killed there.

So Mr. Lloyd, if you want to see who is in trouble, look straight outside the window of your Ivory Tower.

Posted by KyleDexter | Report as abusive

Remember USSR under Stalin who murdered 20 million plus of his fellow citizens he died of old age and is still worshiped today in some circles of Russia. IE. Never underestimate the stupidity of Russians to kiss the rears of their murderous oppressors, nor their capacity to drown their nightmares in vodka.

Posted by UScitizentoo | Report as abusive

Things in Russia are even more worse, than it’s said hear. But the final conclusion may be correct – the question is how long Putin’s regime can resist by people’s hatred.

Posted by Dmitry_Kogan | Report as abusive

The Russia’s half cold media war from US is artificially created,under political control- the political answer for banning Americans from adopting Russian children and banning USAIDA’s activities in Russia.Sorry John but you are not a free man and original; go in China for similar job!

Posted by aditurars | Report as abusive

Excellent and insightful.

IMHO, you will never see $50 oil. Oil is priced in dollars; dollars will loose value faster than the commodity as the years progress. You’ll see $100 oil within a few years as the Fed plays out its hand.

Posted by Billyfrumusa | Report as abusive