A major piece from The National Interest, July 1:
“Russia is isolated with its economy in tatters,” said President Obama in his State of the Union address
on January 20, 2015. At that time, many thought it was true: the
Russian currency was in free fall, while the federal budget was losing
its revenues and beginning to extensively rely on reserves accumulated
in previous years, and so many experts predicted the collapse of the
Russian economy—an economic decline of 10 percent or more, comparable to
the 2008–09 crisis. But though the Russian economy plunged into a
crisis and could not halt its decline for six consecutive quarters, the
real scale of the economic shocks was significantly smaller. The fall in
GDP was 3.7 percent in 2015, and most experts foresee a drop of around 1
percent in 2016. Oil prices’ rebound from their nadir allowed the ruble
not only to stabilize, but to gain a foothold. A 10 percent fall in
private consumption has not led to any visible increase in social
tension.
Short-term forecasts for the Russian economy are gloomy, and do not
envisage a rapid post-crisis recovery. In the medium and long run, if
the conflict in eastern Ukraine is not peacefully resolved and Western
sanctions are not removed, the economic situation may worsen, but no
collapse will occur. The primitive structure of the Russian economy and
Putin’s pro-market economic doctrine will prevent chaos, and disasters
will not be able to turn around the economy’s sluggish growth.
The Economy’s Surprising Stabilization
For many the biggest mystery of the past year was the relatively
moderate drop in the Russian economy. In early 2015, many experts
predicted an inevitable 8–10 percent decline, basing their projections
on the fall of the ruble, falling imports and expectations of falling
investment. However, nothing of the sort happened. Why? I see three
reasons for this.
First, the base of the Russian economy is the production and export
of raw materials and commodities. Unlike 2008–09, there is no crisis in
the global economy, and the main consumers of Russian raw materials
(Europe, China and Middle East) continue to grow, albeit unevenly; there
has been no reduction in demand for Russian raw materials this time, as
opposed to six years ago. Moreover, the key product of Russian
exports—oil and refined products—recorded a slight increase, both in
production and in exports. The stability of the Russian raw-material
sector entailed the stability of railway cargo (more than 70 percent of
its turnover is raw materials and commodities) and pipeline
transportation volumes (which in terms of its effect on GDP is equal to
railway-cargo turnover).
Taxation of the Russian oil and gas sector is structured such that
the main part of the increase in world oil prices benefits the budget.
And, vice versa, the decrease in oil prices hits the financial situation
of oil companies at a much smaller scale than the revenue base of the
federal budget. Moreover, all export-oriented industries benefited from
the devaluation of the ruble (local production costs paid in rubles
devalued in currency terms) and from the government's policy of freezing
wages in the public sector; workers’ pressure to raise wages plummeted.
All this has allowed the raw-materials sector to maintain production
and keep the necessary investments.
Second, by 2015, the Russian government launched a full-throttle
program to finance ambitious military procurement and reinvestment into
the defense industries, which are mainly state-owned. On this basis, the
production of military products in 2013–15 grew by 15–20 percent annually,
and approximately the same growth should continue in 2016. The rapid
growth of the military industry evidently benefited many industrial
sectors and prevented the decline in industry as a whole.
Third, thanks to the reforms of the nineteen-nineties, the Russian
economy became a market one, that is, it is inclined to restore
equilibrium using a free-floating ruble exchange rate. We must
acknowledge the Russian authorities, who not only did not freeze prices
during the crisis, but did not even discuss this idea. As a result, the
economy was able to quickly adjust to shocks both external (decline of
oil prices and 50 percent devaluation of the ruble) and internal (a ban
on food imports from Western countries). However, the price of this
adjustment was the rise in inflation to 17 percent in spring 2015, a 10
percent decrease in the level of private consumption and 40 percent
reduction in imports.
The Ruble’s Rollercoaster
The second important mystery of the past year, the fast recovery of
the ruble after its collapse in December 2014 and its relative stability
afterwards, can be solved much more easily.
On the one hand, since 2012 the ruble has been an “oil currency,” as
is evident from comparing the movements of oil prices and the
ruble-to-dollar exchange rate rate. Statistically, in the 2014–2015, 92
percent of the fluctuations in the ruble-dollar rate were explained by
changes in oil price. In the first half of 2015, oil prices were slowly,
but steadily, growing from $32 per barrel in January to $65 per barrel
by the beginning of the summer. Thus the stabilization of the ruble
exchange rate in the spring of 2015 and its strengthening by 50 percent,
as well as the slight increase in foreign exchange reserves of the Bank
of Russia, should not be surprising. As soon as oil prices fell in the
fall of 2015, the ruble devalued as well, and as oil prices recovered in
the spring of 2016, the ruble regained its value....MUCH MORE
