July 29, 2016

The Economic Crisis in Russia and Its Impact on Forms and Methods of Moscow's Actions against Ukraine

Ivan Sichen, Military and Political Expert

At the end of June during the EU Summit, the leaders of the EU member states adopted a decision on the continuation of sanctions against V. Putin's regime for another six months. Despite the RF leadership's statement about Russia's being able to overcome the sanctions' negative impact on the Russian economy, they have already led to qualitatively new problems in the Russian Federation. First of all, it concerns the critical reduction of Russia's financial reserves, which had always been the government's main instrument of maintenance of relative stability in the country.

 

Thus, according to the RF Ministry of Economic Development, by the end of 2017 Russia will have fully exhausted its Reserve Fund and will have to move to a wider use of money from other funds to cover the budget deficit (which in 2016 has exceeded 3 trillion rubles). For this purpose, they already use money of the RF Pension Fund and of the Russian National Wealth Fund (NWF), which was created to implement socio–economic development programs.

According to the latest forecasts of the RF Ministry of Finance, if the US and EU's sanctions against the Russian Federation are maintained, within three years the above–mentioned Funds will have been exhausted too. In particular, the resources of the NWF will have decreased by 2.8 trillion rubles — to 500 billion rubles.

International Reserves of the Russian FederationInternational Reserves of the Russian Federation

At this, due to the sharp shortage of foreign exchange, Russia has actually lost sources to replenish its financial reserves. Thus, according to the Central Bank of the Russian Federation, during the last six months, for the first time since 2014, the outflow of currency from the country exceeded its revenues. The reason for this was the reduction of Russia's foreign trade due to the West's sanctions and Moscow's counter-sanctions, as well as the fall in world prices for energy carriers which form the basis of Russian exports. Besides, since the beginning of this year, the outflow of the foreign capital from Russia has amounted to 10 billion US dollars.

These circumstances greatly complicate the RF government's ability to support the Russian economy, and this leads to its further stagnation. In the first half of 2016, the decline in production in the mining industry in Russia was 0.9 %. Despite the statements of the Russian side concerning the growth of production of automobile engineering, significant problems remain in this sphere. In particular, since the beginning of 2016 the income of “Kamaz” (the largest producer of trucks in Russia) has fallen six times compared with the same period of 2015.

Characteristically, financial difficulties are taking place in power structures of Russia which get guaranteed and priority funding from the Russian state budget. According to the RF Ministry of Energy Engineering, by the end of this year the debts of departments of Defence Ministry, Interior Ministry, Emergencies Ministry, the FSB and the Ministry of Justice of Russia for heat and electricity could reach 7 billion rubles.

 

In this situation, the government of the Russian Federation is trying to solve the problem of the growing budget deficit through budget cuts and additional sources of financing, including through internal and external borrowing and mass privatization of state property.

For example, since the beginning of this year, there have been held two sequesters of the public budget towards reduction in funding socio-economic development programs. Due to the lack of funds, the Russian government has given up the plans to raise pensions and salaries of public sector employees (they have even been reduced) and canceled the program of introduction of ration cards for the poor.

Besides, it has been decided to “freeze” the budgetary costs of 36 out of the 42 federal programs, including those that are strategically important for Russian interests. In particular, in June this year it was decided to reduce the amount of financing of the “Federal Targeted Program for Development of the Crimea and Sevastopol till 2020” by 3.5 billion rubles.

In 2016, they have withdrawn from the Program 226.48 million rubles, planned for Rosavtodor for the construction of a transport bridge across the Kerch Strait, and 300 million rubles planned for reconstruction of the air and sea connections of the Peninsula with Russia. They have also significantly reduced the volumes of financial support to the self-proclaimed “DPR” and “LPR” in the East of Ukraine.

In turn, to raise additional funds to the state budget, the Ministry of Finance of Russia plans to increase domestic borrowings to 300 billion rubles this year and to 1.29 trillion rubles in 2017. The main sources of these loans are considered loans from Russian credit organizations, loans from budgets of other levels of the budget system of the Russian Federation, and sale of securities issued on behalf of the Russian Federation. At the same time, a significant problem in this matter is the domestic Russian residents' shortage of money. At this, as of July 1, the RF government's domestic debt has already reached 7.4 trillion rubles, which virtually eliminates the possibility of its being paid, even in the medium term.

At the same time, in the period until 2019, it is expected to get annually 3 billion US dollars in foreign loans. In particular, within the framework of implementation of these plans, in May this year the RF Ministry of Finance launched a package of Eurobonds (government securities) in the amount of 1.75 billion US dollars. However, Russia's ability to make external borrowings also has a number of problems that are caused by the West's sanctions against it. Since the introduction of sanctions, banks of Western countries and their partners have stopped providing the Russian Federation with long-term loans. Because of the threat of sanctions, Chinese banks' position is similar. In this situation, Moscow can count on loans from some countries of the “third world”, which do not address Russian needs. Besides, Russia's external debt (including the state's obligations on loans received by commercial entities) already makes about 520 billion US dollars, exceeding all the reserve funds of the Russian Federation.

Given these circumstances, the Russian government's main hopes to quickly obtain additional funds are connected with implementation of a large-scale program of privatization of state property of the country. In 2016 the largest of these programs is selling the assets of Russian companies “Alrosa”, “Rosneft”, “Bashneft” and “Sovcomflot” and of the VTB Bank. In case of successful implementation of these plans, the Russian government expects to receive up to 1 trillion rubles. However, even in the best case, the above-mentioned amount will not cover the deficit of the state budget which is three times larger than this sum. The feature of privatization acts is their “one-time” nature, which allows only to cover current financial needs and deprives the government of its control over its economic assets.

In view of this, the leadership of the Russian Federation is also making concerted efforts to “pump” money from the Russian society and from small and medium business by introducing new taxes, and taking other measures. Since the beginning of this year, there have been adopted about 20 pieces of legislation providing for increasing the tax burden on both individuals and business entities. Besides, last year they significantly raised fees for the use of transport communications by heavy vehicles.

 

Worsening of the economic situation in Russia, and the RF leadership's attempts to cut the state budget spending and to raise taxes have led to sharpening social problems in the country. Thus, during the last two years, incomes of citizens of the Russian Federation have fallen by about 10 % lower than the average level in Serbia, Romania and Poland. At this, in May of 2016 alone, this figure was 5.7 %.

Consumer price index in the Russian FederationConsumer price index in the Russian Federation

At the same time, since spring this year, we can see recovery of the trend to acceleration of inflation in Russia, especially in terms of higher prices for basic foodstuffs. According to the Federal State Statistics Service, in April the consumer price index for food rose by 5.3 %, in May — by 5.6 %, in June — by 6.2 %. According to experts of the Central Bank of the Russian Federation, in the coming months the food inflation in Russia will gain additional acceleration. Evidence of this is the rapid increase in food prices in Russia's regions. Over the past three months, the price of potatoes has increased by 42 %, onion — by 31 %, cabbage — by 25 %, carrot — by 12 %, buckwheat — by 10 %.

Lack of money makes the Russian population move to more austerity in wages and pensions, including by reducing spending on food and essential commodities. In June this year these spending decreased by 11.4 % compared to May of this year. Most of all such spending have been reduced by residents of Moscow and other large cities — averagely by 16 %.

The consequence of these trends is the growth of poverty in Russia. Since the beginning of this year the number of Russian citizens who live below the official subsistence level has increased by 1.5 million people to more than 20 million people. Independent experts give even worse estimates. According to them, the number of poor in Russia is 65-70 million people — 45-50 % of the population. If the current pace of impoverishment of the citizens continues, by the end of 2016 this figure can increase to 80-85 %.

 

All this also causes significant changes in the moods in the Russian society. According to sociological researches, conducted by the Russian Fund “Public Opinion”, today 86 % of Russian citizens recognize the country's transition to a state of deep economic crisis. At this, 35 % (last year — 26 %) of respondents point out the significant impact of Western sanctions on their standard of living At the same time, 38 % of people (last year — 51 %) do not notice the sanctions.

The number of opponents of Russia's counter-sanctions against Western and other countries is also growing. Negative consequences of such Moscow's actions for the Russian economy and personal wealth are experienced by about 40 % of the population (last year — 26 %). Due to this, 54 % of Russian citizens are for cancelling counter-sanctions. At this, 50 % (last year — 26 %) of the population believe in the long-term nature of external sanctions against Russia.

Besides, the attitude of Russian citizens to Russia's annexation of the Crimea is also changing. While last year more than 70 % of the population of the Russian Federation approved of the annexation of the Crimean Peninsula, now less than 60 % do. Moreover, according to observations of political scientists, as the economic situation in Russia deteriorates, this figure shows a tendency to drop.

So, within a year public moods in Russia have changed fundamentally. At present, the majority already sees negative consequences of Moscow's policy for their daily lives. Accordingly, the level of protest moods in the society grows. Evidence of this is the increasing number of protests in Russia by 40 % since the beginning of this year, which fact is being carefully hidden by the Russian authorities. This dissatisfaction with the situation in Russia, is being expressed by both, ordinary citizens and representatives of small and medium business.

These trends are becoming particularly dangerous for the leadership of the Russian Federation in the approaching parliamentary elections in the country this autumn. According to Western experts, the worsening of the socio-economic situation in Russia could lead to weakening of the ruling political forces. At this, the government's attempts to ballot-rigging is highly likely to cause mass protests.

 

At the same time, to date the only way to quickly solve Russia's economic problems is to lift the US and EU's sanctions against Russia. In turn, this provides for strict implementation by Moscow of the Minsk Agreements on settlement of the conflict in the East of Ukraine, which is unacceptable to V. Putin's regime.

Instead, Moscow puts forward its own demands to Ukraine regarding “stabilization” of the situation in the Donbas, which, on the one hand, should create conditions for lifting of Western sanctions from Russia, and on the other — to ensure Russia's achieving goals in respect of our country (first of all, actual disintegration of Ukraine in the form of its federalization).

Such demands have repeatedly been expressed by the leadership of the Russian Federation, directly to Ukraine and in bilateral and multilateral negotiations with Western countries, and include Ukraine's granting “special status” to the “DPR” and “LPR” and holding local elections in the breakaway republic without any conditions put forward by the Ukrainian side (primarily relating to: cessation of hostilities in the conflict zone, withdrawal of Russian troops from the occupied territories and return of control of the eastern section of its state border to Ukraine).

Within the framework of forcing our country to concessions to Russia, the Putin's regime continues carrying out a comprehensive policy of pressure on Ukraine in political, economic and military spheres. Lately such displays of Moscow's actions have been the following statements of the leaders of the “DPR” and “LPR” on the following: local elections without the consent of Ukraine, energy carriers for the occupied territories to be paid for by the Ukrainian government, and intensification of fighting in the Donbas.

At the same time, in the view of intransigence of Ukraine's positions on defending its own interests, V. Putin's regime is trying to implement a large-scale scenario to destabilize the internal situation in our country through organization of massive social unrest and political crisis in the country. The above-mentioned is aimed at:

as a minimum — demonstration in front of the USA and EU of “failure” of Ukraine's leadership to ensure stability in the country. It will be used as proof of Kyiv's “responsibility” for the conflict in the Donbas and therefore “lack of reasons” for continuing Western sanctions against Russia. In this regard, V. Putin's regime especially counts on Ukraine's using force against protesters, which would “play into the hands” of Moscow under the above-mentioned approach;

as a maximum — return of pro–Russian forces to power in Ukraine through creation of conditions for holding early parliamentary and then — presidential elections in the country. In case of a victory, the new pro-Russian leadership of Ukraine would take all favorable for Moscow political decisions on the Crimea and Donbas, which would create formal reasons for lifting the US and EU's sanctions against Russia.

In this context, the Putin's regime's main hope is for strengthening pro-Russian sentiments in the European Union, which were openly demonstrated during the preparation of the EU Summit in late June this year. In fact, the decision of the leaders of the EU member states to continue sanctions against Russia was taken exclusively through solid and consistent position of Federal Chancellor of Germany A. Merkel, who is the main unifying force of the EU's sanction policy towards Russia.

The question of maintaining/lifting sanctions against Russia may be revised by the EU in October this year. That is the time for which Moscow plans to organize a social explosion in Ukraine.

In a sense, Russia also counts on the USA's position, which involves removing sanctions against Russia in case of recognition by the leadership of Ukraine of the Crimea's status determined by “the will of the population of the Peninsula under international control”. The relevant draft law on the subject was approved by the upper house of the US Congress July 14 this year.

 

So, the EU and USA's sanctions against Russia lead to qualitatively new problems in the Russian economy due to the critical reduction of financial reserves of Russia. In this situation, V. Putin's regime is doing its best to change the attitude of Western countries to Ukraine, which would create conditions for their lifting sanctions against Russia. To this end scenario is being implemented for restoration of pro-Russian government in Ukraine by large-scale destabilization of the situation in the country.

All this creates a rather predictable situation of further development of the situation around Ukraine and determines the main directions of our State's actions to counteract the Kremlin's armed aggression. Under any circumstances, Ukraine should hold out until the end of 2017. Then Russia will enter into a deep economic crisis which will greatly weaken Moscow's chances to achieve its goals in relation to Ukraine.

 

www.reliablecounter.com