全球智库信息集成服务系统

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. A proper analysis requires consideration of a number of key and often overlooked features of Russia’s post-Soviet economy.

The Post-Soviet Economy

• By the late 1980s, the Soviet economy had become completely dysfunctional due to internal imbalances and rigid management required by the command economy and the socialist property system. Yet Russia also inherited a Soviet legacy that included well-developed infrastructure, a large number of ineffective but functioning industrial assets, and enormous mineral deposits.
• Since 1991, the economic system has undergone rapid changes, but democratic institutions have never emerged.
  
  Andrey Movchan

  Movchan is a nonresident scholar in the Economic Policy Program at the Carnegie Moscow Center.

  More >
• More recently, high revenues from hydrocarbon exports together with massive subsidies for domestic energy consumers have hurt other sections of Russia’s economy. Since oil prices have fallen, the country has been plunged into relative economic isolation.
• External factors—primarily Western economic sanctions—are secondary and insignificant and have little impact on the economy, although the Russian regime is actively exploiting them to justify current economic hardships.

Key Conclusions and Projections

• There is no reason to expect any serious surprises in the Russian economy in 2017, of either a positive or a negative kind. A baseline scenario does not anticipate economic catastrophe or radical social upheaval.
• The weakest link in Russia’s economy over the next few years will be the banking system. But other vulnerable parts of the system could also experience catastrophic changes.
• The Russian government has chosen not to tackle economic challenges by reforming the economy. Instead, it has focused on maintaining the budget deficit at its current level in the short term, in part at the expense of long-term development. The government’s main strategy is to raise tax revenues and cut public spending.
• The government might significantly loosen its monetary policy and cut off capital flow abroad. In this case, foreign currency transactions will be restricted and price controls will be imposed. But this will certainly not happen before the 2018 presidential elections.
• Judging by the current state of public opinion, future changes are likely to include stricter political control, further nationalization of private property, further shutting down the economic space, and new processes that make economic transactions in the country less sophisticated and more inefficient.

Some Preliminary Caution: Can We Believe What We Are Seeing?

Any quantitative analysis of the state of Russia’s economy is limited by the unreliability of measurement methodologies and the accuracy of available data. Pre-1991 economic indicators are hardly any use as statistical methods employed in that era were completely different from modern ones. They measured an artificially valued currency and operated within a price-controlled economy.^[1] Statistics did improve after 1991, but there are still serious question marks about their validity.

An additional analytical complication is the issue of how much Russia’s large shadow economy contributes to its gross domestic product (GDP). The statistics are skewed first of all by the existence of off-the-book wage earnings and other unofficial revenues. The practice of artificial pricing by inflating the costs of government contracts also distorts data. For instance, price inflation for construction contracts has ranged from 20 to 50 percent,^[2] while contracts for complex technological and consumer equipment have amounted to up to 200 percent of the real price.^[3] This scheme was exposed by an investigation into the enormous bribes received by government officials for importing medical technology into Russia. There is also a widespread practice of lowering prices for imported goods so as to avoid paying lower import tariffs. (For example, there was a gap of $10 million, or 0.5 percent of GDP, between Russia’s calculations of imports from China and China’s calculation of the scale of its exports to Russia.^[4])

In the same fashion, businessmen declare lower prices for services so as to reduce the amount of value-added tax (VAT) they pay, and prices for export goods are artificially reduced so as to declare lower revenues and avoid paying income taxes. Shadow business comprised 10 percent of the Russian economy in 2013–2014^[5]—a significant drop from the 1990s, when, according to some estimates, unofficial businesses actually outnumbered officially registered ones. It is far from clear, however, how official statistics measure numbers for the shadow sector (private payments for services, outdoor markets, home businesses, illegal energy consumption, and so on) The governmental statistics agency, Rosstat, reportedly overhauled its calculation methodology in 2014 and significantly increased its estimate of the share of informal businesses in the GDP.^[6] Thanks to this adjustment and the inclusion of the economy of Crimea in the calculations, Russian GDP actually grew in 2014, albeit by less than 1 percent.^[7]

It is also hard to obtain accurate data on Russia’s median household incomes, whether total numbers or industry- and region-specific ones. Russia has prohibitively high payroll taxes even for the lowest income levels, which is why many salary payments are disguised as other financial transactions or made off the books.^[8] In 2014 more than 80 percent of retail transactions were done in cash, while 30 percent of the population did not own an ATM card.^[9] The amount of cash rubles in circulation has grown more than forty-five times in the past fifteen years.^[10]

The distribution of household income is skewed by the wide-scale practice of fictitious employment of citizens from economically depressed regions, where it’s impossible to find real work for cash. Here, state officials formally hire unemployed people but do not give them work, and pay them minimal amounts (of around $10–20 per month) for participation in the scheme, thus allowing the officials to pocket most of their salaries. This scam is especially common in the municipal sector but also affects other state-controlled services and some federal organizations.

Secrecy is another factor. It is difficult to give accurate figures on Russia’s budget spending when more than 30 percent of it is classified as secret.^[11] It is generally believed that the classified items in the budget are used to finance the military-industrial complex and security agencies, but there is indirect evidence suggesting that these funds have many other uses as well. They may range from financing the “friends of Russia” abroad to closing gaps in the balances of state-controlled companies and allowing top officials to make personal purchases.

Even the exact size of Russian government reserves is hard to estimate. Even though the full amount is made public, many items are not transparent, and some of them, such as, for example, money transferred to Vneshekonombank, are likely to be bad debts with little probability of recovery.

The question of which units to choose for reporting poses another problem. From 2000 to 2015, the real U.S. dollar to Russian ruble exchange rate was fluctuating in a range between 140 and 60 percent of the inflation-adjusted exchange rate (see figure 1). If Russia’s 2013 GDP were converted into dollars based on the inflation-adjusted exchange rate rather than the real rate, it would come to no more than $1.4 trillion instead of the official figure of $2.1 trillion.^[12] An analytical study of the Russian economy suggests that this volatility in the ruble’s rate is due to a dramatic overestimation of the Russian GDP in 2005–2013, rather than a steep decline in 2015–2016.

An even bigger problem arises when applying purchasing power parity (PPP) estimates to Russia’s economic indicators. Prices in Russia are greatly distorted (for example, fuel prices are heavily subsidized and still are quite close to those in the United States, utilities’ and state services’ prices are very low, while some food items are more expensive than in Europe). Social stratification in Russia is so pronounced that consumer baskets look totally different for varying social groups and regions. The official PPP level, which exceeds 300 percent,^[13] does not properly reflect either relative price levels in Russia or the cost of living—not to mention the very different components that constitute a GDP rating. As well as other obvious reasons for this phenomenon, imports that come mostly from the European Union (EU) account for at least 50 percent of Russians’ personal consumption, while the import share of industrial consumption is even higher.^[14] In an analysis of the Russian economy, which can only be as accurate as the data it relies on, all these quantitative flaws must be taken into account.

A Booming Gas Station—Russia’s Economy After 2000

In the last fifteen to sixteen years, the Russian economy has undergone a classic resource cycle and Dutch disease caused by a big influx of oil and gas revenues.

Russia’s political system, lacking strong checks and balances, exacerbated these economic distortions. By the time Russian President Vladimir Putin took power in 2000, the majority of key assets were owned either by the state or by a small group of private individuals,^[15] who had obtained these assets from the state in return for political obedience and loyalty. After the constitutional crisis and violence of 1993, the president and the Kremlin administration had appropriated almost all power to themselves. Parliament played an advisory role at best, while parliamentary parties swore loyalty to the president in exchange for economic rewards. An independent judiciary had not emerged, and the country’s laws remained archaic, contradictory, and ineffective. As a result, there was no real legal protection of property and investments and no remedies against ever-changing legislation and invasive state action.

The country went through an internal debt default and a 600-percent devaluation of its currency against the U.S. dollar caused by unreasonable budget spending and a dramatic decrease in budget revenues due to the fall of oil prices in the early 1990s, as well as low tax collection and dramatic capital outflows.^[16] Amid this critical situation, the public demanded the continuation of reforms and was supported by the government, which saw no other way out of the economic crisis. But the spike in oil prices in the early 2000s allowed the government to take another tack. A rapid increase in budget revenues and skyrocketing profits in the oil-and-gas sector allowed the government to abandon the path of expanding the tax base through reforms. The public enjoyed better living conditions thanks to oil revenues—but both investors and ordinary people wrongly attributed the new prosperity to correct and efficient government policies.

At the same time, the ruling regime aimed and succeeded at gaining back full control of the oil exploration and trading business (which had been lost during privatization in the mid-1990s), after it arrested the rebellious oligarch Mikhail Khodorkovsky in 2003, nationalized his Yukos oil company, and ensured all other oligarchs got the message and would obey. The regime gradually consolidated its indirect control over the hydrocarbon industry and banking, and, by extension, over the country’s entire economic sphere. Simultaneously, the Kremlin effectively consolidated all major media under its full ideological control after it sent the two main media tycoons into exile. This had a negative impact on the development of any non-oil-related business, made economic and budgetary choices less efficient, and deterred investment.

By 2008, 65 to 70 percent of the Russian budget effectively either directly or indirectly consisted of hydrocarbon export revenues.^[17] Changes in GDP, budget revenues, and state reserves have had a 90–95 percent correlation rate with oil prices (see figures 2, 3, 4.1, and 4.2). The massive influx of petrodollars into the Russian economy also led to a strong overvaluation of the ruble. In 2006–2007, its real exchange rate exceeded the inflation-adjusted rate by over 35 percent.^[18]

Three negative factors most influenced Russia’s economic development in this period:

1. In its effort to control financial flows,^[19] the regime unwittingly worsened the investment climate by changing legislation and unduly influencing Russia’s government and legal institutions for its own benefit and in contradiction to the law. This resulted in a dramatic increase in the risk perceptions of domestic and international businessmen, much lower than possible investment inflows, a permanent outflow of capital and human resources, and a strong trend of businesses consolidating around the most profitable hydrocarbon industry and state-owned enterprises. In sixteen years, according to the data presented by the leading Russian business newspaper, Vedomosti, the private sector’s share of GDP has fallen to 30 percent from almost 70 percent,^[20] and foreign debt, which once reached more than 75 percent of GDP, dropped below 50 percent of GDP due to a lack of demand for investments. Higher levels of risk caused higher interest rates, sustained high inflation, and shortened investment horizons. More than $1 trillion worth of capital was taken out of the country by Russian rentiers, while the annual rate of foreign direct investment in Russia never exceeded $50 billion. Russia’s best businesspeople and professionals followed in its wake. Russia is estimated to have lost up to 4.5 million people to emigration since 1991.^[21] More than one-third of these emigres have gone through higher education. The number of emigres declined in 2009, but went up again in 2010 and in 2015 almost reached the levels of 1995.
2. During the first few years of high oil prices, the government made the decision to transfer budget surpluses into reserves. This policy paid off during the 2008 and 2014–2016 economic crises, making it possible to offset budget shortfalls. Yet it also had the effect of raising the cost of attracting investments. As a result, investments became less popular and, in the case of capital-intensive or slow-growing sectors, almost impossible.
3. By 2007–2009, a rapid rise in economic inequality—due to the inefficiency of non-natural-resource sectors in the economy, lack of investments, a bloated public sector, and the overvalued ruble—was impossible to ignore. Fearing it might lose public support, the regime took a number of populist measures, including unjustified salary increases in the public sector and extra social spending. These steps, along with already existing high corporate taxes and payroll deductions, as well as an unreasonable appreciation of the ruble, have sharply increased production costs, making Russian domestic production a money-losing venture.

Eventually, despite the overall income increases caused by hydrocarbon exports and accelerating consumption growth, almost all sectors of the Russian economy have degraded, and their level of competitiveness has even decreased. Hydrocarbon production accounts for up to 20 percent of Russian GDP. Trade, buoyed by the enormous influx of imports bought for petrodollars, accounts for up to 30 percent—twice the average in developed countries. The domestic energy market and infrastructure are responsible for another 15 percent of GDP, state projects comprise another 15 percent (a large number of which have been launched, most of them being inefficient and with no clear purpose), while the financial industry contributes 9 percent. No more than 10 percent of Russia’s 2013 GDP came from the independent service sector and non-mineral-resource production. The share of small and medium-sized enterprises in GDP does not exceed 18 percent (compared with a conventional minimum for successful economies of over 40 percent). According to Rosstat, imports accounted for 85–90 percent of capital goods in 2014, and 50–70 percent of consumer goods.^[22]

The situation has been made worse by reckless social policy in which growth in personal incomes surpassed even oil-adjusted GDP growth. In 2013 alone, while GDP growth did not exceed 1.3 percent and while investments, capital construction, and exports were shrinking as oil prices reached a peak, inflation reached 6.5 percent but the increase of wages in real terms exceeded 11.9 percent, retail trade grew by 4 percent, imports added another 1.7 percent, and the cost of public services was up by 8 percent.^[23] The public sector shouldered a tremendous burden by providing jobs for 30 percent of the workforce. Three attempts at pension reform failed basically because of the government’s indecision and unwillingness to abandon socialist principles. As a result, by 2015, the Russian Pension Fund’s deficit amounted to 15 percent of federal budget revenues (approximately 3 percent of GDP). In addition, the budget was swollen by ambitious but inefficient projects, excessive security and defense spending, and high levels of corruption.

A Ministry of Finance report suggests that foreign trade accounted for 38 percent of budget revenues in 2014.^[24] Only up to 8 percent of this came from non-natural-resource exports, with hydrocarbon exports accounting directly for 35.4 percent of the federal budget.^[25] When one takes into account natural resource-related taxes, fees, and payments (20 percent), as well as VAT paid on imported goods—which are primarily bought with petrodollars (17 percent) and custom duties and excises on imports (13 percent)—the overall contribution of oil and gas in the federal budget appears to be much higher and comprises at least 83.4 percent of the total. That is not even the end of it. Businesses involved in oil and gas production pay taxes on their revenues, and so do workers employed in this sector. Forty percent of individual income taxes are collected from federal and public-sector employees. So it’s not surprising that oil prices and federal budget revenues correlate with over 98 percent accuracy.

Nowadays, as Russia faces a decline in oil prices, it has an undiversified and quasi-monopolized economy that lacks the capability and resources for growth.

The Most Pessimistic Forecasts Fail

When oil prices fell precipitately in 2014,^[26] many European analysts and economists predicted a quick collapse of the Russian economy and were surprised to find that Russia successfully weathered the global oil shock. Two factors helped Russia to overcome the oil shock relatively smoothly.

First, the country had accumulated substantial gold and foreign currency reserves during the years of high oil prices, and these were three times higher than anticipated import levels in 2015. Businesses had also acquired sufficient fixed assets, while the public had amassed over $250 billion in bank savings and possibly as much in cash. People had stocked up on durable goods and housing conditions had improved as per capita housing space more than doubled in the years of high growth. It is also important to note that inequality in Russia has increased over time, leaving the majority of citizens accustomed to a state of poverty. For these citizens, the current economic crisis was not a disaster simply because it had always been there.

Second, Russia is still enjoying the benefits of liberal economics. Cross-border capital flows are not restricted, there are no price controls on most goods and services, wages are set by market forces, and the ruble’s exchange rate is determined in the free market, albeit with some intervention by the Central Bank.

In 2014–2015, the Russian economy contracted sharply but avoided cataclysmic shocks. The only dangerous moment came in early December 2014 when the Central Bank unwisely decided to double the refinancing rate,^[27] causing panic in the markets. However, the government quickly corrected the situation by giving a firm promise (one of only a few it has actually delivered on) not to take drastic steps of this type anymore.^[28]

By the fall of 2016, Russia’s dollar-equivalent GDP was 40 percent below 2013 levels (a 15-percent decline in real ruble prices—see figures 5.1 and 5.2). There was an unprecedented drop in household real incomes of about 15 percent according to Rosstat data,^[29] but given Russia’s growing income inequality, especially in the last two years, the poorest segments of the population have lost more overall. However, even this precipitous fall brings Russians back to the relatively stable levels of 2007.

Russia’s per capita GDP projection for 2016 is around $8,500, which puts the country at around 70 in the International Monetary Fund’s world rankings, alongside Turkey, Mexico, and Suriname.^[30] Arbitrary GDP at PPP figures raises Russia to around 50 in the world, next to Latvia, Kazakhstan, Chile, and Argentina. While these indicators are quite modest, they are far from disastrous. (Empirical evidence suggests that countries vulnerable to “color revolutions” and regime change have their nominal per capita GDP at a level of $6,000 or less. That was the per capita GDP level in Egypt, Colombia, Syria, Ukraine, Indonesia, Tunisia, and many other countries that experienced periods of instability.^[31])

In the case of Russia, a sharp decline in imports managed to stabilize the economy. A decline in imports caused by a catastrophic drop in demand by far exceeded declines in household incomes and export revenues, as the ruble underwent rapid devaluation and all players in the market lost faith in the prospect of an economic recovery. Consumers postponed their purchases of durable goods and switched in part to domestically produced ones, further diminishing imports. That ensured the maintenance of a surplus in the foreign trade balance and the balance of payments. This eventually stabilized the ruble exchange rate and, as oil prices stabilized at new levels, reduced inflation.

The devaluation of the ruble also eased economic shocks—while creating different problems. The devaluation played a positive role in sustaining exporters and the budget, but it has not promised GDP growth in Russia due to the country’s uncompetitive production sectors. GDP growth in Russia almost entirely depends on domestic demand, as it is measured in rubles and therefore is not affected by the devaluation. Export growth requires investment and technology, which Russia currently lacks. And even in the few areas where Russia produces competitive goods, 100 percent of this production is to some extent tied to importing raw materials, parts, or equipment, where the ruble devaluation increases the ruble-denominated cost of products and services faster than international consumer demand can absorb.

An Archaic Economy, a Declining Workforce

At first glance, all circumstances militate against the prospect of recovery for Russia’s economy. Both the legacy of the past and the consequences of recent policies inhibit progress, while the macroeconomic situation only promises worse times ahead.

Russia has long suffered from insufficient fixed capital investment and, even at the modest output levels in 2016, is working at almost 85 percent of production capacity.^[32] Yet a substantial part of Russia’s production capacity (more than 40 percent by some estimates) is both technologically and functionally obsolete and cannot produce competitive and marketable products. For instance, Russia’s machine stock has shrunk by almost one-half in the last ten years—a problem that is only in small part explained by old, inefficient machinery being replaced by new high-tech equipment.

The Russian economy badly needs to rapidly capitalize production and build new capacity, and the state simply lacks the money to accomplish this goal. Private investors consider it too risky to invest in Russia, with the result that only a tiny fraction of the necessary capital comes into Russia and that mainly in areas such as retail trade, logistics, and the assembly of very simple goods with the lowest added value. The budget deficit will exceed 3 percent of GDP in 2016 and will most likely be as high as 5 percent in 2017 or 2018—state-run enterprises cannot afford the costs of modernization (see figure 6).^[33]

Russia seriously lags behind its competitors in terms of energy and logistics efficiency. For example, it consumes four times more energy per dollar of GDP than Japan does.^[34] Cargo transportation, storage, and customs processing costs are significantly higher in Russia than in developing and even many developed countries, making Russian products less competitive.

Crucially, Russia also increasingly lacks labor resources, which are falling at the rate of 0.5 percent a year for natural demographic reasons (see figures 7.1, 7.2, and 8). Moreover, most of these workers are employed in spheres with zero or very low value added, such as the public sector, private security, retail, and the extremely inefficient banking sector. The remaining employees do not have skills the state needs. There is an urgent shortage of engineers, researchers, workers with technical skills, and professional managers.

Millions of migrants, many of them illegal, from other ex-Soviet states have filled gaps in the lower levels of the labor market for years. The Russian public utilities sector has relied heavily on these guest