Outside a currency exchange office in Moscow, November 2014. (Vasily Maximov/AFP/Getty)

Since the beginning of hostilities in Ukraine in February 2014, Vladimir Putin has assured the Russian people that any resulting economic hardship would be short and mild. Even after energy prices slumped, sanctions were imposed, and the economy weakened, Putin optimistically pointed to “signs of recovery,” to “declining dependence on oil,” and insisted that sanctions were not a burden but an opportunity. Russia’s premier, Dmitry Medvedev, assured the people that the government would “fulfill its social obligations [pensions and health care] in full.” Putin praised the Kremlin’s economic Houdinis for showing the West that its “economic sanctions are having no effect.”


All of this official optimism proved wrong. The Russian economy faces low growth at best and prolonged stagnation at worst. The outcome does not depend on oil prices and sanctions alone but also on more deeply rooted problems. Although some reckon that prolonged stagnation would bring Putin down, his repressive system shields him from economic mismanagement and from the costs of political adventurism, for which the Russian people are paying through lower living standards.

The Statistical Record


As 2015 clocks in with a 4 percent GDP contraction and a decline in living standards twice as large, the Kremlin no longer argues that recovery is nigh. Instead, it declares the economy has hit bottom, although the conditions that set off the contraction remain (many were present before Ukraine). The Kremlin has replaced its optimistic 2016 forecast with projections of zero or near-zero growth, and independent forecasters agree. These depressing figures may prove to be on the high end. I stick with my conclusion from last May: “Unlike 2008/9, there are no signs of sources of recovery on the horizon. Russia must learn to live with negative growth for the near future.”

The quarterly GDP figures from the Russian Statistical Agency (Rosstat) are the most closely monitored indicators of Russian economic performance. Figure 1 shows Rosstat’s GDP growth rates (quarter to previous year’s quarter) from 2010 to the present. I use conservative adjustments for the inclusion of Crimea in 2014, and the chart begins in 2010, the year the Russian economy began its recovery from the 2008–9 financial crisis. Figure 1 also charts two measures of living standards: the growth of personal consumption and wages, both adjusted for inflation.

Figure 1 shows no signs of the imminent recovery earlier promised by the Kremlin. Instead, the pattern is one of deteriorating performance of GDP dating all the way back to 2012. Of the twelve quarters in 2013 through 2015, two are essentially zero and six are negative — a sad performance for an economy that joined BRICS (Brazil, Russia, India, China, and South Africa) in 2006 on the basis of its rapid growth.

Figure 1 reveals that Russia began the period with healthy growth of personal consumption and of real wages. These welfare measures started to decline in 2013 (notably after Putin’s reelection) before falling 9 percent in 2015. Living standards declined at twice the pace of the overall economy. Russian consumers, workers, and pensioners have been most affected by the economic decline; defense spending, propaganda, and government employment have been largely spared.

Table 1 provides a sense of what the Russian population is experiencing on the ground. It faces high inflation, falling consumption, declining government support of education and health care, and the government’s reneging on the indexation of pensions. Russians have had to cut back on the small luxuries of life, such as buying imported goods and foreign travel. They are now limited to charter flights to low-cost tourist destinations, such as Egyptian seaside resorts.

Sources: Real wages: “Trends in Average Monthly Nominal and Real Gross Wages,” Russian Federal State Statistics Service, updated Oct 30, 2015; Real government spending: “Commentary on the State and Business,” National Research University, Graduate School of Economics, Sept 23–Oct 15, 2015; Inflation: Consumer Price Indices for the Russian Federation, 1991–2015, Russian Federal State Statistics Service, Updated Nov 6, 2015; Foreign travel: Alexeï Lossan, “Sharp Decline among Russians Travelling Abroad,” Russia and India Report, June 10, 2015




The Changing Kremlin Narrative: From Signs of Recovery to Reaching the Bottom

The story of the Kremlin’s loss of confidence in its “signs of recovery” can be seem from its official forecasts prepared by the Ministry of Economic Development. The first variant, issued in May 2015, shortly after Putin’s upbeat assessment, optimistically projected 2016 GDP growth at 2.3 percent (versus –4 percent for 2015), investment growth at 3.1 percent (versus –1 percent for 2015), and retail-trade growth at 1.5 percent (versus –9 percent for 2015). Although these projected 2016 growth rates were modest, they represented an astonishing turnaround to growth from deep contraction.

Between May and October 2015, Russia’s economic gurus moved from a prognosis of modest expansion to one of near-zero growth. The forecast of GDP growth rate was reduced from 2.3 to 0.7 percent. Investment was predicted to fall by 1.6 percent rather than grow by 3.1 percent. With the bad investment climate, it was predicted that business would delay acquiring plant and equipment until 2017. Retail trade offered somewhat better news — at least it was rising, by a half a percent, not falling like everything else.

A clearly frustrated Prime Minister Medvedev expressed exasperation over such drastic changes-for-the-worse forecasts: “Everyone is complaining about forecasts, but you try to forecast in the circumstances of such volatility.” Medvedev was stating the obvious: that the Russian government itself has little idea what future growth will be. International organizations, banks, and Russian agencies downgraded their growth projections as well, announced by headlines such as “World Bank Lowers Its Forecast of Russian Growth,” “IMF Downgrades Its Prognosis for the Russian Economy,” and “Morgan Stanley Refuses to Support the Optimism of Russia Authorities.”

Table 2 summarizes the latest forecasts for 2016 and 2017. They agree that the Russian economy will remain at basically zero growth for at least another year and that the modest growth thereafter will not dent the losses of the three-year slump. The one note of optimism is that the death spiral is over. The headline from a government publication of September 30 captures the somber mood: “The Government of Russia Hopes for Economic Growth in 2016 Despite Forecasts.”

Sources: Bank of Russia1, Bank of Russia2, World Bank, IMF, Higher School of Economics, Standard & Poor, Morgan Stanley, Ministry of Economic Development1, Ministry of Economic Development2, Citibank.

As the official forecasts worsened, the Kremlin’s language turned from “recovery” to “hitting the bottom” or to the awkward “reaching the peak of the crisis.” In his declaration at an October 14 economic forum, Putin assured his audience that “some specialists consider, and I agree with them, that the peak of the crisis, on the whole, we can say, has been reached, and the Russian economy, on the whole, has adapted or is confidently adapting to the changing circumstances of economic life” (my italic).

Putin continues his search for signs of recovery. Speaking optimistically of the third quarter of 2015, he declared that capital was returning on its own and that Russia was a great place to invest. This favorable turn of events, Putin modestly declared, was due to the “high level of responsibility, determination, and stability of our economic team.” (It turned out that the “return of capital” was a blip.)

The consensus appears to be that 2016 will see virtually no growth in the Russian economy and that 2017 will see feeble growth at best.

The disappointing October forecasts formed the foundation of the revenue projections of the 2016 budget. Medvedev reported that federal budget expenditures could rise only 3 percent in nominal terms, and the federal deficit would reach the 3 percent of GDP upper limit, slightly above the finance ministry’s reserve fund balance. Russia’s finance minister, Anton Siluanov, declared that Russia would soon exhaust its reserve funds: “2016 is the last year when we are able to spend our reserves in this way. . . . After that, we will not have such resources.” (Russia also has a National Welfare Fund, part of which may be available to tide the economy over until 2017.)

From the vantage point of November 2015, the consensus appears to be that 2016 will see virtually no growth and that 2017 will see feeble growth at best. The Russian government seems to have abandoned the “resumption of growth” scenario in favor of the “hitting the bottom” scenario. As the budget discussions reveal, a Russian economy that limps along at the bottom faces extremely tough budget decisions. The economy isn’t robust enough to keep living standards steady or to increase spending on defense and social welfare. The forecasts indicated in table 2 may not make the Kremlin happy, but at least they suggest that the economy’s death spiral has ceased spinning.


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Is the Worst Yet to Come?

We should ask why the consensus prevails that the bottom has been reached from which a recovery will begin. After all, most of the problems said to cause the contraction still plague the economy. The low oil prices and sanctions are not going away soon. Russia continues its inflationary import boycott. Tight budgets squeeze government employees and pensioners and hence consumption. The weak domestic capital market cannot supply investment finance. Sanctions restrict the flow of advanced technologies essential to a recovery in the Russian energy sector. Policy uncertainty weakens capital spending. Inflation will remain high.

Kremlin planners continue to hope for a miracle — a robust world economy, higher oil prices, and a divided Europe lifting sanctions.

Kremlin planners have no plan. They continue to hope for a miracle — a robust world economy, higher oil prices, and a divided Europe lifting sanctions. They spin tales of improving consumer demand despite a decline in real wages, wage freezes for government employees (20 percent of the total), falling real pensions for Russia’s 40 million pensioners, and uncertainty about retirement funds.

We lack international experience to predict how long a contraction induced by low oil prices, credit freezes, and restrictions on technology should endure in a petro state like Russia, where half of state revenue comes from energy. We do know that the Kremlin has ignored the World Bank’s advice to reduce reliance on oil exports, cut back on employment in the public sector, and develop a private sector that makes market-oriented business decisions. They are reaching instead into their old bag of tricks to raise energy taxes, which will speed the collapse of production.


Almost 70 percent of the Russian middle class works for the state and opts out of careers in business. Although Putin praises “adaptation” to low oil prices, Russia remains isolated from energy technology. Despite a decade of promises, the economy and the budget are even more dependent on petro dollars now than before. The middle class, on which diversification depends, is fast disappearing. Every second resident of Moscow and Petersburg knows someone who has moved abroad, and up to one in five Russian would like to leave.

#related#We should not expect an automatic return to higher growth if oil prices recover and sanctions are removed. Figure 1 dates the beginning of the collapse of growth to early 2012, when oil prices were above $100. The removal of sanctions will not dispel concerns that Putin will embark on yet another international adventure. As long as corruption drives up investment costs and distorts capital spending, Russia’s major companies will be grossly undervalued relative to their potential. As long as the leadership can arbitrarily confiscate their assets, oligarchs and wealthy Russians will purchase foreign real estate and paper assets instead of building their businesses. (For further discussion of these points, see the Center for Strategic and International Studies panel of Russian experts.)


In the face of these negative factors and obstacles, prolonged stagnation is as likely a scenario as is the consensus that the Russian economy will resume modest growth in 2017. Owing to the qualitative nature of these growth-inhibiting factors, we cannot project future economic performance, other than to say it will not be a pretty picture.

Will the Russian Economy Tame Putin (Or Worse)?

Putin approached his 2012 election to a third term as would a traditional politician. Shaken by massive street protests, he promised, among other things, higher wages and pensions, baby bonuses, and capped utility rates. He reminded Russians that he had given them growth: If they would stick with him, he said, they would be prosperous, safe, and secure. Putin has broken his pledges. Although his propaganda machine churns at full speed to divert attention from the economy, some 61 percent of Russians now expect an economic crisis.

Will the Russian people, sooner or later, hold Putin to account for, to use Barack Obama’s characterization, “running the economy into the ground”? Bad economies rarely bring down repressive regimes such as those in Russia, Cuba, Venezuela, Zimbabwe, and North Korea. Those looking for economic weakness to unseat Putin may have a long wait. We do not know the limits to Putin’s balancing act of trading off political “victories,” such as Crimean annexation and perhaps now in the Middle East, for worsening economic performance. Can he continue to blame foreign enemies for Russia’s economic woes? What will happen if his Syrian adventure brings home body bags instead of a new humiliation of the evil West?