The coming Slav crash
Ukraine is not the only crisis to emerge from the former Soviet Union. It’s the most immediate and most immediately dangerous. But beyond the stunning images of boiling demonstrations in Crimea and eastern Ukraine, there is a less vivid but as potentially destabilizing danger growing greater by the week. It is the threat of a Slav crash.
The three Slav republics of the former Soviet Union are Russia, with more than 140 million people, Ukraine, with around 47 million, and Belarus, with nearly 10 million. These made up some three quarters of the USSR’s population and were (apart from the tiny Baltic states) the richest regions.
But now they are faltering; Ukraine most obviously. Sergei Voloboev, head of emerging markets at Credit Suisse, said in London this week that the country has a current account deficit of nearly 10 percent and a fiscal deficit of 7.5 percent.
These are very high, but need not be deadly if the economy is healthy and reform is under way. But Ukraine’s economy is sick, and reform will be difficult. Alone among the former Soviet republics, Ukraine has made no post-communist headway. It’s as poor now as it was in 1989.
In part, says Alex Pivovarsky of the European Bank of Reconstruction and Development, this puzzle is explained by the huge concentration of heavy industry in Ukraine that was built up and maintained by investment from Moscow. When this investment stopped, Ukraine had to either modernize (which meant closures) or keep the industry going on its own budget. It chose the latter, ruinously.
Corruption in Ukraine is “very open, no pretense about it,” Voloboev said. State companies were looted by the regime of the departed President Viktor Yanukovich, private companies are harassed to give a cut of profits to local and central administration and their owners take many of the subsidies, especially on energy, designed to assist the poor.
The new government has already made common cause with two oligarchs, appointing Sergei Taruta and Ihor Kolomoysky as governors in Donetsk and Dnepropetrovsk — regions where their companies are the major employers. It’s a depressingly early sign of capitulation to Ukraine’s real power.
The country is still on the verge of dismemberment. Crimea may break away. The parliament, dominated by ethnic Russians, declared a decision to unite with Russia. A defection of the eastern industrial areas, which account for 25 percent of the country’s gross domestic product, would be a still greater blow.
“Without reform,” said Pivovarsky, “Ukraine will remain poor, with an income level of 25 percent of the European Union average.” A new, largely inexperienced, administration in Kiev has among the worst governance tasks in the world — merely combating corruption in its own ranks will be a huge challenge.
Belarus, the smallest of the Slav republics, had been a post-Soviet success. The authoritarian government could boast of GDP growth in the pre-crash mid-2000s of 10 percent or more. No more – the bi-monthly newsletter Belarus Digest says “long run growth potential has weakened, productivity lags behind the rest of the world and the currency reserves are depleting.”
Growth last year was under 1 percent and this year it might see negative growth. Productivity increases by little over 2 percent lag far behind a growth in real wage rises of 17 percent. Some relief will be bought by devaluing the currency — but this is a classic tactic to avoid reform.
Russia now enters a darker tunnel than its leadership has had to face for the past 14 years of President Vladimir Putin’s time in power. One of its most senior bankers, speaking on terms of anonymity, painted a picture of stagnation.
The word (in Russian “zastoi”) conjures up the “zastoi period” of the latter years of Leonid Brezhnev, the Soviet leader from 1964 to 1982. He rejected all meaningful reform in favor of tightly controlled stability.
“For Putin,” said the Russian banker, “political stability is definitely number one.” He noted that with a stabilization fund of $500 billion and poll ratings heading toward 70 percent after his display of solidarity with the Russian speakers in Ukraine, Putin’s response to distant economic problems may tend to be, “What? Me worry?”
But he should worry. Growth this year won’t be much greater than 1 percent — perhaps even below that level if sanctions are imposed. Real wages are declining after years in which they rose by up to 10 percent, productivity is only 30 percent of U.S. levels — about the same as in the “stagnant 1970s, household savings are down as people raid their savings accounts, inflation is between 6 percent and 7 percent and foreign debt is rising.
Alarms are sounding throughout Russia’s economy. The fact that the state has taken control of the strategic sectors of oil, gas and telecommunications leaves little for the embattled private companies to invest. “Russia needs modernization urgently,” said the banker, “more than other emerging and competitor economies like Brazil or Poland.”
Social and political pressures, likely to grow sharply this year, will be an index of past success. Russia is far richer than 20 years ago, even outside of the gilded centers of Moscow and St. Petersburg. A new and larger middle class has become used to improvements in living standards. A plateau would cause pain and a decline might spark unrest.
If largely middle class protestors turned out in 2011 — when times were good — what will happen this year and next when the climate is tighter if Russia becomes more of an international pariah and the state clamps down to maintain “stability?”
In Western media coverage, Putin is portrayed as a leader who is authoritarian, but also successful and strong. This leaves Western leaders floundering. It’s all an illusion, however.
Russia, with faltering growth, a demographic crisis and no modernization in sight, is a year or two away from the economic fever ward.
PHOTO: Pro-Russian supporters block the car carrying U.N. special envoy Robert Serry before his departure in Simferopol, March 5, 2014. REUTERS/Vasily Fedosenko