Predicting Russia’s imminent economic collapse is a favorite hobby of many observers, despite often-tenuous grounds for the argument. For example, when you hear a prediction of a double dip US recession coupled with the European debt crisis that could cause oil prices to plummet, bringing economic catastrophe to Russia, it is easy to dismiss the idea. However it’s altogether more serious when it is the country’s Finance Minister who is saying it.
Earlier this month, Finance Minister Alexei Kudrin offered a grim perspective on the possibility of a second wave of global economic crisis (a one in four chance, he says), and a Ministry report obtained by Bloomberg showed that officials expect a “substantial” devaluation of the ruble if oil prices go any lower than the identified breaking point of $60 a barrel.
Whether or not oil breaks even below $100 a barrel this year, this panic felt by Russian officials illustrates the deep political vulnerability that exists between commodity prices and the survival of Vladimir Putin’s brand of “managed democracy.” In a year that has seen numerous, once-stable dictatorships tremble and fall under the weight of popular uprisings in the Arab world, Russia’s leadership is on high alert to avoid a similar fate.
With these economic questions in play, will we see the Arab Spring followed by a Russian Fall? That will depend on a number of factors. For several years now, Russia’s economic and political models have moved apart, creating a misalignment that requires a relatively high level of economic growth to bridge the gap. The successful management of this misalignment during the upcoming election, as well as the price of oil, is going to have a powerful impact on the credibility and legitimacy of the Russian state.
In terms of stability, there is not much breathing room. Unlike other economies of the BRIC group, Russia stands apart for its overwhelming dependency on petroleum prices – oil and gas accounts for 40% of the state budget, compared to 10% and less for Brazil, India, and China on any single export commodity. The diverse range of services, manufacturing, and other entrepreneur-driven businesses in these economies are absent in Russia, where aside from top-down attempts to foster innovation, such as the Skolkovo Valley project, opportunities are few and far between for those who aren’t members of government or connected by family. Many fear that this failure to
And there’s no reason for Russia to lag behind Brazil, Russia, and China in economic diversification – the country features very high GDP per capita, education levels that are incomparable with China, and social indicators far above those of India. There is no question that Russia has an impressively talented entrepreneurial class, but the opportunities for development are repeatedly asphyxiated by the bureaucracy. Russia’s tightly controlled political system has firmly cemented a predatory culture of corruption that subsists on red tape, burdensome regulations, office raids, and even arrests to extract rents.
There was no better example of the inflexibility of Russia’s political model than the sudden ouster of billionaire Mikhail Prokhorov from the leadership of Right Cause, an “official” opposition party designed to serve as a pressure valve for critics. Outraged by the controversial coup within the party, Prokhorov denounced the architect of sovereign democracy, Vladislav Surkov, as a “puppet master” who “long ago privatized the political system, who has long misinformed the Russian leadership about what is going on in the political system, puts pressure on the media, and tries to manipulate citizens’ opinions.”
Although some observers have tried to apply ill-fitting comparisons to the Khodorkovsky experience, Prokhorov was recruited to play a willing role in an illusory project – and then seems to have forgotten his limits. Prokhorov claims that he was removed because his calls for liberal reforms were met with rejection by conservatives from within the government that felt threatened by any change to the status quo. Naturally, at no point throughout this debacle or the course of the campaign, did Prokhorov utter one word of criticism toward Vladimir Putin.
The fact that the current leadership was unable to tolerate the ideas of just one person, who was not only under their control but also perched atop a potemkin party that would garner no more than 2% of Duma seats, means that the political system is rigid to the point that it is difficult to imagine that any reforms are possible to wean the economy off oil and gas dependence.
The lack of representative mechanisms, accountability, and rule of law in Russia have resulted in the formation of competing interest groups within the ministries and bureaucracy that do not always fulfill duties of office as directed by superiors, but rather toward the fulfillment of individual and corrupt interests. This type of institutional breakdown is visible on a daily basis in Russia: presidential decrees are openly ignored, repeated infrastructure tragedies are not attended to, and dysfunction within state owned companies like Rosneft and Transneft are unable to keep together a critical oil deal made with the Chinese through the Eastern Siberia Pacific Ocean pipeline.
Adding to these domestic issues, the Russian leadership is facing a gradually diminishing level of influence to both the East and West, as shale gas and fracking technology threaten Gazprom’s one-dimensional leverage over Europe, while proactive energy diplomacy from Turkmenistan, China, and even Iran is beginning to circumvent the previous stops made in Moscow to broker deals.
When you add all this up against the possibility of oil prices weakening, you have an interesting situation for the Russian Fall and the approach of the 2012 elections. Unlike Egypt or Libya, no one is expecting a mass uprising by an angry, unemployed youth, and Russia’s subtle repressive methodology has yet to be tested. Fed by oil, corruption, and resource nationalism, the Putin government is going to stick around for a while.