Russian economy faltering in the face of sanctions
International sanctions threaten to trigger a painful economic recession. But tens of thousands of Russians put aside worries about the precarious future and happily flocked to the May 1 parade in Moscow’s Red Square this week, waving banners proclaiming their support for Vladimir Putin.
Amid furious appeals from EU leaders over the Ukraine crisis, the Russian president has awarded heroes of labor medals to outstanding workers, including an oilman, dairy farmer, museum curator and swimming coach, for services returned to the homeland.
Then, wearing his Uncle Vlad hat, Putin greeted union leaders in the Kremlin, promising that his government would do its best to honor its pledge to raise public sector wages despite the economic downturn.
Russia celebrated the annual Spring and Labor Day against a daunting economic backdrop. Investors have fled the Moscow Stock Exchange and the Russian ruble has lost 8% of its value against the US dollar since the start of the year, pushing up the cost of imports.
To add to the gloom, the International Monetary Fund cut its Russian growth forecast for 2014 to 0.2% this week – the second downward revision in less than a month – and warned that the economy was already in recession. Russia’s economic performance could deteriorate further if the conflict in Ukraine escalates and prompts the United States and the European Union to apply tougher sanctions.
Russia has benefited during Putin’s 14-year rule from high global oil prices that have boosted prosperity in this energy-rich country. While the fabulously wealthy oligarchs have benefited the most, poverty rates have fallen sharply, swelling the ranks of the new middle class who see Putin as their savior.
Thanks to the oil windfall, Russia has the fourth largest financial reserves in the world and is not burdened by significant sovereign debt. But even before the Ukraine crisis erupted, there were signs that its oil-based growth model was failing.
Putin has overseen the rise of large state-owned companies that, often run by close associates, dominate the economy. Structural reforms aimed at creating a level playing field and encouraging investment in innovative industries have been repeatedly suspended, leading to an economic slowdown.
As growth plummeted last year, Russians stopped spending so freely, ending a consumer boom. Falling sales combined with the depreciation of the ruble forced automakers and steel mills to start laying off workers.
So far, the United States and the European Union have targeted sanctions against Russian officials and companies close to Putin in an attempt to persuade the Kremlin to change its policy in Ukraine. The idea is to make the entourage of the Russian president suffer, while avoiding harming the irreproachable population.
But international retaliation against Putin’s cronies is adding to the pressure on Russia’s faltering economy.
Speaking at a press briefing in Moscow this week, Antonio Spilimbergo, head of the IMF’s Russian mission, said the sanctions had undermined business confidence and robbed Russia of much-needed investments.
Capital flight is skyrocketing, with $ 64 billion leaving the country in the first quarter of the year, more than the total outflows in 2013. “What we have noticed is the fear of sanctions could be even more powerful than the sanctions themselves, Spilimbergo mentioned.
Russia’s central bank has raised interest rates twice since the onset of the Ukraine crisis, in an attempt to support the ruble. However, the measures were not enough to prevent inflation from exceeding the government’s 5% inflation target this year, according to the IMF.
Putin’s already high approval ratings have skyrocketed since Russia annexed Crimea in March. But there is a risk that once the wave of euphoria has passed, people will start to complain about the cost of territorial expansion.
The Ukrainian crisis could be a game-changer for the Russian economy, in a positive or negative direction, said Chris Weafer, senior partner at Macro-Advisory, the Moscow-based political and economic consultancy.
An economic downturn could be a glimmer of hope, giving impetus to much-needed structural reforms. But there are high risks that “the hawks may trump government doves and create a backdrop for new disputes in the Arctic or the Middle East while placing less emphasis on reforms and privatizations ”.