Why Russia's Economy Isn't Going To Collapse

However, after getting decimated during the worse days of the financial crisis, Russia’s economy has been plugging  along with steady and unremarkable growth in the 3-4% range, hardly world beating but actually faster than almost every country in the EU. As more time has passed and Russia’s economy has defied predictions by continuing to not collapse, I’ve become increasingly convinced that its economic stability has been somewhat underrated and that, despite its many faults, its basic economic model is quite likely to endure through the short and medium terms. I certainly don’t think that Russia is going to become some sort of economic hegemon, but it seems far more likely than not that it will evolve gradually, and not through some titanic rupture or revolutionary upheaval.

But my hunches and inclinations aren’t very good evidence, so I thought I would put a few charts together which show why I think that  Russia’s economy is basically going to stay stable over the next several years and that it’s a huge mistake to predict a cataclysm which will sweep away the dread Putin.

1.The price of Brent crude has stayed remarkably robust despite chronic economic weakness in the developed world.

I suppose it’s possible that the EU will never emerge from its current doldrums, but I think that the developed world will eventually get out of its funk and start to grow again. When it does that growth will likely drive the price of oil even higher, or at least prevent it from going much lower.

2. Russia still has very large foreign reserves, some of the largest in the entire world

Although you often hear, as in Matthews’ piece, that "the Russians used to be responsible with their oil money, now they’re become totally reckless and irresponsible,” Russia still has very large foreign reserves that amount to almost 25% of its GDP. Note the similarity between the oil price graph and Russia’s foreign reserves, their shapes are almost identical

While the utility of foreign reserves can often be overstated, they can be veryhandy in averting economic catastrophes, and, as you might expect, the Russians drew heavily on their foreign reserves during the worst days of the 2008-09 crisis. I think that the reserves provide a cushion that will help to shield Russia from a future shock, such as a rapid and massive decline in the price of oil. Of course there’s still the chance that Russia will suffer a slow and gradual decline in competitiveness, but what I’m pushing back against is not that argument but the argument that the whole house of cards is going to collapse in the next couple of years.

3. The Russian government still runs a budget surplus, and its spending as a percentage of GDP is not very high

From January-October 2012 Russia ran a budget surplus of about 1.4%, smaller than the 2011 figure (3.2%) but a surplus nonetheless.  Russia’s total level of government spending (about 32% of GDP)  hardly seems outrageous or unsustainable. Additionally, despite a lot of loose and foolish talk from the Russian defense ministry about it looming re-armament campaign, Russia’s budget spending is more weighted towards the social sphere than the military industrial complex. Courtesy of the Gaidar institute, here’s a graph showing where Russia’s consolidated government spending was directed in the first ten months of 2012:

The Gaidar institute is hardly a Kremlin outfit, indeed the overall tone of the report to which I linked is actually quite gloomy* and critical of the authorities, and considering its track record I don’t think that it would have spun the numbers in a more pro-Putin direction. When analyzing any country’s budget posture you need to focus on where the money is actually being spent. While there’s been an awful lot of talk about comprehensively re-arming the Russian military, the actual level of spending remains relatively small and well within the country’s ability to pay.

The purse-strings are clearly somewhat looser than they used to be, but a quick glance at Russia’s budget certainly doesn’t give the impression of a totally reckless and debauched approach.

4. Russian unemployment is at or near a post-Soviet record low

Russia’s labor market isn’t exactly a model for anyone else, but its arguably more robust now than its ever been before. I think that this will act as a sort of stabilizing influence in its own right, but, more importantly, it might allow the government to feel comfortable enough to do some tinkering and implement a few moderate reforms. Basically, the government is more likely to undertake some modest liberalization if the labor market is healthy and it’s confident that people will be able to find jobs than if the unemployment rate is already trending upwards (unemployment is obviously highly politically sensitive in "performance legitimacy” regimes like Russia’s).

Let me be clear in saying that I do not think that any of the above demonstrates that "we should all become like Russia!” Russia’s economy has a lot of serious problems, and it will eventually have to go through some serious structural changes if it wants to remain relevant. The growth in the non-oil deficit is particularly worrying, and the Kremlin will need to address that in the near future before it gets any further out of hand. However, based on its post-crisis performance, the Russian economy seems to be flexible enough to deal with a number of serious challenges. It would be a big mistake to allow distaste for Putin to cloud judgement about the likely course of Russia’s economy, which seems like it will continue to experience modest growth in the short and medium terms.

Mark Adomanis

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