During the fat years between mid-2010 and mid-2014, when international oil prices averaged over $100 per barrel, Russia accumulated reserves. The Russian middle class also has quite a few rubles — and 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 exits — i.e., people don’t stampede to buy foreign currency or to withdraw their savings.
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 verything in Russia will be OK. 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 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. Now, the engines won’t be fired up quickly. The airliner 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 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 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 to end support for terrorists in eastern Ukraine, stop sending weapons, ammunition and fighters there and allow Kyiv to dismantle the separatist zones. Additionally, it will probably have to abandon the Transdnistria 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. 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 inquiry into the 2006 death of ex-KGB officer Alexander Litvinenko laid the blame for his poisoning on high-level Russian government officials up to Putin. Finally, whatever form the investigation into the downing of the Malaysian airliner over the Donbas 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. The Russian people are not ready to accept 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.
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 War 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.
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 Russian people are facing another long economic winter, which is going to get a lot harsher before there is light.
Alexei Bayer is a New York-based economist and writer. His new detective novel, “Latchkey Murders,” set in Moscow in the early 1960s, is coming out in English in early July.
