Carnegie Moscow Center

In the autumn of 2009, 18 months after his inauguration, Russian President Dmitry Medvedev put forward a thesis about the need for the modernization of Russia. The word ‘modernization’ may best encapsulate what Russia needs to do to address all the problems it faces today and will face for the next decade. This huge country needs to escape from its semi-archaic state, in which elements of the nineteenth, twentieth and twenty-first centuries are curiously intertwined. Russia needs to become a country moving confidently along with the flow of global evolution. The basic danger is that it may lag behind other countries, get stuck in a bog of obsolete values and find itself on the periphery of the modern world.

Though the next presidential election in Russia is scheduled for the beginning of March 2012, its outcome is already clear to everyone: Vladimir Putin will return to the Kremlin. The only question is whether he will stay there for six or twelve years—or maybe even longer. In contrast to his first arrival in the Kremlin in 1999, when he inherited a dynamic economy on the rise after the difficult transition years of the 1990s and public finances that had stabilized after the crisis of 1998, this time around Vladimir Putin will see a very different picture. The economy has lost its momentum and is approaching stagnation. The oil and gas revenues that for several years guaranteed macroeconomic stability now appear insufficient as oil prices stop rising. Moreover, new macro shocks are visible on the horizon. The budget is still balanced, but if all the decisions on expenditure that have been made are implemented, future imbalances will inevitably result. The country’s population is gradually ageing, and in the decades ahead Russia will face a sharp decline in its labour force. A dominant culture of bureaucracy and corruption, and a lack of independent judicial protection for property rights, have deterred foreign direct investment, exacerbating the country’s technological backwardness.

There are solutions to these problems. Many countries have faced them and have found ways and means to overcome them. But history provides no guarantee that Russia during Vladimir Putin’s next presidential term can find adequate answers to the challenges it faces. The new/old Russian President cannot point to a reassuring track record in economic policy. His team is stagnating: it has not attracted newcomers for a long time, and existing essential staff, it seems, have exhausted their mental potential and political will to undertake reforms. All politicians know that the initiation of any reform (unless the situation is so severe that the necessity of change is recognized by the whole of society) leads to a decline in popularity that in democratic countries may result in electoral defeat, and in authoritarian countries may undermine the stability of power structures. Thus Putin’s desire (and the desire of those closest to him) to keep power in their own hands indefinitely is the main obstacle to any reform measures in Russia, to any rational decisions in the field of economic policy, and to real modernization of the country.

This article considers the role of Russia in the world economy and its slow recovery from the deep recession of. It examines the economic challenges facing the country over Putin’s next presidential term, with particular focus on demographics, dependence on the oil price, and the impact of that dependence on monetary policy, the budget and the balance of payments.

This article first appeared in International Affairs (London), Volume 88, Number 1, January 2012, pp. 31-48, and is reproduced with permission.