The official view is that Russia is an outstandingly successful economy temporarily derailed by a financial shock of foreign origin. Its annual economic growth in real terms averaged 7 per cent in the years during which Vladimir Putin was president (2000-08), annual real wages rose by almost 15 per cent, the federal budget was continually in surplus. Mr Putin, now prime minister, was quick to blame America for the downturn. Before the crisis hit home Dmitry Medvedev, Russia’s president, boasted in June that Russia was not part of the problem but part of the solution. Its cash-rich companies would invest abroad, Moscow would become a world financial centre, the rouble would become a reserve currency and so on.
All this turned out to be fantasy. The Russian stock market has lost 70 per cent of its value this year. The commodity prices that spearheaded its boom are now falling. The easy credit money from the west that fuelled it has now fled. Russia has failed to diversify its economy and its politics have long made investors nervous. A confrontation with reality is long overdue.
Metals, energy, and food account for 80 per cent of Russian exports. The growth of the economy in the Putin years was largely driven by the devaluation of the rouble in 1998-99 and the increase in the prices of these products: between 2000 and 2007 real prices of metals went up by 275 per cent, of energy by 210 per cent, and of food by 160 per cent. However, it is now clear that the commodity boom peaked in June-July 2008 and is in sharp reverse. Since July, the commodity price index has dropped by more than 20 per cent.
This fall has a twofold significance. First, Russia’s consumer economy has been built on the commodity economy. The great oligarchic fortunes are in oil and metals. Although domestic consumption has contributed significantly to growth in recent years, diversification away from commodities has barely started since the high price of oil strengthened the exchange rate and sucked imports into the retail sector, and oil revenues made it easier to posture as a great power. The downturn in the commodity economy will thus have a multiplied effect on the consumer economy and the Russian standard of living. Second, the government’s spending plans are based on a $70 a barrel oil price. Every one-dollar decrease in the barrel price implies $3bn less in export revenues a year. It is currently at $65, having fallen from $140 in June.
Attention has focused on the slide in Russia’s dollar-denominated benchmark RTS index. More important is over-leveraging by a few huge companies. Russia’s banking system has been a poor channeller of commodity wealth into non-energy businesses. There are too many banks; most are undercapitalised. Growth in the non-energy sectors has been fuelled by collateralised loans from western banks. Russian banks and companies have about $450bn (€362bn, £292bn) of foreign debt, $50bn of which must be repaid or refinanced by the year end. So Russian businesses are exposed to the troubled European banking system when the value of the shares they put up as collateral may have fallen below the cost of the loans, and Russian inter-bank lending is frozen by a crisis of confidence. The economist Sergei Guriev argues that the fall in commodity prices and the credit crunch have cut Russia’s annual growth potential by 2 per cent.
Despite the professionalism of the rescue mounted by the finance ministry and central bank – and the budgetary cushion provided by the stabilisation fund, brainchild of Andrei Illarionov, Mr Putin’s discarded economic adviser – Russia carries a heavy burden of political risk. This is the real economic legacy of the Putin years. Mr Putin does not understand the need for a degree of consistency between economic and foreign policy: or rather the reconciliation he has sought has been based on Russia’s energy windfall. If this has now ended, as seems likely, the key assumption of his politics – that Russia can use its energy power to boost its world power without paying much attention to the sensitivities of anyone but the Russian electorate – has been destroyed.
Russia needs to scale down its geopolitical ambition to its real weight – that of an emerging economy with only 3 per cent of the world’s gross domestic product and a quarter of America’s living standard. Also, it desperately needs to develop its human capital. The Putin era is over but Medvedev’s has not begun. This is the real Russian crisis.