WASHINGTON, DC – As 2014 came to a close, an enormous financial crisis erupted in Russia. World oil prices had fallen by almost half since mid-June, and the ruble plummeted in December, finishing the year down by a similar margin. Russia’s international reserves have fallen by $135 billion, and inflation has reached double digits. Things are only going to get worse.
The current oil price will force Russia to cut its imports by half – a move that, together with the continuing rise in inflation, will diminish Russians’ living standards considerably. Add to that ever-worsening corruption and a severe liquidity freeze, and a financial meltdown, accompanied by an 8-10% decline in output, appears likely.
Russia’s ability to negotiate its current predicament hinges on its powerful president, Vladimir Putin. But Putin remains unprepared to act; in fact, so far, he has pretended that there is no crisis at all. In both of his major public appearances in December, Putin referred simply to the “current situation.” In his New Year greeting, he boasted about the annexation of Crimea and the successful Winter Olympics in Sochi, carefully avoiding any reference to the economy.
But, with the economy in free fall, Putin cannot pretend forever. And when he finally does acknowledge reality, he will have little room for maneuver.
Of course, Putin could withdraw his troops from eastern Ukraine, thereby spurring the United States and Europe to lift economic sanctions against Russia. But this would amount to admitting defeat – something that Putin is not prone to do.
Likewise, short of initiating a major war, Putin has few options for driving up oil prices. Moreover, even before the oil-price collapse, crony capitalism had brought growth to a halt – and any serious effort to change the system would destabilize his power base.
In fact, Putin’s leadership approach seems fundamentally incompatible with any solution to Russia’s current economic woes. Though accurate and timely statistics on Russia’s economy – needed to guide effective measures to counter the crisis – are readily available to the public online, Putin claims not to use the Internet.
Instead, the journalist Ben Judah reports, Putin receives daily updates on Kremlin politics, domestic affairs, and foreign relations from his three key intelligence agencies. His actions suggest that he considers economic data to be far less important than security information – perhaps the natural attitude of a kleptocrat.
To be clear, there is no dearth of economic expertise among Russian policymakers. On the contrary, Russia’s key economic institutions boast competent managers. The problem is that policymaking is concentrated in the Kremlin, where economic expertise is lacking. Indeed, the last of the economic heavyweights – all of them holdovers from the 1990s – in Putin’s personal circle was Alexei Kudrin, who resigned as Finance Minister in 2011. Unlike in the US, none of Russia’s top economic managers sits on the National Security Council.
Putin has usurped authority not just from his more knowledgeable colleagues, but also from the prime minister, who has traditionally served as Russia’s chief economic policymaker. Indeed, since Putin returned to the presidency in 2012, Prime Minister Dmitri Medvedev has been all but irrelevant.
In short, Putin – who is no economic expert – makes all major economic policy decisions in Russia, delivering orders to top managers of state-owned enterprises and individual ministers in ad hoc, one-on-one meetings. As a result, Russian economic policymaking is fragmented and dysfunctional.
Nowhere is this lack of coordination more obvious than in the sensitive currency market. In Russia, unlike in most other countries, the central bank does not retain the exclusive right to intervene. When the ruble tumbled in December, the finance ministry – which holds almost half of Russia’s foreign reserves, $169 billion, in two sovereign-wealth funds – deemed the central bank’s intervention to be insufficient. So it announced that it would sell $7 billion from its reserves to boost the ruble – a move that caused the exchange rate to overshoot on the upside.
When the exchange rate plummeted again, the Kremlin urged the five largest state-owned exporting companies to exchange a portion of their assets into rubles, leading to another overshoot, followed by yet another sharp decline. Clearly, such uncoordinated interventions are exacerbating currency-market turmoil, with the ruble’s value fluctuating by 5% – and as much as 10% – in a single day.
Russia’s fiscal situation, determined by Putin’s arbitrary budget management, is hardly better. Putin’s priorities are clear: first come the military, the security apparatus, and the state administration; second are the major infrastructure projects from which he and his cronies make their fortunes; social expenditures (primarily pensions), needed to maintain popular support, come last. Suddenly, oil revenues are no longer sufficient to cover all three.
As hard as the finance ministry may try to balance expenditures and revenues, it lacks the needed political weight. Last year, the central government delegated more education and health-care expenditures to regional bodies, without allocating more resources – and there was nothing anyone could do about it.
If Putin wants to save Russia’s economy from disaster, he must shift his priorities. For starters, he must shelve some of the large, long-term infrastructure projects that he has promoted energetically in the last two years. Though the decision in December to abandon the South Stream gas pipeline is a step in the right direction, it is far from adequate.
Likewise, Putin should follow Finance Minister Anton Siluanov’s sensible recommendation to cut public expenditure, including on social programs and the military, by 10% this year. But experience suggests that Putin is unlikely to do so.
Russia faces serious – and intensifying – financial problems. But its biggest problem remains its leader, who continues to deny reality while pursuing policies and projects that will only make the situation worse.
Anders Åslund is a senior fellow at the Peterson Institute for International Economics in Washington, DC.