While Vladimir Putin is gloating about annexing Ukraine's Crimea and setting up pro-Kremlin separatist governments in Ukraine's Donbas, the Russian president doesn’t have much to show for improving the economy for Russia's 144 million people.
Whereas the number of Russian dollar millionaires has doubled in 2013, the overall prosperity of local citizens fell by six percent in the same period, Siim Kallas, a former vice president of the European Commission and currently a professor at Estonia’s University of Tartu, wrote in EurActiv on Nov. 3.
The world’s eighth largest economy of some $2 trillion grew by a modest 0.8 percent in the second quarter year-on-year, while the International Monetary Fund doesn’t expect its growth to go beyond 0.2 percent this year and 0.5 percent next year. Russian central bank’s reserves fell to $444 billion, a four-year low. The regulator was spending up to $3 billion a week to strengthen the ruble, the Russian currency, that devalued by 25 percent this year against the U.S. dollar to hit new lows.
Moreover, economic sanctions applied by Western democracies as well as the unpredictability of Putin’s political rule has led to capital flight of over $85 billion which is two times what Russia lost last year, according to the central bank. Meanwhile, Higher School of Economics in Moscow reports that the figure is bigger and reaches $110 billion.
“Just imagine a percentage of senior-aged women (in the U.S.) who asked their relatives to transfer their pension savings in those funds that do not invest in Russia,” wrote Yakov Pappe, professor at the Higher School of Economics. ”Our authorities … simply do not see or do not want to see how dependable our country’s economy is on American senior-aged women.”
The Kremlin wants to show the world that “we’re not you, we’re different, we’re cool,” he explains.
Still, the poor state of Russia’s economy is not news. Yet it 2013, Standard & Poor’s, an assessor of state and corporate debt, reported that the Russian Federation had exhausted the potential of its current economic growth model – oil and gas production that account for 70 percent of export revenue.
With oil prices shrinking by more than 25 percent since June, reaching $85 per barrel, Russia is even in bigger trouble. A similar situation on the oil market led to the country’s full-scale default in 1998. Its oil production break-even price stands at $100 per barrel, which means that under current prices Putin will not be able to keep up his populist spending policy that includes paying relatively high salaries to those employed in the military. Some of them are deployed in Ukraine’s east in order to control the region or at least to make sure President Petro Poroshenko’s pro-European rule doesn’t get too much support in Donetsk and Luhansk oblasts.
“At the very least, we should prepare for limited debt defaults by Rosneft (state-owned oil company) and the troubled Russian banks,” wrote Kallas. “Russian society is very resilient to economic sanctions. This is a society which has for centuries accepted the loss of prosperity as part of the cost of imperial and military objectives.”
State-owned Gazprom, a gas monopoly and another major revenue earner, is more of a big corruption scheme than a business, according to Mikhail Korchemkin, head of East European Gas Analysis, a consultancy in the U.S. When Gazprom constructs a pipeline through joint projects with foreign investors, costs are approximately twice cheaper than for the pipelines that Gazprom builds on its own, which means that the share of corruption-related cash outflows might account for half the company’s expenditures.
Gazprom refused to comment on this.
Instead of promoting diversity, the Russian government supports the concentration of businesses and creation of giant conglomerates, mostly through nationalization, explains Pappe of Higher School of Economics. However, business giants are usually managed ineffeciently no matter who owns it – a state or a private investor, he adds.
Oligarchy, a toxic mix of business interests and political power, has been a life-long feature of how the Kremlin runs Russia. Boris Berezovsky, an oligarch whose wealth was reaching $3 billion by Forbes estimates, is believed to have had a critical influence on Boris Yeltsin, Russia’s president in 1991-1999. It was Berezovsky who convinced Yeltsin to pass power to Putin in early 2000, the billionaire’s skiing partner at that point, according to the Los Angeles Times and research by Peter Baker and Susan Glasser. Later, Berezovsky and Putin got in a conflict that arose out of what seemed to be purely political issues in the Russian media. In 2013, Berezovsky was found dead in his house in Berkshire, the U.K.
Meanwhile, Russian economist Rair Simonyan, who leads Switzerland’s UBS AG branch in Moscow, says the CEO of Gazprombank Andrey Akimov is a key negotiator in Putin’s circle when it involves finding a common denominator in political or business affairs.
“Andrey (Akimov) is able to maintain professional relationships with everyone in Putin’s inner circle and beyond, even though some of them won’t even talk to each other,” he told Bloomberg.
Karen Dawisha, an American political scientist, investigated the Russian president while working on her recently published book “Putin’s Kleptocracy. Who Owns Russia?” and found that Putin holds a stake in Gunvor, a Geneva-headquartered oil trader, through several proxy entities. Officially, a 44-percent stake in the company belonged to the Russian businessman Gennadiy Timchenko who sold it to a partner with a Swedish passport right before the West started introducing sanctions against Russia this year.
Moreover, Dawisha reveals that Sergey Chemezov, head of Rostech, a state-run developer of technological solutions, some of which have military applications, is involved in exporting arms through the war-torn Donbas and Odesa in southern Ukraine to Syria, a country in a factual state of civil war since 2011.
However, what looks like a highly corrupt country with a poorly functioning economy is not viewed by some of its citizens as a reason to make a pivot towards the values of a liberal market. “Care about the people is much higher in North Korea than in the U.S.,” says Denis Smirnov, 31, a Moscow-based Ph.D. student who is writing a thesis on globalization. “This is my personal view.”
The tenets of liberal freedoms, free markets and private property are nothing new, they are a product of Western propaganda, he adds.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
