Russia’s double trouble

Russia’s Putin addressed his legislators on December 04 with the State of the Union speech. With it he aimed to marshal popular and elite support based on three (major) tenets of policies that he mixes with populist economic appeal. First is his further carving out of the image of the enemy; second is the promise of economic and tax liberalization and budget discipline; and the third is to move away from dependence on foreign markets and become more self-reliant.

Voice of America photo of the address
Voice of America photo of the address

The further carving out of the image of the enemy – including amongst others, an attempt to build a new ”Iron Curtain” around Russia, support of terrorists by external powers against it, aiming at its dismemberment and defeat (like Hitler) and to efforts of the enemies to stymie its expanding capabilities and Russia’s historical mission in defense of the sacred homeland (including the Crimea) are the cornerstones of this message now. This approach has always worked to some extent in Russia (and elsewhere for that matter). It is also not new and originates (in the Russian reality) from Stalin who first articulated the idea of a ‘Garrison State’ which besieged by the enemies had to make itself (and its system) secure before exporting the communist revolution elsewhere. It has been re-played by many rulers, including Putin, for it is an highly effective message if you control the media and have access to all the tools of propaganda – which is the case today more than ever before. This part of Putin’s speech does not come as a surprise.

I’m quite skeptical about his second set of ”new” policies combining liberalization, budget discipline and tax breaks or  ‘tax holidays’ as he termed it. If genuinely pursued, liberalization and less government control will undermine his authoritarian rule; budget discipline – less money to spend – will bring losses to those whose incomes come from the state but will also harm them who profit from the spoils of corruption, kickbacks and so on. However, if these steps would not be taken, it would be the Russian economy that would be further undermined – in light of falling oil prices (set to perhaps decline a bit further, especially in light of OPEC’s last decision not to cut production) and Western sanctions. Recession, sanctions and lesser revenues from oil (Russia funds almost half of its federal budget with its energy revenues) will however eventually put serious strains on its political system as well.

The third proposal (import substitution, increased investments in infrastructure, expansion of social and health benefits and new infrastructure developments in the Far East) seems to me both quite impossible to implement and must be labelled as populist. Impossible because you can only do this if you have more money to spend, not less which is currently the case. Populist because it aims at the hearts and minds of people who will be the first to be hit by a recession: the rural population, doctors, sports teams, school teachers and all who rely heavily on budget subsidies but who are a political risk since they command public opinion. His emphasis on the need to focus domestic savings for national investments shows that it is not a sustainable strategy from the very outset because they will eventually run out. In addition it might require certain controls on capital outflows. Obviously, these measures are all designed to help Russia tackle the double trouble of an economic downturn and the need to keep the benefits (of often corrupt practices) flowing in order to ensure regime stability.

To avoid a deeper recession with obvious political consequences, several things have to happen: sanctions will have to be lifted to ease the strains of a weak currency and to reduce capital outflows and restore the access of Russian firms to Western capital markets. In addition, oil prices should rebound to well above $80 a barrel and stay there. A surge of the price is possible but would take time and might not go as far since the US is fast expanding its oil production which is profitable well below Russia’s oil price projections for the next year.

The options are thus either a smaller budget or bigger revenues. The former will require deep, quick and painful reforms; the latter – Western cooperation. This implies that the positioning of the EU and the US with regard to some of the Eastern Partners will be even more important but also more consequential than is already the case.

President Putin has of course some other means to maintain his popularity – for example stage a yet another small and victorious war and declare it a strategic victory of historic magnitude. This might work for some time, but not solve the structural problems and perhaps be even more costly – if currently affordable. This is however, especially for us down here in Georgia, still a looming threat.

I do not claim that Russia finds itself in an imminent crisis forcing it to reform quickly or that the country is confronted with serious political upheaval. At least not now. Putin’s public position is still strong, there is no credible political opposition or an alternative political narrative available. Russia has accumulated large reserves which it can rely on for quite some time and it must be aware of the impatience of Western firms to return to normal business on the Russian market. But at least for the moment there is real scope for action in order to influence the acts of Russia in the foreign arena. There are more strategic opportunities in the longer run: one of them could be the inability of the leadership (this or the future) to find a better solution to its self-inflicted woes than by gradually opening up,  developing the real rule of law, liberalizing and democratizing and ultimately (if not quite ironically) gradually moving closer to those nations, whom Putin now portrays as the biggest enemies of the Russian state – the Western democracies.

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