Carnegie Moscow Center
Having found itself in a lose-lose situation, the West will most probably do nothing—keeping sanctions in place and freezing the situation. The Kremlin will be happy. Russia won’t stop meddling in Ukraine or give up Crimea.
Russia faces bleak economic prospects for the next few years. It may be a case of managed decline in which the government appeases social and political demands by tapping the big reserves it accumulated during the boom years with oil and gas exports. But there is also a smaller possibility of a more serious economic breakdown or collapse.
The budget clearly illustrates its authors’ thinking. They fear popular discontent and so don’t want to risk taking unpopular steps. The regime’s main goal is short-term stability, so it keeps supporting the paternalistic governing model, which is increasingly trapped in the cycle of social spending.
The $120 million in cash found in Dmitry Zakharchenko’s sister’s home must have come from some sort of illegal business activity—likely involving the contraband market.
Trade relations between the EU and Russia will likely remain stable for many years, even as the overall volume of bilateral trade gradually contracts. The EU will grow less dependent on Russia for energy security, while Russia will become less reliant on European finance, industry, and infrastructure.
It will be nearly impossible for Russia to revive its economy through state investment in infrastructure alone. Conservative estimates suggest that Russia would have to invest 15 percent of its GDP in infrastructure annually for many years to have a significant effect on the economy.
Russia’s economy will likely contract gradually over the next three to four years and then become increasingly socialized, as the government implements price and currency controls, monopolizes foreign trade, embarks on a large-scale nationalization of private industries, and increasingly regulates salaries and consumption.
The Russian government will attempt to increase state revenues without meaningfully reforming its economic or social welfare system. Its main objective will be to preserve the stability of the regime while continuing to provide support and sources of substantial profits for elite interest groups.
The Panama Papers cannot do much damage to the reputation of Putin and his friends, and they have not exposed criminal activity by prominent Russians. But they shed light on a fundamental problem: not even elites trust Russia’s economic, legal, or political system.
As Russia enters its second year of economic malaise, elite interest groups that rely on revenue streams from the federal government continue to oppose state budget cuts. But they have successfully managed to escape responsibility for the economic crisis.