National Security & Defense

Russia Worries About Shock Economic Scenarios

Putin at the Kremlin, December 3, 2015. (Krill Kudryavtsev/AFP/Getty)
If the price of oil doesn’t rise, the nation could see considerable unrest.

On the eve of taking full power, Stalin derided his opponents as sailors whose boat drifted aimlessly with the current. Unlike Stalin, they did not known how to take control. Stalin would have the same criticism of President Vladimir Putin, whose economy drifts helplessly with the price of oil. Despite promises of diversification, Russia is more dependent on oil today than it was when Putin took power a decade and a half back.

The Russian parliament has just approved the 2016 budget, breaking a rule that requires a three-year budget cycle because of the high degree of uncertainty about 2017–18. The key assumption of the 2016 “base budget” is an average $50 per barrel price of oil. At $50 oil, Kremlin economists project the economy will either shrink a small amount (Central Bank) or grow about half a percent (Ministry of Economic Development), and the budget deficit will come in at around 3 percent of GDP, which can be covered by reserve funds. At $50 oil, Russia can muddle through, but a real recovery will have to wait.

With the current price of Urals crude at $41 and a budget based on a price of $50, however, the Ministry of Finance must consider “more risky” but “less likely” scenarios. Russia’s budget authorities do not even bother to produce an “optimistic” scenario with oil above $50; rather, they consider the consequences of $40, $35, and $30 oil for 2016.

These scenarios are summarized in the authoritative business newspaper Vedomosti’s “The Second Wave of Crisis: The Shock Scenario for 2016 May Become the Base Case.” If the average 2016 price of oil is $40, GDP is projected to decline 1.5 percent for 2016. At $35, the economy will shrink 2 to 3 percent, real wages will fall by double digits, inflation will be 7 percent at year end, the investment collapse will continue, and unemployment will rise as businesses start shedding employees. If the oil price falls to $30, Russia will face, according to the current finance minister, “a complicated year,” and according to a former finance minister, a biblical “seven lean years.”

RELATED: Russia’s Economic Stagnation

Note that in all the below-$50-oil scenarios, 2016 will see a “second wave” of recession, falling real wages and pensions, a declining ruble, and near-double-digit inflation. Putin’s own forecasts have changed from imminent recovery to “reaching the bottom” to his latest warning, in his end-of-year press conference, to prepare for more “belt tightening.” Grandiose investment plans and even preparations for the 2018 World Cup must be shaved, not abandoned, but Russians need not worry, assured Putin, because “the Russian economy has generally overcome the crisis, or at least the peak of the crisis, not the crisis itself.” (I am hard pressed to understand what Putin means by this). Notably, most of the three hours of press-conference questions were about bread-and-butter issues of the economy.

#share#Currently, economic problems — inflation, inequality, jobs, and living standards — are Russians’ greatest worries. With 2016 expected to be a year of zero or negative growth, high inflation, and falling living standards, Putin’s United Russia party may be in for a tough time. In the September 2015 regional elections, United Russia lost a number of regional governorships, including a landslide defeat in Irkutsk. Putin’s opposition in the 2011 parliamentary elections was Russia’s decimated liberal class; his 2016 opposition will be blue-collar workers and the middle class, who have been the victims of Russia’s economic recession, inflation, and corruption.

Putin’s opposition will be his core supporters — blue-collar workers and pensioners — who have been hardest hit by economic stagnation.

The Kremlin is in the midst of its first nationwide strike, as long-haul truckers protest a new federal highway tax and the corruption associated with it. Notably, 70 percent of Muscovites favor the strikers against the government, and elements of the Communist party have come out in their support. The blue-collar truckers have been careful to label their protest as non-political. The accusations of a Russian businessman at a December session of the Moscow Economic Forum accusing the government of corruption and strangling business has gone viral on the internet as has a video on the corruption of the family of Putin’s chief prosecutor.

Putin unleashed the spending gates on the eve of the December 2011 parliamentary and March 2012 presidential elections. The outrage over election fraud was limited to Moscow’s liberals, whom Putin hastily beat into submission. The September 2016 elections will take place in a time of scarce budget resources and dwindling reserve funds. Putin’s opposition will be his core supporters — blue-collar workers and pensioners — who have been hardest hit by economic stagnation. Putin’s media can scarcely accuse them of being CIA agents or traitors.

#related#Putin still has enough tricks to keep his United Russia in the majority, but the new Russian Duma (parliament) will be comprised of parties that are invigorated by electoral support and may be more willing to stand up to Putin.

If the past is a guide to the future, Putin will embark on a new foreign pre-election venture, most likely in Ukraine, to divert attention and rev up Russian nationalism and patriotism. Perhaps this time he will learn that you cannot go to the same well that often.

— Paul Roderick Gregory is a research fellow at the Hoover Institution, Stanford University, and Cullen Professor of Economics at the University of Houston.

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