The Struggles of the Russian Government – 8/9/16

Russian officials are desperately trying to fill massive holes in a national budget devastated by low oil prices.

As oil continues to hover around $45 a barrel, the Russian government is trying to balance social stability concerns with the reality of reduced oil revenues. After losing its biggest source of export income in the price collapse, Russia’s GDP contracted in 3.7% and will likely fall again this year. The Russian government initially allowed the rubble to depreciate by 60% against the dollar in 2015 at the expense of real incomes which shrank 9.5% that year; it traded citizen’s purchasing power and about half of a $90 billion reserve fund for temporary relief these last two years.

Russia can still fall back on reserves to cover this year’s deficit which many analysts estimate will be at least 4% of GDP with the rest of the reserve fund as well as a smaller fund meant to pay for pensions and the like, but since proceeds from energy accounted for about a third of budget revenues, the government will need to start making painful decisions soon.

Most recently, officials have tried a tax on road usage that has already sparked protests, as well as cutting health care and medical spending. The healthcare cuts come to a nation whose health system is already poorly ranked by the World Health Organization at 130th out of 190 nations, slightly below Brazil (125th).

Western sanctions in response to Putin’s aggression in Ukraine are also limiting Russia’s ability to borrow on the international market as banks in Europe have so far shied away from the country’s controversial bond offerings.

Putin could afford to fight wars, waste $40 billion on a Winter Olympics, and ignore the need for reforms when oil prices were over $100 a barrel. However, as the chart from Bloomberg shows, once oil prices start to dip, even Putin will acknowledge the need to introduce things like a flat income tax and reserve funds if he wants to maintain control.

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The most serious threat to his grip on Russia is the presidential election year coming up in 2018. The fall of real incomes has yet to significantly affect Putin’s popularity ratings as he shifts the public’s attention to various foreign engagements, but distraction via nationalism is a stopgap measure. If the government raises income-tax levels or increases the value-added tax to make up for revenue shortfalls at the expense of voters, then Putin’s party could face embarrassment at the polls even after his ban of most opposing groups. As illegitimate as Putin’s regime may be, a repeat of the 2011 protests denouncing blatant electoral fraud is something he will try to avoid.

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