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 percent 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 US 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.
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. Unlike in the US, none of Russia’s top economic managers sits on the National Security Council.
In short, Putin 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.
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 percent this year. But experience suggests that Putin is unlikely to do so.
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©Project Syndicate
