Russia’s Economy and Implications for Russia’s Future

**Though slightly dated, these meeting notes were included for an added Arctic-element on the economic and geopolitical implications of low oil prices.


CSIS held an event on the present and future state of Russia’s economy, which is currently in serious trouble.  Vladislav Inozemstev, Visiting Fellow at CSIS, assessed the ways in which Russia’s economy might evolve and the implications of these changes for Russian policy and stability over the next decade.


He began by setting the scene of Russia’s recent economic history:  for roughly a decade, beginning in the 1990’s, Russia experienced record growth. But, this growth started to taper off in 2008. The fall of oil prices, deterioration of the business climate, and economic sanctions were the main contributing factors.


He stated that through 2008 to 2015, sanctions played only a minor role; it was primarily the fall in oil prices and President Putin’s strategies that contributed to the failing economy.  These two factors have such a large effect on the economy that even the lifting of western sanctions could not save it.


This is because Russia’s previous trading partners wouldn’t necessarily want to resume trade relations, and the European banks that imposed financial sanctions would not likely resume lending to Russia as Russian banks are failing.  Furthermore, the sanctions to the oil and gas industry were targeted at northern oil explorations that would only be profitable if oil was $80 to $90/barrel. In the current low oil price environment, there is no demand for the shipment of this type of equipment to Russia.


Assuming that the biggest problem in Russia is its own government, we should be prepared for a prolonged slowdown with the economy continuing to shrink by 2-3% a year.


In the first eight years of his presidency, Putin’s policies did bring about more order to the Russian economy by adding new rules of law, a slight decrease in taxation, coupled with rising oil prices.


From 2008 through 2014, the average annual growth rate was less than 0.5%. This is attributed to a slump in the price of oil along with a disproportionate amount of government funding for projects that would not pay off or deliver any lasting financial benefits.


Because Putin’s policies, which focus on foreign policy and geopolitics instead of the economy, will not likely change, we should continue to see a downward trend over the next several years.  There are also no clear potential sources for growth in 2016. The next question is how long the Russian people and businesses will be able to tolerate the economic downturn. The Russian public is already somewhat prepared from previous experience with economic hardship.


The Russian people generally do not recognize Putin’s role in the poor economic situation the country is experiencing.  They see falling economic conditions largely as a result of sinking oil prices, something the president has little control over.  Furthermore, the people don’t typically attribute economic hardship from sanctions to Putin’s policies, even though most of the damage done by sanctions is from internal sanctions imposed by the Russian government itself.


Because the majority of Russians do not see the harm internal sanctions have on the economy, social upheaval is very unlikely, even in economic crisis. Furthermore, there are fewer tendencies in Russia to organize and participate in large group protests. There are occasional group protests for specific disputes, such as doctor or teacher wages, but the government has been effective at solving these problems.


For the past several years, the Russian government has been dipping into international reserves for short term stabilization and going further to devalue the ruble. Even with an increase in oil prices, Russian government prices will also rise, and it will not help the Russian economy. The price of oil will need to get all the way to $120-140/barrel to liberalize the deficit.