Carnegie Moscow Center
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.
The Russian budget won’t be saved by the new round of privatizations announced by the Russian government. What’s more important is how they set out the rules of behavior in the Russian elite.
External factors are having little impact on the health of the Russian economy. Sanctions and counter-sanctions are not a big factor either. An effort to make Russia self-sufficient and rely on import substitution poses a much bigger danger.
Whether Russia’s foreign policy achieves its objectives depends primarily on the success or failure of the country’s economic relaunch.
Lack of investment, a deficit of trust of the private sector in the government, and a drain of migrant workers and professionals make it much harder for Russia to recover from its current economic malaise.