Friday, October 2, 2015

Foundations that allowed Putin to rise to power are quietly crumbling.


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Vladimir Putin’s Fierce Bark Isn’t Backed Up by Russia’s Feeble Economic Bite

Vladimir Putin’s Fierce Bark Isn’t Backed Up by Russia’s Feeble Economic Bite Russian President Vladimir Putin used the United Nations General Assembly meeting to flex his muscles on Syria, justifying his military buildup there by blaming the United States for failing to stanch the crisis. The Kremlin’s strongman also refused to back down on Ukraine, where he has annexed Crimea and where his troops remain active, despite the continued bite of Western economic sanctions. But the former KGB agent’s bluster ignores an underlying key fact that ultimately threatens his might on both fronts: The Russian economy is anemic, and indicators show it could remain that way for a long time.
Putin is facing a perfect storm of bad financial news. His economy continues to suffer under the weight of Western penalties imposed for his actions in Ukraine. The price of oil, a lifeblood of Moscow’s economic engine and already at historic lows, won’t go back up until the market makes its way through millions of barrels of oversupply. All of this has sent the value of Russia’s currency, the ruble, down 44 percent against the U.S. dollar in the last year, leading to a spike in inflation.
“The pressure is on,” Tina Fordham, Citigroup chief global political analyst, said on Bloomberg television last week. “The currency is weakened. Oil prices are looking soft, probably for a long time. The multiplier effect of these two things happening at the same time is significant.”
With the value of their currency depressed, Russian companies and regional governments are stuck with billions of dollars in debt they’re struggling to pay. Add growing doubts that the Arctic will yield an oil windfall Russian oil companies desperately need to fulfill future promises, and Russia’s economic future is looking increasingly blighted.
All of this comes as Putin, who depends on an estimated $366 billion in reserves to remain financially afloat, launches ambitious plans in an effort to end the civil war in Syria and combat Islamic extremism. On Wednesday, Moscow launched its first airstrikes in the campaign against the Islamic State; those same attacks are also meant to keep Syrian President Bashar al-Assad in power.
Russia’s economic woes were especially acute last year when Putin invaded Ukraine. As the chart below shows, the 2014 drop in Russian GDP coincides with the start of the war along its border with Ukraine. The World Bank projects Russia’s economy will shrink by 3.8 percent this year and only moderately rebound in 2016. In August, the country’s Federal State Statistics Service announced its economy shrank 4.6 percent in the second quarter compared with the same period the year before. It’s the largest drop since 2009.

The decline in Russian GDP, combined with Western sanctions that forbid firms from doing business there while limiting Russian access to international capital markets, and a weak ruble, has put the squeeze on companies. According to Bloomberg, Russian businesses sold off $564 million in foreign-currency bonds in 2014, down from $42 billion in 2013, before the sanctions took hold.
This has forced Russia to get creative on where it gets the money to pay back what it owes. In 2014, ahead of this year, in which Russian firms owed an estimated $120 billion to creditors, the Russian Central Bank launched a $50 billion program to lend companies U.S. dollars at a steep discount to keep up.
Others have turned east, to China. Earlier this year, Gazprombank, Russia’s third-largest lender, applied to offer debt in Hong Kong in hopes it could scrounge up some cash there. Russia’s finance minister, Anton Siluanov, said in July that Chinese firms helped Russian companies raise more than 1 billion rubles.
It’s not just companies that are feeling the pinch; regional governments are as well. In 2012, after he was inaugurated as president, Putin announced the so-called “May Orders,” guidelines in a social and economic welfare program meant to raise Russian salaries, improve social service programs, and raise life expectancy to 74 by 2018; right now, the average Russian man lives to 66, according to the World Bank.
The May Orders are widely popular and have only served to grow Putin’s broad Russian base; nearly nine out of 10 Russians have a positive view of their president, according to Levada Center polling. But they are also expensive.
Regional governments were forced to borrow to pay for them. Now, Chukotka, the territory separated from Alaska by the Bering Strait, has a debt-to-revenue ratio of 144 percent. More than 80 Russian regions must come up with $42 billion this year to pay back what they owe in the coming years. According to the Moscow Times, $7 billion is due this year alone.
Christopher Miller, a fellow at the Transatlantic Academy who has written extensively on the Russian economy, said cutbacks on social welfare programs are inevitable.
“When you add up the effects of these wage cuts and pensions, you have dissatisfaction from the middle and working classes,” Miller told Foreign Policy this week. Additionally, he said, cuts to benefits, combined with the economic slowdown, could sow discontent among those who support Putin for his bombast, not his finance policies.
But Miller said the bigger threat was widespread economic stagnation and income inequality. According to the Credit Suisse Global Wealth Report for 2013, 110 Russian billionaires — the oligarchs that form Putin’s power base — control 35 percent of the wealth in a country of more than 142 million people.
Equally troubling for Russia’s long-term economic outlook is a lack of interest from foreign firms. In 2014, as the civil war in Ukraine raged, just four European nations — Britain, Italy, Ireland, and the Netherlands — increased the amount of money invested in Russia. Direct investment from Germany, Europe’s largest economy, was down nearly 50 percent.
Miller said Ukraine isn’t the only reason foreign companies have problems with Russia.
“Internal governance, the rule of law, getting court decisions done quickly, lack of property rights: All the things that make business easy to do, Russia’s doing poorly on,” Miller said.
This is evident in the chart below. It shows a clear downward trend in the amount of money foreign firms are reinvesting back into Russia, regarding profits made in the country. Since 2012, it has been trending down, with 2015 on pace to be the worst year since 2009, when the Great Recession was at its peak.
“The biggest problem that Russia faces is stagnation,” Miller said. “They’re going to be in recession this year; there’s a good chance they’re going to be [in recession] next year. And the three- to five-year timeline isn’t looking promising.”
Photo credit: Steve Sands/Getty Images
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Vladimir Putin’s Fierce Bark Isn’t Backed Up by Russia’s Feeble Economic Bite

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