May 1 2014, 9:17am CDT | by Forbes
I’ve written before that when it comes to Russia most analysts have been overly focused on the necessity of punitive sanctions, on the need for the US and the EU to “do something” to impress upon Putin that his government’s actions in Ukraine have been beyond the pale. Many people, particularly those of a more right-wing bent, have been positively infuriated by what they view as the “weakness” of the Obama administration and its European allies.
However, if you look at the actual performance of the Russian economy you could see that the Kremlin was already “paying a price” (and quite a hefty one at that!) for its adventures in Crimea and the Donbass. Capital has been fleeing the country at a record rate, the ruble has been plunging in value, and inflation (the single most politically sensitive topic in Russia) has been persistently above target. Given the panicked moves of the central bank, which has hiked its primary interest rate by 2.5% over just the past two months, it seemed clear to me that Russia’s already-wobbly economy was on the verge of a recession and that the longer the chaos in Ukraine continued the greater the economic harm would be.
You can add the International Monetary Fund to the growing chorus of naysayers. According to Antonio Spilimbergo, the IMF economist in charge of Russia, the Russian economy is already in a technical recession: ”If we define recession as negative growth in two quarters in a row, then Russia from that point of view is experiencing recession.”
And it’s not as if there is much good news on the horizon. The IMF forecasts that for all of 2014, Russia’s GDP will expand by 0.2 percent before accelerating slightly to 1 percent growth in 2015. However even those gather grim predictions (which, outside of 2009, would be the worst that Russia has performed since Putin first came to power) are predicated on a gradual decrease in geopolitical tensions and some sort of stable settlement in Ukraine. Spilimbergo specifically noted that “continued conflict could lead to additional sanctions and deterioration of confidence that could reduce investment and growth further,” and that the risks for Russia were all on the downside.
One should be careful in noting that even the dour IMF forecast does not equate to a “collapse” of Russia’s economy. For a variety of reasons, including the fact that the economy is still at or near full employment and the fact that the state budget remains in a small surplus, it is highly unlikely that there will be substantial short-term instability. For at least the next year or two the Kremlin will have more than enough cash on hand to plug all of the leaks. Russia’s adept performance during the far more serious 2009 crisis (when it rapidly instituted effective stimulus) suggests that it can weather almost any storm. So if you are expecting the current spate economic weakness to rapidly translate into public unrest of the kind that overthrew Viktor Yaukovych, you are likely to be sorely disappointed.
But from a medium and long-term perspective the risks to Putin and his government are growing at a frighteningly rapid rate. Because of space constraints I don’t want to list all of these risks here, but the IMF report does a very thorough job of explaining them all. These problems differ in many ways but what they have in common is that they are deep-seated and structural, and will therefore be much more difficult to solve. Defending a currency peg or tightening the supply of money can be done almost instantly. Courting foreign investment, however, is a highly uncertain process that can take years or even decades. There’s no quick-fix for having a bad reputation among investors, and over the past few months the Kremlin has gone out of its way to remind the world that Russia is an exceedingly risky place to do business.
I sincerely hope that the ever-more-apparent economic costs of destabilizing Ukraine will impress upon Putin and his advisers that it is in their own best interest to swiftly find a negotiated settlement. They have been exceedingly aware in the past how much of their legitimacy rests on economic performance, so it’s primarily a matter of getting them to return to business as usual. Given how much harm Russia’s economy has already suffered, though, and given how little impact this has had on Russian policy, I have very little faith that there will be any sort of de-escalation. Economic considerations now seem to be systematically discounted in Moscow and that’s a strategy that can only end in tears.
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