The Russian economy is contracting but not collapsing. Yet. 

At the end of 2015, per capita GDP fell to 2006 levels (in real terms) and average salaries fell to 2007 levels. If the current trends continue, these indicators will decline over the course of 2016 to 2005 and 2006 levels, respectively. 

Still, the economy has further to fall before the government runs into trouble. At the height of the financial crisis of 1999, the situation was much worse. Per capita GDP was 21 percent lower than it is today, and average salaries were 40 percent lower. The economy seemed to be one step away from ruin.

Average Russians will be able to adjust to decreasing salaries and household incomes. A reduction in the budget, however, will severely reduce access to revenue streams for elites, who are used to pocketing money from inefficient, intermediary, and corrupt enterprises.  

These elite influencers are fighting to protect their resources and will continue to oppose any and all budget cuts. As a result of pressure from influence groups, state budgetary expenditures have decreased by less than 20 percent from their peak. Over the next few years, this trend will likely result in unjustifiably large budget spending and a rising tax burden, which will inhibit economic activity overall.

The influence groups will try to offset their losses from shrinking state budget allocations by tightening their grip on state and non-state businesses, demanding higher “rent” (bribes, forced control of equity, non-market transactions of goods and services, and unfair competitive advantages). The regime’s efforts to retain the support of these groups will further slow the economy.

Thus, over the next few years we can expect the economy to contract at an increasing rate, with budget revenues falling even faster (in large part because revenues from taxes on hydrocarbon production and exports can be expected to decline). This downward spiral will likely lead to economic collapse, but definitely not for at least 3 to 4 years, the minimum amount of time it will take for the economy to contract to 1999 levels.

Why hasn’t the latest economic crisis caused social instability and undermined the regime’s approval ratings? There are several reasons.

First, for the overwhelming majority of Russians, the current crisis follows a lengthy period of economic growth. To most Russians, the fact that their quality of life is better today than it was fifteen years ago is more important than the current economic malaise. Household incomes would probably have to drop by another 30 to 40 percent (to 1999–2000 levels) to cause widespread discontent.

Second, the growth in prosperity between 2000 and 2012, much like the decline between 2014 and 2015, was very unevenly distributed. Only a small group of people experienced really significant changes to their quality of life. Just 24 percent of Russian citizens residing outside Moscow had foreign passports enabling them to travel internationally in 2015, and only 7 percent of Russians had traveled abroad at least once per year in recent years. The difference between the median and mean income in Russia is almost 40 percent, meaning that the majority of Russians make very modest wages. Less than 20 percent of Russians have savings in the bank and only 4 percent have savings denominated in a foreign currency.

Russia’s GINI coefficient, measured by the World Bank, has grown since 1990 from about 25 to over 41 and its R/P 10 ratio (the ratio of the average income of the richest 10 percent to the poorest 10 percent) is now close to 13 (the level of Swaziland and Senegal). The majority of Russian citizens did not actually notice the crisis as they did not feel the previous growth—they have little reason to protest. The growth in prosperity has been concentrated in Moscow and several other major cities. Per capita GDP in Moscow was about $35,000 in 2014 and fell to around $20,000 by the beginning of 2016. Muscovites are known for being more liberal and more determined to protest against autocracy than the rest of the Russians. However, per capita GDP is far too high to expect major social turmoil in the capital.

Third, unlike in Western democracies, there is no overt competition for power among elite groups in Russia, and opposition groups within the elite don’t openly criticize the regime through independent media or other channels. The state effectively has a monopoly on information: independent media reach less than 10 percent of the population. In contrast to developed democracies, the Russian media downplay economic problems, absolve the authorities of responsibility, and blame external factors for domestic hardships. The opposition is effectively cut off from access to capital and restricted in its ability to coordinate protests. 

In such circumstances, the majority of the population sees the Kremlin not as the reason for the current economic recession but as the central power making a relatively successful attempt to consolidate society against external enemies that seek to strangle Russia economically. Somehow, it is not hard for the Kremlin-controlled media to find proof and symptoms—Western sanctions are presented as a major instrument of destruction, causing severe harm to the Russian economy; the oil price decline is declared to be the result of an anti-Russian plot; and even the situation around Ukraine is treated as an attack on Russian foreign trade, on Russia’s ability to cooperate with a neighboring market of 45 million people, and on the traditionally close economic ties between Ukraine and Russia. Over time, economic hardships have become a reason for the increase in public support of the president and his policies, not a reason for protesting.

By:
  • Andrey Movchan