Russia’s Political Economy at the crossroads

In February 2014, following the Euromaidan protests which led to the fall of Yanukovych, Russia started a set of intrusions in the Ukrainian territory, with the annexation of Crimea after a contested referendum and following by ongoing hybrid conflict in Eastern Ukraine. To support its Ukrainian all and the international law, the UE and the […]

In February 2014, following the Euromaidan protests which led to the fall of Yanukovych, Russia started a set of intrusions in the Ukrainian territory, with the annexation of Crimea after a contested referendum and following by ongoing hybrid conflict in Eastern Ukraine. To support its Ukrainian all and the international law, the UE and the USA took a series of significant sanction measures towards the Russian economy. There are sanctions against businesses, officials and individual who took part in the conflict. Still effective by the end of 2018, questions have been raised concerning their utility in fixing the issues and punishing the actors involved. Indeed, Russia has more than ever integrated administratively and economically Crimea into the Federation and, besides the agreement of Minsk II sponsoring a peace process in Donbass, the war in East Ukraine seems to deepen in a worriedly violent status quo.                                 

       I am going to argue that despite injurious consequences, Western sanctions policies and Russian relative exclusion of the international market have been an opportunity for the regime to develop new inner production markets, strengthen the control over the economy and decrease its dependence on foreign countries good and services supply. Supporting this idea that at some points it has indeed sustained the countries’ economy, I am nonetheless going to discuss Putin’s administration policies weaknesses and the disastrous drawbacks for the Russians’ purchasing power and disposable income. In a nutshell, this essay will study the economic evolution since 2014 and the prospects of political economy in Russia.

 

  • INEFFICIENT SANCTIONS?

       Although economic sanctions are a widespread tool used by the Western countries, especially by the USA, to significate their disagreement towards one’s policy, they appear not as efficient as promised in the case of Russia. Indeed, it is hard to weaken sustainably a state which is food, defense technology and energy sufficient, as Russia is. Even if a drop in the GDP and the value of the Russian rouble have been observed, it is hard to argue that it is because of the sanctions. They are one variable among others for Russian slowdown growth: there is a correlation almost perfect between the price of the oil barrel and the fall in GDP and currency value: in June 2014, the barrel cost 110$ while in January 2015 only 47$; in February 2014 1$ cost 35 roubles, while in January 2015 more than 65 roubles. The structural inefficiency of the Russian economy, which combines low-productivity and low-wages, does not support consumption nor innovation. These features are to take first into account, as the sanctions targeted mainly the financial institutions and the exportation of weapons and technology from the UE to Russia, along with the freezing of overseas assets of Russian officials. Much more impact is seen in the targeted sectors than in Macroeconomics in general. Despite these features, sanctions did not encourage growth in Russia, which still is economically in a limbo.

Sanctions are to achieve a political goal, in this case, the restitution of Crimea and the respect of Ukraine territorial integrity. Crimea is now fully administratively and economically integrated into the Russian Federation and the ongoing war in Donbass is not solved at all. Far from solving the problem, the sanctions arguably participated to isolate Russia from the European political standard. In such an authoritarian regime, the ruling elite uses the country as its own property, which led to the worsening of the economic climate. Indeed, Putin responded with counter-sanctions on the agricultural imports from the UE, which lost 90 billion dollars in export and lots of jobs, as for instance 400,000 in Germany.

 

  • THE EMPOWERMENT OF THE RUSSIAN ECONOMY: THE END OF THE RESOURCE CURSE?

       Russia for a long time has been interested in joining the international organizations and to cope with their norms, as it joined the WTO in 2012 for example. Still, the Ukrainian crisis, far from being only a punctual routine crisis, affected for long the integration of Russia in the World Economic system and even questioned its belonging to it. Arguably, its alliance with China in favor of the Beijing Consensus jeopardizes the Washington based current system. The role of the sanction in this regard is crucial for the scholar Emma Ashford: “the sanctions have also encouraged Russia to create its own financial institutions, which, in the long run, will chip away at the United States’ economic influence. After U.S. senators and some European governments suggested that the United States might cut off Russia’s access to the Society for Worldwide Interbank Financial Telecommunication (swift) payment system, the Russian Central Bank announced that it was going to start negotiations with the other BRICS states- Brazil, India, China, and South Africa-to create an alternative. To lessen its dependence on Visa and MasterCard, Russia has made moves toward setting up its own credit-card clearinghouse. And it has moved ahead with the proposed BRICS development bank, which is designed to replicate the functions of the World Bank and the International Monetary Fund [1].” This quote also mentions that Russia is willing to find new partners in the non-Western developing countries in order to reshape with these actors the West-dominated economic system. The empowerment of the Russian Economy Putin-style is closely related to its will of independence from the West. This institutional distance involves also the de-dollarization, which is at stake in the public debates[2] but cannot be implemented without large economic losses.

       The empowerment of the Russian-economy because of the sanctions is not limited to the change in the financial institutions but is also related to the core of the counter-sanctions implemented by Russia: the agriculture. Indeed, as Russia decided to boycott European agriculture exports, it led to the rise of Russian agriculture. During the USSR, Moscow used to be a leader in the export of food products but after 1991 was not even self-sufficient. Europe largely provided Russia with fruits, meat, and vegetables. However, at the edge of the sanctions’ policy towards Russia, Moscow considered that the adequate response was to suspend the food inputs from Europe, to undermine Europe’s economy but also to stimulate its inner market. Therefore, the government launched public grants and reduction of taxes to revive this formerly abandoned market. The Agenda 2020 for food self-sufficiency is adopted in 2015: from 2016 to 2017[3], the sector increases its benefices by 7% and becomes the first sector of exports of Russia, which is even ranked 4th at the Global stage in terms of meat exports[4]. This process was helped by the fall of the rule, supposedly imputed to the sanctions. The other side of the coin deserves to be mentioned, even if correlations are once again blurred: if the Kremlin argues that the sanctions are valuable, it could also be analyzed as a proud-rhetoric, while the real factors remain discussed by the analysts.

       Such agriculture policies are a good illustration of the attempts of the Russian government to avoid the resource curse which has weaken for years the economy. The resource curse is the idea that for long the country has been dependent of its oil and gas incomes and did not invest in the productive sectors, relying on the rent provided by the high oil prices. With a lower price of oil combined with economic sanctions, Russia had to do something not to collapse economically and socially. Moreover, the concept of Dutch curse comes into play when these rent incomes are used to import massively without providing enough jobs. That was arguably the situation of Russia before the Ukrainian crisis, but as the geopolitical features have changed, it could not afford any more such expenses. That is why various initiatives to strengthen the IT and high technology sectors which makes Russia the 12th most innovative country in the world according to Bloomberg[5]. Still, there is a long way to go for Russia recovering and development, as pessimism is the most common thing shared by Russian managers in 2018.[6]

 

  • THE DEEP STATE-CAPTURING OF THE ECONOMY AFTER 2014 – Putin-style

       Sanctions offered the regime the possibility to expand its control over the economy. As Allen states, “without being accountable to the wider public, elites can do this relatively unchecked, as ‘leaders may benefit from sanctions, as domestic publics are unable to impose political costs and the economic constraints of sanctions often allow leaders to extract greater rents while overseeing the trade of scarce goods[7]“. Arguably, it gave Putin the opportunity to build a new era of ruling legitimacy based on the protection of the Russian-speaking people and culture with huge elements of nationalism supporting the idea that the Putin may own the states for the best. When he first came into power in 1999, his legitimacy was built on its control over the oligarch, but it appears that a new generation of rulers, the “siloviki” size the lucrative businesses, the law enforcement agencies, and advice the Tsar.

       This new division of power was already in process before the Ukrainian crisis but its monopoly over all the key states sectors has been accelerating since the implementations of sanctions. Indeed, in my opinion, this crisis could be also understood as a crucial event in the kleptocratic authoritarian consolidation of the regime. It has consolidated his power, because “he has rewarded his closest cronies at the expense of other elites[8]. The patterns for such a state economic capacity have however been instituted before the conflict. Indeed, as Gaaze argues, «the parade of loyalty from big business enjoyed by the Kremlin in 2014 would have been impossible if the business owners owed the West instead of Putin and the largest Russian government banks. By giving loans to oligarchs, Putin had guaranteed the loyalty of the wealthiest Russians” [9]. This complete seizure of the economy, along with Western sanctions, led to relative stability for Russia’s political economy. Nevertheless, it does not appear enough to sustain the economy.

            For the economy to be fully and comprehensively controlled, the authoritarian state must secure control over society, using this economic tool. “Not only can non-democratic regimes allocate scarce resources to allies of the incumbent regime in order to strengthen elite cohesion, they are also able to redistribute resources to important socio-economic constituencies that will ensure popular, as well as elite, support for the regime […] sanctions can create the conditions for the rise of powerful constituencies in the target nation that benefit from international isolation [10]”. The elites and the people are interdependent, but somehow the people cannot easily in that condition break the downward spiral, as clientelism become the rule and the only way to survive. Tatiana Tkacheva develops the idea that loyalty is even more concrete, paradoxically, in the autonomous republics as the grants depend on the capacity from the local administration to gather votes for the regime.

 

  • PROSPECTS FOR THE POLITICAL ECONOMY OF RUSSIA

One of the main problems for the Russian economy is the relatively high inflation which threatens the growth and the Russian household purchasing power[11]. Indeed, the rate is now at 16%, and I will not be improved by the next year as the Russian government increases the VAT from 18% to 20%. The 2014 financial crisis is the main responsible, along with the western sanctions. It is hard to state that it is the direct outcome of sanctions but still they appear to be a burden to the economic dynamism. Still, it is to consider as the government’s policy proved to be inefficient so that the social discontent increases as Putin’s approval rate falls at 40% of the surveyed people.

The question related to Russia Political economy to ask about is about the sustainability of the political-economic ruling coalition is how long the Russian population will cope with the strategy of survival and grand international power instead of modernization, redistribution, and development. Even is the anger is contained within the Russian households, huge deception and feeling of treachery came up as a consequence of the pension reform (as a symptom) but mainly because of the deep economic stagnation which barely provides the middle-classes with decent conditions. Russian people are known to know much about history and politics, so one may imagine that there is a resilience threshold.

Regarding the issue of the sanctions, it theoretically depends on the respect of the Minsk II agreement and the restitution of Crimea, both features which do not tend to be fixed yet. So, could we imagine long-term sanctions? Many factors are at stake in this regard. First, it depends on the European capacity to the unit over this issue – and the 2019 Parliamentary Elections are going to be crucial. If populist leaders govern Europe, it is possible to imagine the implementation of a changing doctrine over Russia. It also depends on its relationship with NATO, as Europe is willing to emancipate from its oversee big brother by founding a European army. The attitude of Russia towards Europe and the US is also at stake, as repeatedly Moscow has proven to adopt an aggressive attitude in recent months: GRU (Russian military intelligence agency) involved in poisoning in the UK, cyber attacks in the Netherlands; allegations of attempts of destabilization of Europe through social networks, etc.

Even beyond the sanctions, Russian needs to be trusted by the World Economy actors if the rational agent theory is accurate. An unstable geopolitical environment will not serve the Russian interests for long, as it as structural problems which make an essential deep and comprehensive partnership. The World Bank office in Moscow sums up this idea and seems to plead for sustainability: “Russia’s growth potential is low, and structural reforms are needed to put the country on a higher, more sustainable growth path. A higher level of private investment and a lift in consumer confidence are needed.[12]

[1] Ashford Emma, Not-So-Smart Sanctions, Foreign Affairs, p114-123

[2] Putin calls for common dollar-less payment system as key for economic sovereignty, RT, 6/12/2018, available at https://www.rt.com/business/445741-putin-eaeu-common-currency/

[3] How does the sanctions foster the Russian agriculture, Actualité du jour France, available in French at https://www.actualites-du-jour.eu/article/comment-l-agriculture-russe-prospere-sous-les-sanctions/2476992?

[4] Russia’s boom (farming) economy, Politico, 11/07/2016, available at https://www.politico.eu/article/russias-boom-farming-economy/

[5] These Are the World’s Most Innovative Economies, Business Bloomberg, 19/01/2016

[6] Бизнес заявил о катастрофе в российской экономике, finanz.ru, 2018-05-23.

[7] Allen, S. H. (2008) ‘The Domestic Political Costs of Economic Sanctions’, Journal of Conflict Resolution, 52,

[8] Ashford Emma, Not-So-Smart Sanctions, Foreign Affairs ; New York  Vol. 95, Iss. 1,  (Jan/Feb 2016): 114-123

[9] Gaaze Konstantin, The accidental formation of Russia’s War coalition, Carnegie Moscow Center, 22/06/2017

[10] Connolly Richard, The Empire Strikes Back: Economic Statecraft

and the Securitisation of Political Economy in Russia, 2016, Europe-Asia Studies, 68:4, 750-773

[11] Russie: l’inflation bondit à 3,1% sur un an, Le Figaro, 05/09/2018, available at http://www.lefigaro.fr/flash-eco/2018/09/05/97002-20180905FILWWW00207-russie-l-inflation-bondit-a-31-sur-un-an.php

[12] Website of the World Bank, overview about Russia, read the 01/12/2018, available at https://www.worldbank.org/en/country/russia/overview

 

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