Summary:
by Elizabeth Teague
The last session on Day 3 was devoted to the state of the Russian economy. The Guest Speaker was Professor Philip Hanson, Associate Fellow of the Russia and Eurasia Programme at Chatham House.
Why, Professor Hanson asked, is developing a growth strategy proving so problematic for Russia? In the judgement of Moody’s, one of the big three international rating agencies, Russia has positive policies and robust public finances. It has coped well since 2012 with establishing economic stability (controlling inflation, balancing the budget, building adequate currency reserves). And yet, again according to Moody’s, Russia also suffers from chronic low investment, slow productivity growth, and excessive state interference in the economy. This amounts to saying: “macrostabilization good, growth bad.” This signifies both the success and the failure of the Russian state. How can we explain this contradiction?
For the Russian economy, 2010 and 2011 were years of reasonable (4%+) growth, and in 2012 the economy also looked good. Inflation was at 5.1%, there was a strong government surplus, and reserves were high. This encouraged the ambitious targets set in Putin’s May 2012 edicts.
In 2013, however, Russia’s economic performance began to deteriorate. Inflation went up to 6.8%, there was a slight government deficit, and reserves were down a little.
By 2014, this was beginning to look like an emergency. The oil price fell, sanctions were imposed by the US and other western states, the exchange rate fell rapidly, and inflation took off.
The government needed to concentrate on stabilising the economy. What followed was a tough stabilisation. In real terms in 2016, pensions were cut by 10%, the national defence allocation was cut, business had to put up with high interest rates, and transfers to the regions were cut (in 2015, the regions received only 77% of the support that they had received at the time of the 2009 crisis).
This stabilisation policy was successful. Output fell only in one year (2015), inflation fell fast, pensioners did not storm the Kremlin, import substitution began to work, as too did countersanctions.
And yet, Russia still has a growth problem. The share of Russia’s output in the world output is going down. Incomes and consumption are stagnating.
The Russian slowdown matters, Professor Hanson explained, because it is happening at a lower development level than that of other leading world economies. And it matters to the Russian leadership also because Russia’s weight in world output is edging down.
What may explain Russia’s slowdown? According to former Finance Minister Aleksei Kudrin, the economy is stagnating because there is no political competition. Incumbent politicians and incumbent firms are mutually dependent on each other. The politicians act as krysha (covert patronage and protection) for the firms, which in return reward the politicians with covert funding (kormlenie). Firms that do not pay such funding run the risk of asset-grabbing (reiderstvo). This system (sistema) deters investment, innovation and competition. This is a binding constraint on Russian growth since the boom of 1999-2008, now that other sources of growth have failed.
