Russia's ailing economy

Red square blues
Jun 4th 2009
From The Economist print edition
Russia’s failure to diversify away from oil should worry the Kremlin

NOT long ago, Russia proudly counted itself as one of the BRICs—with Brazil, India and China, the four emerging-market giants that were outgrowing the rich world. Yet it now makes more sense to talk of the BICs. With GDP shrinking by almost 10% in the year to the first quarter, Russia is in deep recession.
This is upsetting and worrying for the country’s political masters in the Kremlin. Upsetting because, as late as last autumn, they dismissed the economic crisis as a Western problem that would leave Russia unscathed. But the collapse in the oil markets has shown just how much Russia still depends on getting a good price for its natural resources. Neither President Vladimir Putin in 2000-08 nor (since last May) President Dmitry Medvedev has done anything like enough to diversify the economy—indeed, it depends more on oil and gas now than it did. The government has utterly failed to create a legal and political infrastructure to support business and enterprise.

The Kremlin may not care much about either of these shortcomings, especially now that oil once again costs $70 a barrel. Yet even at this price it must worry, for it can no longer honour its side of Mr Putin’s original bargain: that, in return for a guaranteed rise in living standards, ordinary Russians would accept curbs on the media, rigged elections and a slide into autocracy. The Russians are now lumbered with the second part of this deal without gaining the benefits of the first. Not since Mr Putin came to power have high inflation and shrinking GDP caused such a fall in real incomes.

Why has this not led to more protests? Partly because the Kremlin is firmly in charge and partly because many Russians built up savings in the boom years and have yet to feel the full impact of recession. Besides, faith in the “good tsar” and low expectations of government mean that few blame Mr Putin, now Mr Medvedev’s prime minister.

In the past few months the Kremlin has also tried to show a friendlier face. Mr Medvedev gave his first full Russian interview to Novaya Gazeta, an opposition newspaper, on the grounds that its journalists “did not suck up to anyone”. He has acknowledged critics among non-governmental organisations. He hailed Barack Obama in their first meeting in London in April, inviting the American president to Moscow in July.

The trouble is that this has yet to produce any change. The second sham trial of Mikhail Khodorkovsky, former boss of the Yukos oil company, makes a mockery of judicial independence. Better relations with America are portrayed in Russia as a belated American recognition of past errors and a vindication of the Kremlin’s assertiveness, notably over Georgia.

Nor is there any sign of the promised falling-out between a hardline Mr Putin and a liberal Mr Medvedev. In fact, the differences between the two men are largely of style. After a year of Mr Medvedev’s presidency, only 12% of Russians feel that he is in charge, whereas over 30% believe that power remains with Mr Putin. And Mr Putin has hinted once again that he may resume the presidency for two more six-year terms in 2012.

Bear markets

The risk for the Kremlin is not that it will lose control or collapse into internecine fighting—Mr Putin’s grip is too firm. Nor is it that Russia will go bust, as the Soviet Union almost did in the late 1980s and Boris Yeltsin’s Russia did in 1998. Foreign reserves of $380 billion mean there is enough money to pull through. But without legal, political and economic reform, Russia could well lapse into stagnation. It has squandered one oil-price boom. The price of doing nothing again would be to condemn Russia to the vagaries of the oil market. Mr Putin and Mr Medvedev must not make the same mistake twice