"It's the economy stupid," said Bill Clinton during his election campaign, and he was right. Under democratic and free market conditions, economic indicators determine the effectiveness of politics and voters support. The poor economic conditions, the deteriorating living conditions of people, the inability to run a business safely, are the reasons for mass protests and the change of governments. However, this is not a rule that applies everywhere. It turns out that the economic crisis in Russia is not a reason for a revolt against ruling power. The efficient manipulation of data and directing public opinion on non-economic topics can strengthen the position of the authorities within the country, and even abroad. Seems unbelievable, but works!
The crisis
The crisis started in Russia at the end of 2014 as the oil prices faced a dramatic fall. The rouble lost 60 percent of its value to the US dollar. In the beginning of 2015, the economic crisis hits Russia with full force with the high inflation rate at 12, 9% and drop of GDP per capita from $15,000 to $9,000. Russian economy shrank by about 4 percent. The high inflation rate has caused a dramatic decrease in real wages. The crisis has affected mostly the poor people, large families, and city dwellers. The cuts in state spending forced by the catastrophic financial situation rapidly affected the education and health sector. The crisis has sharply transformed the banking sector as well as car and construction industry. Consumer spending and investments declined, and the foreign direct investment was at a drastically low level. In 2015 international rating agencies announced downgrading Russia’s credit rating to the ‘junk’ or non-investment level.
What caused Russia’s economic collapse?
The Russian system is primarily a corrupted, top-down economy (in 2005 - 35% of the economy was state owned; in 2017 it is already 70%). The rapid increase of the state's share of the economy is not the result of the desire for a wider distribution of goods. The paradox of renationalisation in the Russian style results in the privatization of profits and the nationalization of losses (the best example of this rule was Rosneft's acquisition of Bashneft). Taking over the companies by the state is also a cause of the inability of many establishments due to poor management and ubiquitous corruption. Interestingly, the losses resulting from ineffective management and corruption are estimated at several times the losses Russia suffered as a result of falling oil prices.
Cancer that devours the economy is a fully sanctioned system of good’s division among the oligarchs. The economy is based on a loyal group of oligarchs who gain enormous wealth, with the full support of state institutions and secret services that follow the instructions sent from the Kremlin. The greatest beneficiary of this system is the President and his closest surroundings. Whoever wants to conduct business in Russia must adapt to it, otherwise, will be excluded from the game according to the letter of the law. According to the latest Amnesty International report, Russia is in 131st place in terms of corruption in 176 countries.
Undoubtedly, the cause of the recent crisis in Russia, as well as the main threat to the economy in the long term context, is the lack of diversification and its full dependence on the export of raw materials. The attempts by the government to find a “blue ocean” and develop it under the conditions of the Russian economy have so far failed. The cause of the collapse was not the bad ideas, but ideology-based, top-down strategy for their implementation. It is worth recalling at least three flagship projects: the nanotechnology investment (with a huge plant), the Hyperloop project or the Russian version of Silicon Valley in Skolkovo. Huge investments that were supposed to change the face of the Russian economy but ended with disappointment.
There is no doubt that the Western sanctions imposed on Russia after its aggression against Ukraine, are making difficult to get out of the crisis soon. These sanctions not only limit economic cooperation, trade but also don’t allow Moscow to take the new loans, needed at least to service the debt.
This is already the 4th economic crisis in Russia in the last 25 years. However, this one seems exceptionally long and especially troublesome for the Russians. Society is clearly moving from the consumer society to the shortage society. It seems that the rulers are aware of the main causes of the weak economic situation and could take appropriate steps to improve the situation.
Propaganda for the crisis. Crisis for the propaganda.
Why do not people protest? For many reasons: they are afraid because of the repressive system in Russia works very intensively, they have to struggle for survival as well as more than 60 million of Russians are maintained by the state (20 mln employees, 40 mln pensioners).
An important role is also played by the massive propaganda machine. The lie repeated many times becomes true - it is the main rule of the Russian information policy. People are being told that the main cause of all economic failures and worsening living conditions are Western sanctions imposed on Russia. Imposing retaliatory sanctions on the other countries, such as the ban on the import of food products from Poland, has been explained as a beneficial for Russian citizens because European goods are “genetically modified and unhealthy”.
The aggressive rhetoric of the government and state media intensified while the Russian economy went into recession. As Western sanctions have caused the impoverishment of the Russian people, on one hand dealing with the crisis is a patriotic duty of every Russian, and on the other hand, the role of the state is to respond to this hostile gesture. In this situation, it is absolutely natural that defense is a priority and that significant resources from the budget for military modernization should be devoted. In the budget for 2017, $43 billion was allocated for defense (4.7 % of Russia's GDP), what in the situation of a country that is struggling with the economic crisis, not a war, is a dizzying sum.
Undoubtedly, the main task of the internal propaganda is to exclude President Putin from responsibility for the economic problems that the Russians face. There will always be a scapegoat that can be blamed for the misery of ordinary people. Smart shifting of the responsibility shows that President Putin has nothing to do with the deteriorating living conditions of the citizens. Some analysts compare Putin's carefully crafted image with the propaganda of Brezhnev's time. There are for sure many similarities in economic matters: backwardness of the top-down market, the economic gap between Russia and western countries, expensive top-down planned unsuccessful investments, huge costs of the aggressive international policy and lack of necessary economic reforms. However, this comparison should be a warning to President Putin because it was the catastrophic economic situation that led to the collapse of Brezhnev and subsequent historical changes in the Soviet Union.
Russians because of their mentality, history, as well as understandable fear, do not undermine the official line of authority. However it is interesting, how successful is Russian propaganda abroad.
I would admit that the so called active measures not only retained the efficiency from the Cold War but more effectively adapted to the new capabilities of modern technology. Internet development has abolished previous communication barriers. New media provides real-time access to information and enables immediate penetration. Thanks to social media, anonymous individuals can quickly disseminate desirable content. The Russian, foreign language media (RT, Sputnik), theoretically objective bloggers, Internet trolls, but also invited to the discussion journalists, scientists - all working on favorable for Russia message to the world. Russian foreign media serve not only to support Russian policy but also to disseminate misinformation about the true state of the economy, science, poverty, and investment.
Sometimes the message produced in Kremlin, after being transported through several friendly sources, begins to operate as reliable information in the trusted Western media.
Few months ago Ministry of Finance and the Russian Federation Federal State Statistic Service (Rosstat) presented data on sudden improvement of the economic situation. Based on this information, some banks, financial institutions have prepared optimistic financial forecasts. This information was also picked up by several journalists, proclaiming not only the end of the economic crisis in Russia but also a sudden positive change in the Russian economic structure.
In an article entitled "Sorry Senator McCain, Russia No Longer Just a Gas Station Masquerading As A Country" (Forbes magazine) the author maliciously refers to “hating Russia" Senator McCain, claiming that the Senator was wrong because Russia does not only managed to cope with the crisis already but also magically diversified its sources of revenue…Means that Kremlin Anti-Crisis Show runs really well, and journalist failed to do his homework properly.
The Rosstat is directly subject to political scrutiny. Due to the need of improving the image of the government ahead of the spring 2018 election, last data published by Rosstat are in conflict with the data from previous months. In January 2017 the Russian Statistical Office changed the methodology of research and by the way, they completely changed the market data. According to the new information, over the last two years (2015-2016) the Russian economy shrank by 3%, and not by 4.5% as previously estimated. There has been an increase in industrial output, although there has been a simultaneous decline in citizens' income and fixed investment.
Rosstat's subordination to the government made official data less credible, and unfortunately, they should be treated more as an element of propaganda than reliable market data.
According to the report by The Centre for Eastern Studies (OSW) “Increasing caution is advised when interpreting these data. Doubts regarding the quality of the indicators presented by Rosstat make the assessment of Russia’s actual economic situation increasingly difficult. As a consequence, reservations towards the Russian statistics office seem to be all the more justified. These suggest that Rosstat is under political pressure from the Kremlin and that these new, improved statistics meet the government’s propaganda-motivated demand for information.”
Political and Economic Consequences
Christopher Hartwell, President of Center for Social and Economic Research (CASE) is summarizing the current Russian economic situation: “Sounding the trumpet about defeating the recession would be like Napoleon claiming he conquered Russia once he reached Smolensk,”.
Available economic data indicate that Russia might be slowly recovering from the crisis, but stagnation is expected in the years to come. Due to the lack of in-depth reforms, compared to other countries, the Russian economy will be receding. Even the Russian Prime Minister Medvedev during the last Gaidar Forum Russia and the World: the Choice of Priorities said: “The fact that Russia overcame the recession doesn’t necessarily mean the problems are resolved,” He also noticed that the key challenges are Russia’s technological backwardness, the commodity-based economy and the enormous role of the government in it. The World Bank report on Russia (RER) shows encouraging signs of overcoming the recession (recovery in consumer demand, the growth of economic activity, inflation decline). However, it states that adjustment has taken place through massive expenditure cuts, as opposed to revenue mobilization and still Russia’s growth projections remain sensitive to oil prices.
The last available monthly report of the World Bank on Russia (June 2017) again highlights the signs of recovery and defines medium-term prognosis as favorable, but it says Russia’s longer-term growth prospects remained constrained by its low productivity.
This means that further falls in oil prices, for example, through faster shale production in the USA or ineffectiveness of oil production limitation agreement could reduce revenue, investment, and confidence. If the President Donald Trump will fulfill his promise to make the U.S. an independent energy power, Russia may have big problems maintaining stable economic growth. Sooner or later the development of car batteries combined with the emergence of renewable energy sources will make the basic Russian raw materials no longer an essential element of the global economy.
The Russian economy is strictly based on public expenditure, so any cuts in these expenditures forced by reduced oil prices, lead to serious effects throughout the economy. The average income of statistical Russians in 20% comes from the state (in 2006 it was only 11,6 with a decline in income from business activity (in 2016 only 7.8%, in 1993 - 18.6%.)
So how the weak condition of the Russian economy translates into the political power of President Putin? Mass strikes and protests in the near future in Russia are unlikely. It seems that the only thing that could hinder President Putin's ruling is the oligarch rebellion caused by the aggressive and uncompromising foreign policy of the Kremlin that leads many Russian businessmen to serious financial problems. As a result of sanctions, some oligarchs can not conduct the free economic activity and use their frozen funds abroad. Moreover, majority of the oligarchs is no longer willing to bear the costs of unprofitable government investments. So far, Putin has won the oligarchs with his loyalty and protection by the state services as well as strong opposition to introduce any economic reforms that could disrupt the existing oligarchic system. Undoubtedly, the extension of the US sanctions will undermine President Putin's position among influential Russian businessmen. How long will it be possible to maintain the support of the oligarchs in a country where there is less and less to be taken, is unknown.
There is such a joke in Russia: Before the next year's election, Putin went to the fortune-teller asking for his political future. The fortune - teller said that it would be his last spring. Putin: "In that case, there will be no spring". I am wondering if this simple solution can be easily translated into the economy.
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