Russia: Recession Unstoppable, Future Unclear – 3/4/16

Prospects for Russia are bleak. The country’s economy has always been volatile and uncertain but recent events illustrate the magnitude of its problems.

Russian interference in other countries has put many neighbors on the defensive and prompted sanctions and reduced trade with Europe and the US. As a result, Russia is cut off from the foreign capital markets it needs to stimulate an economy devastated by crashing oil prices while simultaneously miring itself in expensive Middle Eastern and Eastern European conflicts. Russian GDP contracted 3.7 percent last year and could fall as much as 3 percent in 2016 if oil prices average $35, according to the central bank. The Russian government is largely hamstrung by budget shortfalls as almost 50% of its revenue came from crude and natural gas and Russian reserve funds are dwindling at astonishing rate as they may be exhausted within a year.

Dependence on oil is proving to be Russia’s undoing. No matter how well the economy was doing when oil prices were high, the dangers of relying on a volatile commodity like oil should have been accounted for. And, in fact, Putin made promises to implement serious reforms and diversify budget revenues only to renege on those promises. According to Time, in 1999, oil and gas accounted for less than half of Russia’s export proceeds; today they account for 68 percent. Government control of the Russian media may allow Putin’s administration to stoke the nationalism needed to maintain high approval ratings but the millions of Russians sinking into poverty as incomes fall and jobs are lost are growing restless.

A Russia ranked 119th on Berlin-based Transparency International’s corruption perception index, released in January, behind Pakistan and Tanzania. Freedom House gave the country a 6.75 on its corruption scale; 7 is “most corrupt”, while also criticizing the government for harassing opposition, stacking judicial bodies to favor personal interests, and using foreign conflict as crutch for holding power. Productivity for the country is also terribly low. The average Russian worker contributes $25.90 an hour to Russia’s GDP compared to $36.20 an hour for Greeks and $67.40 an hour for US workers. Demographic fundamentals for Russia continue to deteriorate as deaths go up and births go down. Though the “external” mortality deaths (murder, suicide, alcohol poisoning, and transport accidents) decline, deaths from all diseases besides tuberculosis are increasing. Hundreds of thousands of educated Russia’s continue to flow out the country.

The only indicator for the Russian economy that has not consistently tanked seems to be its hard currency reserves. Putin has made it clear that he will not let reserves fall for the sake of the economy saying “Gold and currency reserves are created by the central bank for other purposes, not for financing current economic problems.” Under Putin, Russian reserves now hold about $360 billion more than the $13 billion they held when he took power in 2000, and he has maintained them at such a high level by allowing volatility in its currency that other countries spend billions trying to avoid. Consumers and businesses bear the brunt of the pain produced by Putin’s strategy. Consumer prices jumped 12.9% in 2015 while businesses struggle to predict future rates, and the currency fluctuations complicate Russia’s dependence on imports to supply food, industrial equipment, and other basics.

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