With the Russian economy in freefall, rather than offering parachutes to his countrymen the Russian dictator Vladimir Putin is doling out anvils. He has the country racing full speed towards neo-Soviet collapse.
Russia posted 3.4% GDP growth in 2012, and earlier of this year the World Bank had projected economic growth for Russia of 2.3% for 2013.
That was then.
Last week, the World Bank concluded that Russian growth this year would be a stunningly anemic 1.3%, only slightly more than one-third what Russia achieved last year and just over than half what the World Bank had predicted for this year. Russia’s failing stock market is reflecting the wider economic malaise.
What’s more, the World Bank has cut projected growth for Russia in 2014 from 3.1% earlier to just 2.2% at present. If 2013 is any gauge, one can expect that projection to once again be far too optimistic, as last year’s was.
But even at 2.2%, Russia’s numbers would lag far behind the other members of the BRIC group (consisting of Brazil, Russia, India and China) of emerging economies to which Russia is routinely compared, and just as far behind the baseline levels Russia needs to sustain its giant population. China is posting growth at roughly four times Russia’s rate, and it doesn’t have to manage the world’s largest national territory, covering eleven time zones. Nor is it artificially buoyed by vast fossil fuel exports.
Disturbingly, the Putin economy is faltering even though the crude oil prices that form its bedrock have remained strong.
A county with such vast size as Russia, and such a puny economic base, simply can’t afford such anemic levels of growth. 1% economic growth in the USA, whose economic base is eight times larger than Russia’s despite having only twice as many workers, results in adding $160 billion to the economy, $500 for each American. That same level of growth in Russia produces just $20 billion, a mere $150 for each Russian. And Russia has such rampant corruption that the lion’s share of that $150 will simply be stolen rather than reaching the pockets of citizens in need.
As the Financial Times reports, Putin believes Russia faces a truly dire emergency and is taking risky steps which could make the situation much, much worse. Next year, he plans to implement startling price controls on gas, electricity and railroads. Putin is terrified, you see, that Russia could begin to experience the devastating phenomenon of “stagflation” in which prices rise out of control even as incomes are falling.
And he’s not wrong to be afraid.
The FT reports that the main reason for Russia’s calamity “is a drop-off in investment. Fixed asset investment is forecast to grow just 0.2 per cent this year.” It explains: “Many analysts say that Russia is finally paying the price for its failure to convince private investors that it will protect property rights and allow the rule of law.”
Even a first-year economics student would understand the breathtaking risk created by imposing price controls on an economy that is already in the doldroms.
The impact of imposing massive revenue reductions on Russia’s key industries to keep the heat on in Russian homes is eminently foreseeable: choking the last life out of the country’s GDP. Russia won’t be able to finance new energy exploration projects, and as the FT notes Russia is already “investing less as a proportion of its GDP than other large emerging markets.” The FT warned ominously that Russia’s “economy is now lacking the capacity to produce more even if the demand is there.”
Price controls will, in other words, cause GDP growth in Russia to come to a standstill or enter recession.
Two recent reports on Russia’s so-called “monotowns” offer vivid examples from ground zero of the Russian economy, illustrating how close Putin’s system is to unraveling.
In Newsweek, ace Russia scribe Anna Nemtsova penned a piece called “One Big Detroit.” She explains how Putin is losing control over vast swaths of the Russian heartland, where one-industry towns are faltering and collapsing one after another, like dominos. Amazingly, though, that’s not the worst news that comes out of her reporting.
She writes that her attempt to interview Russians in monotowns about their lives resulted in making the situation even worse:
When this reporter met Nina Solodayeva, a former Uralasbest security guard and her husband, Ivan Solodayev, who had stage-four lung cancer, a car with the company’s security detailed pulled up to stop the conversation taking place. Solodayeva lost her job that day.
Putin is, in other words, actually prohibiting reporting about this dark underbelly of the Russian economy, in the manner of the Politburo seeking to sweep the problem under the carpet rather than address it. That can only lead to the most bleak of imaginable consequences, and it can only explained by Putin’s fear that if the truth were known his government would collapse.
According to two Russian analysts, the situation with Russia’s “monotowns” is hopeless. They believe that only a transition to a diverse system of small business economics could have any chance of success, but Putin’s Russia totally lacks the willingness to permit the type of pluralism this would require.
These aren’t the only ways in which Putin’s Russia more and more resembles Brezhnev’s USSR. Putin is also hell bent on massively increasing Russian military spending, thus provoking a new cold war with the West. Having successfully crushed his political opposition by jailing both of his main rivals (Alexei Navalny and Mikhail Khodorkovsky), Putin apparently now feels he can get away with taking bread out of Russian mouths in order to build guns he can waive at the USA.