The glow of geopolitical glory no longer disguises economic problems
The twin shocks of falling oil prices and western sanctions were mitigated to a certain extent by prudent economic policy on the part of the finance ministry and central bank and Russia returned to modest growth in 2017. After hitting 16% in 2015, inflation has been brought down to 2.5%, a historic low for the post-Soviet period. Budget deficits are at manageable levels. Ratings agencies recently upgraded Russia's sovereign bonds from junk status. A new fiscal rule decrees that any revenues gained from oil prices over $40 per barrel will be set aside to boost reserves depleted in recent years.
Macroeconomic stability alone is not enough to spur new growth, however, and the glow of geopolitical glory is no longer keeping economic concerns at bay. "Macroeconomics is like a stoplight, and ours has turned green," says Head of the Economic Expert Group Evsey Gurvich, who is also a member of the Economic Council under the President of the Russian Federation. "But a green light isn't enough to generate movement – you still need an engine." Without significant reform, the World Bank reckons that growth will hover around 1.8% in the coming years, far behind world averages and trailing even developed Eurozone economies. "We have entered a third phase in our post-Soviet development," says Evgeniy Yasin, former minister of the economy and an architect behind Russia's transition to a market economy. Following the "transformational crisis" during the 19 90s and the "restorative growth" of the 2000s, Russia has now entered what Yasin simply calls "stagnation."
Russia's main problem is Russia – structural and institutional
Putin tasked his advisors with drawing up plans to boost the economy in the run-up to the election. "[He] is thinking about what state he will leave the country in," says one senior official. The efforts have been centered around former Minister of Finance Alexei Kudrin at the Center for Strategic Research, who himself has said: "The main problems lie within Russia and they are structural and institutional." Years of underinvestment in human capital has left Russia overreliant on natural resources; predatory government officials cast a pall over the business climate; confrontation with the West has made investment and technology harder to secure; and, most crucially, the state has come to play an outsized role in the economy again, stifling innovation and competition. The share of Russians' income from social payments has risen from 13.9% to 19.8% since 2000, while the share coming from entrepreneurial income has halved, from 15.2% to just 7.6%.
Even the country's own anti-monopoly service believes the state's share of the GDP to have risen from 35% to 70% over the past decade alone, an outsized presence extending beyond its traditional purview: natural resources. Take the case of Sergei Galitsky, who rose from humble roots to become a billionaire by building his grocery chain Magnit into Russia's largest retail network with more than 16,000 stores. Galitsky was praised as a visionary for building a sophisticated logistics system that allowed Magnit to operate in far-flung towns and small cities that large retailers typically ignored; some called him Russia's Sam Walton. When he looked to cash out early this year, the buyer he found was not another private entrepreneur. It was, tellingly, VTB, a state-run bank.