October 26, 2017

Peculiarities of the Development of Economic Processes in Russia and Their Influencing the Situation in the Country and Its Foreign Policy

Ivan Sichen, Military and Political Expert

In the context of the USA and EU's consistent sanctions policy towards Russia, V. Putin's regime is intensifying information measures to prove the “ineffectiveness” of external pressure on him, as well as a tangible “improvement” of the economic situation in the country.

First of all, the evidence of this is said to be the restoration of the positive dynamics of the Russian economy. Thus, according to the Ministry of Economic Development of Russia, in the second quarter of 2017, GDP increased by 2.5 % compared to the same period of 2016.

At this, the highest indicators are in the mining industry, namely: +4.8 % compared to the second quarter of 2016 (+3.2 % in January–August this year). According to the base forecast of the Ministry of Economic Development, taking into account the above-mentioned, in 2017 and 2018, the growth of the Russian economy is expected by 2.1 %, in 2019 — by 2.2 %, and in 2020 — by 2.3 %.

Besides, the emphasis is on significantly faster rate of growth of investment in fixed assets — from 2.3 % in the first quarter of this year and to 6.3 % in the second quarter. According to the Ministry's explanation, the reasons for this are a reduction in overall macroeconomic uncertainty, an improvement in the financial situation due to the strengthening of the ruble, as well as an increase in the investment attractiveness of the country's construction industry.

There are also optimistic forecasts regarding the growth of real incomes, including by 1.2 % in 2017 and by 2.1 % in 2018. Proceeding from here, the Ministry of Finance of Russia expects an increase in real incomes of citizens of the country to the pre-crisis level already in 2018–2020.

 

At the same time, independent Russian experts continue to provide different, including diametrically opposed assessments. Thus, according to the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), Russia's GDP growth in the first half of this year was of a purely situational nature and had nothing to do with positive changes in the Russian economy. The main reason for the increase in GDP in monetary terms was the rise in oil prices for the “Urals” brand in the first half of the year (by about 30 % in comparison with the similar period of the last year). At this, according to the Federal Customs Service of Russia, fuel and energy products remained the main item of Russian exports with a share of 66.5 %. In addition, the cold spring required the production of higher volumes of heat and electricity. In April 2017, the figures for this year exceeded last year's ones by 5.5 %, and in May this year — by 4.7 %. The above-mentioned objectively demanded an increase in the extraction of coal, oil and gas, which also influenced the GDP.

As expected, after the seasonal factors had stopped acting, the economic situation in Russia again deteriorated. In particular, according to the CMASF, in May, June and July of this year, industrial production in the country showed zero growth or even decline. Decrease in GDP growth rate is also recognized at the official level by the Russian Ministry of Economic Development. At this, among the main negative factors they mention the weak dynamics of agriculture, manufacturing and trade. In particular, the decrease in the volume of agricultural production from the middle of this year after the rapid growth of the industry in 2015–2016 by about 12 % is most indicative. The reason for such a tendency was the Russian government's decision to reduce financing of the state program of support to the agricultural-industrial enterprises till 2020 by 1.7 times (in 2017 — by 20 %) due to the lack of funds.

At the same time, according to the CMASF, against the background of the situational growth of profits of the fuel and energy complex of the Russian Federation, in the first half of this year, the share of unprofitable enterprises in other sectors of the Russian economy increased by 0,8 % to 31,6 %, which is the worst indicator for the last ten years. The total loss of about 15 thousand enterprises and organizations amounted to over 1 trillion rubles (this list does not include small business, banks, insurance organizations and budget institutions). In this regard, the most difficult situation arose in the following enterprises: intercity and interstate transportation — total losses increased by 40 %; housing and communal services — by 52 %; construction industry — by 57,1 %; postal services — by 78 %; science and technology sphere — almost twice. In connection with bankruptcies, in the second quarter of this year, 5.4 % more businesses were liquidated than in the same period last year.

All this was the result of the decrease in demand for products and services of the above-mentioned sectors of the Russian economy as a result of the steady decline in real incomes of economic entities and the population. Thus, in rubles, the drop in incomes of citizens compared with the previous year was as follows: in 2014 — by 0.7 %, in 2015 — by 3.2 %, in 2016 — by 5.9 %, and in the first six months of 2017 — by 1.2 %. Even a worse is the drop in incomes in dollar terms: in 2014 — by 12 %, in 2015 — by 31 %, in 2016 — by 10 %. All in all, from the autumn of 2014, the Russians' real incomes have fallen by 20 %.

According to the experts of the Center for Development at the Higher School of Economics, the Russian government's expectations regarding the possibility of a real increase in the volume of investments into the Russian economy are rather illusory. In this regard, the “investment miracle” in the second quarter of this year relates exclusively to the speculative actions of investors who have transferred significant volumes of currency to Russia, hoping to weaken the US sanctions against it. In turn, this strengthened the ruble and stimulated investment imports. At the same time, the purely local nature of these factors does not allow to count on the continuation of investment growth.

Significant problems in Russia's banking sector continue. First of all, this concerns the deterioration of the financial position of banks due to their clients' being unable to return the loans, as well as the outflow of deposits. Thus, according to the RF United Credit Bureau, of 79 million individuals and legal entities that received loans, 8 million — cannot return them in time. At the same time, in August 2017 alone, the population's deposits decreased by 0.3 % or by 63 billion rubles. As a result of the above-mentioned processes, more than half of Russian credit institutions have signs of having their negative assets in the total amount of up to 5 trillion rubles. Besides, in January–September of this year, the net outflow of capital from Russia increased 2.1 times from 10 to 21 billion rubles in comparison with the same period of 2016, and the external debt as of October 1, 2017 reached 537.5 billion US dollars, which is by 4.5 % higher than at the beginning of the year.

 

Against the background of these trends, experts point out that the government of the RF has no effective plans to improve the economic situation in the country, let alone to fulfill Putin's task to make Russian economy 's development rate higher than the world's one by 2019–2020. In fact, all of these plans count on increasing the volume of foreign investments into the Russian economy, while there are no objective grounds for this. The doubts about this are expressed by the management of the RF Audit Chamber, which sees no convincing evidence in favor of investment acceleration.

Accordingly, experts expect economic problems in Russia, as well as its further lagging behind other countries. In particular, already in 2020, China, India and Turkey will outpace Russia by the share of GDP per capita, and by 2035 it will go from 6 to 10–15 places in the global ranking of world economies.

 

The above-mentioned processes are changing the moods of the Russian population to distrusting the politics of the country's government. According to sociological surveys of the Center for Socio-Political Monitoring of the Academy of National Economy and Public Administration (RANEPA) of Russia, the immutability of the country's economic course is supported by less than 4 % of Russians. At this, since the beginning of this year, only 26 % of the respondents have noticed improvement in the economy, while over 43 % of respondents point out the decline.

Similarly, have changed the essence of the main problems that are of the greatest concern to the citizens of the Russian Federation. Now they first of all include: the price increase — 61 % of respondents, the poverty of the population — 45 %, unemployment — 33 %, corruption — 30 %, inaccessibility of many types of health care — 26 %, sharp stratification into the rich and the poor, and unfair distribution of incomes — 25 %. Least of all Russians are concerned with the Crimea's “reunification” with Russia, the armed conflict in the East of Ukraine, Russia's confrontation with the West, as well as the threats of terrorist attacks.

At the same time, the Russian population's attitude to the country's media is becoming negative. According to polls conducted by the “Public Opinion” Foundation in September this year, 51 % of Russian citizens do not trust the Russian media, a record figure since 2008. The reason for this is the significant difference between the real socio-economic situation in the country and “victorious” media releases. As sociologists point out, “the fridge wins the TV”.

 

On the whole, these circumstances completely undermine the ideological basis of Putin's regime's domestic policy based on the idea of “maintaining stability in the country”. Changes are already demanded by the overwhelming part of the population of the country, first of all by young people as the most active strata of any society. At this, the system of “information zombing” of Russian citizens, which was created by the RF government, can no longer perform its functions effectively.

This is precisely the main reason for the growing protest potential in the Russian society, which creates the basis for intensifying the opposition's activity and strengthening its influence in the country. In particular, the evidence of this was the results of local elections in Russia on September 10, 2017. Thus, representatives of opposition received most of the mandates in a part of the Moscow municipalities, and some of them even do not have representatives of the ruling party “United Russia” at all.

 

At the same time, there is a tendency for Putin's personal rating to fall. According to the Russian sociological agency “Levada Center”, 48 % of citizens are ready to vote for Putin in the upcoming presidential elections in Russia in March 2018. At this, less than 60 % of Russians are going to vote in the elections. That is, in reality no more than 30 % of the total electorate of the country will vote for V. Putin.

Of course, V. Putin will win the election under any circumstances, as it is a purely formal act with predefined results. At this, the obvious falsification of the results of the voting will give real grounds to question their legitimacy. It is on this that the activity of one of the leading Russian opposition activists, A. Navalny, is being built.

At the same time, Putin can no longer change the situation in his favor either at the expense of quick resolving of the country's economic problems, or by consolidating the electorate on the basis of the ideas of building the “Russian world”, about which most of the Russians do not care any longer. Moreover, due to the negative effects of Western sanctions, Putin's activity does not suit the inner circle of the Russian President as the mainstay of his power. This problem is becoming particularly sharp after the introduction by the United States in August 2017 of a new package of sanctions against Russia, which directly affect the interests of its ruling elite.

Given these circumstances, the fact of an acute discussion in the leadership of the Russian Federation of the strategy of both the election campaign and further state policy of the country is quite obvious. In particular, the evidence of this — V. Putin's “delaying” the official announcement of his decision on participation in future presidential elections. In this context, the ruling elite of Russia may consider a few options, from the intensification of the armed aggression against Ukraine and confrontation with the West, to finding certain compromises with the United States and the European Union.

Thus, in the first case, V. Putin's regime can count on: moral, psychological and economic depletion of Ukraine and its Western partners; weakening the EU's unity through internal problems; a change in the USA's position regarding Russia (within the framework of D. Trump's election promises); compensation for Western sanctions by expanding trade and economic cooperation with China and the countries of the Middle East and Latin America; the Russian opposition forces' being unable to overthrow the ruling regime of the country in the way it was done in Ukraine. The implementation of this option would allow Putin and his environment to preserve his power, personal security and uncontrolled access to the country's resources for at least six years.

All this will also mean: conservation of Russia's economic problems and its irreversible lagging behind the leading countries of the world in advanced technologies; the need for a high level of military expenditures; strengthening socio-political tension in the Russian society; deepening of the economic, and hence — of the political dependence of the Russian Federation on the PRC. Besides, an extremely dangerous consequence for Putin and his entourage may be the complete blockade of their assets in Western countries, as provided for by the latest package of US sanctions against Russia.

Therefore, we should not rule out the possibility of the Kremlin's even more active attempts to establish relations with the West by demonstrating readiness for certain concessions over the North Korean, Iranian and even Ukrainian issues, in exchange for Western sanctions being eased or lifted. However, such concessions will not be of a fundamental nature and will be carried out solely on the basis of Russia's own interests. This is evidenced, for example, by Russia's consent to the deployment of UN peacekeeping forces in the conflict zone in the Donbas on conditions unacceptable for Ukraine, as well as Moscow's formal supporting the United Nations' sanctions against North Korea, while continuing to cooperate with Pyongyang.

In case of a failure of such steps, the leadership of the Russian Federation can resort to controlled transfer of power in the country, which would be aimed at replacing V. Putin with a less odious person capable of reaching certain compromises with the West. In particular, within the framework of such a scenario, V. Putin's likely successors are said to be the Governor of Tula region O. Dyumin and Mayor of Moscow S. Sobyanin. A similar option can be implemented both during the upcoming presidential election and after Putin's re-election as President of Russia on the pretext of his “disease” or “being unable to perform his duties” or for other reasons (as it was done by B. Yeltsin at the end of 1999).

 

But, under any circumstances, Russia (be it under V. Putin or under any other president) will not give up attempts to establish its control over Ukraine, including by force, and through the restoration of the pro-Russian authorities and the final disintegration of the Ukrainian state. To achieve such goals, Moscow will continue its efforts to destabilize the situation in Ukraine by provoking a political crisis in the country and spreading anti-government moods in the Ukrainian society. At this, such steps by the Kremlin will be accompanied by the intensification of hostilities in the Donbas as a powerful means of pressure on the leadership of Ukraine.