During the fat years between mid-2010 and mid-2014, when
international oil prices averaged over $100 per barrel, Russia accumulated
plenty of reserves. The Russian middle class also has quite a few rubles – and,
importantly, dollars and euros – saved up, which permit them not to curb their
consumption more drastically. This is the equivalent of the 33,000 feet of
height from which the aircraft of the Russian economy has been gliding down.
A major factor delaying the onset of the crisis is the relative
calm of the Russian population. A large proportion of Russian consumers trust
Putin because they believe that he engineered the boom they have been enjoying
since 2000, not realizing that their prosperity is directly correlated to the
price of oil. The two most recent economic crises in Russia, in 1998 and again
in 2008, were quite acute but remarkably short-lived. Russians think that this
crisis, too, as Putin assured them at the end of 2014, won’t last for more than
two years, and that Russia has the resources to tough it out. And so there is
no rush for the exists on this particular airplane – i.e., people don’t
stampede to buy foreign currency or to withdraw their savings from banks.
Finally, Russia is still a major exporter of oil and gas, and
since the ruble has suffered a 50 percent devaluation in the months following
the annexation of Crimea, dollar-denominated revenues from commodity exports
are translated into rubles at a better rate. Russian imports, meanwhile,
dropped by nearly 40 percent in the first half of the year, reflecting Western
sanctions, Putin’s counter-measures prohibiting food imports, the weakness of
the ruble and the fall in domestic demand. This sputtering economic engine
allows Russia to stretch its available reserves.
I have a Facebook friend, a Putin supporter, who keeps sending
me charts showing selected positive economic statistics and assuring me that
everything in Russia will be hunky-dory. It is like using the fact that dinners
on our earth-bound airplane are served hot as evidence that there is nothing
wrong with the airplane’s engines.
The Russian economy is on a crash course. Its collapse has been
delayed – but not for much longer. The pilot has gone nuts. He never knew very
well what made his aircraft fly – and it is unclear how he thinks he’s going to
get out of this situation. His inflamed brain seems to be inventing new forms
of macabre entertainment, like burning and bulldozing imported food products,
even as his plane goes down.
The crew and the passengers whose lives are at stake should
have rushed into the cockpit and put the pilot into a straitjacket a long time
ago. Now, the engines won’t be fired up quickly. The airliner has passed the
point of no return and is about to spiral out of control. A hard landing, at
best, is unavoidable.
Here is why. It is unlikely that world leaders will want to
deal with Vladimir Putin. He has lost all of his political credibility and has
become an untouchable. Even if he changes his way completely or is replaced by
a more palatable leader, such as Mikhail Khodorkovsky or Alexei Navalny, there
isn’t much they will be able to do to right the course.
First and foremost – and very urgently – Russia needs
international sanctions to be lifted. Otherwise Russia won’t have access to
international capital markets which it will soon need to stay afloat. It won’t
get any investment capital and money will continue to flee the country: no
serious business executive, Russian or foreign, will invest in a country under
sanctions.
Once sanctions are lifted, there will probably be a large
influx of foreign money, especially if a new government provides strong
guarantees for investors. But before it can achieve this, Russia will need, as
an absolute minimum, to end support for
terrorists in Eastern Ukraine, stop sending weapons, ammunition and fighters
there and allow Kyiv to dismantle the self-proclaimed People’s Republics on its
territory. Additionally, it will probably have to abandon the Transdniester
region, its toy enclave in Moldova.
Another minimum prerequisite will be to recognize that the
annexation of Crimea was a violation of international laws and to agree with
Kyiv on a timetable fo its rapid return to Ukraine.
Once it admits its culpability, however, Moscow will have to
pay compensation to Ukraine.
Even after sanctions are lifted, it doesn’t mean that Russia
will be welcomed by the community of civilized nations with open arms. There
are ongoing issues which neither Barack Obama nor Angela Merkel can resolve.
There is a Hague Court verdict requiring the Russian government to pay $50
billion to foreign shareholders of Yukos, whom it swindled. The UK police
inquiry into the 2006 death of ex-KGB officer Alexander Litvinenko laid the
blame for his poisoning on high-level Russian government officials going all
the way up to Putin. Finally, whatever form the investigation into the downing
of the Malaysian airliner over Donbass will take, it is likely to find either
Russian-backed separatists or Russia itself guilty.
Post-Putin Russia will need to accept verdicts in all these
crimes, recognize its responsibility and agree to pay enormous financial
compensation. It will have to ask for a delay given the sorry state of the
Russian economy..
This is a tall order, to say the least. The Russian people are
not ready to accept any of this, especially after enduring relentless barrage
of Putin propaganda about insidious Westerners trying to enslave innocent,
peace-loving Russia and steal its oil, territory and history. It almost seems
inevitable that Russia will have to go through a devastating economic crisis
and national soul-searching before it could shed its pariah status.
Even after that it is not going to be a smooth sailing. During
Putin’s years Russia has caught a severe case of the Dutch disease, which is
what economists call deindustrialization afflicting many commodity-exporting
nations. Germany and Japan were able to recover relatively quickly after World
Was II because they were manufacturing nations at a time when the world was
starved for industrial products. They used US investment to rebuild their
factories and work their way back to prosperity.
The modern world has become far more competitive. Russia will
have a hard time reducing its dependence on commodity exports, above all oil
and gas. Even after a more than 50 percent drop since mid-2014, oil remains
pricey by historical standards. In inflation-adjusted terms, oil prices have
averaged between $20 and $30 per barrel in today’s dollars since 1930, or since
the advent of the age of automobile.
There is a possibility that oil prices will rise above $100 per
barrel once more – if emerging economies experiences another burst of growth or
if the Middle East is hit by a lasting, severe turmoil. But neither of this a
plausible scenario. Oil supply has been expanded thanks to superior exploration
and production technologies, such as shale oil production and deep water
drilling, while its demand is limited by improving energy efficiency and
conservation. New, renewable sources of energy are being developed, too.
After quarter of century of relative prosperity, the
long-suffering Russian people are facing another long economic winter, which is
going to get a lot harsher before there is any light at the end of the tunnel.
