10 Reasons Why the Russian Economy Will Falter
by Anders Aslund, Peterson Institute for International Economics
Op-ed in the Moscow Times
September 3, 2008
© Moscow Times
August 8 stands out as a fateful day for Russia. It marks Prime Minister Vladimir Putin's greatest strategic blunder. In one blow, he wiped out half a trillion dollars of stock market value, stalled all domestic reforms, and isolated Russia from the outside world.
Russia's attack on Georgia, its small democratic neighbor, was bad enough, but its recognition of two conquered protectorates as independent states has been supported only by Hamas, Belarus, Venezuela, and Cuba. Putin is turning Russia into a rogue state.
Russia has gone through a grand economic recovery, but its strength must not be exaggerated. In current dollars, its gross domestic product has increased almost ninefold in nine years, but even so, it accounts for only 2.8 percent of global GDP. At present, its per capita GDP of $12,000 is a quarter of the US level. While this is impressive, much of its catch-up potential has been exhausted.
The official government target is to reach half the US per capita GDP by 2020. It is possible to achieve that goal, but it would require carrying out extensive economic reforms during the next 12 years. The problem, however, is that Russia's foreign aggression has strengthened the authoritarian regime, and this has ended all hopes for substantial reforms at a time when they are needed the most.
To understand Russia's economic dilemma, we need to consider the causes of the country's growth over the last decade and the current challenges. The dominant cause of growth has been European or capitalist convergence, which Russia has enjoyed thanks to Boris Yeltsin's hard-fought introduction of a market economy, privatization, and international integration. The country's short economic history can be summed up as: All good comes from private enterprise. The government's contribution has been to keep the budget in surplus and reduce taxation.
A second cause of the high growth has been the huge free capacity in production, infrastructure, and human capital after the collapse of communism. The recovery was also coupled with remonetization, as Russia has enjoyed one of the greatest credit booms of all time. With the rise of the new capitalist service sector, a huge structural change has spurred growth. Together, the systemic and structural changes amount to a gigantic catch-up effect that all postcommunist reform countries have experienced. The average annual real growth in former Soviet states from 2000 to 2007 was 9 percent, but it reached only 7 percent in Russia.
The third factor behind Russia's growth is the most spurious—namely the oil price windfall since 2004. While it has boosted the country's budget surplus, current account balance, and currency reserves, it is likely to have damaged its policy badly, as the elite focused on the distribution of oil rents rather than on the improvement of policy. As a consequence, Russia has seen no economic or social reforms worth mentioning for the past six years.
Moscow's current economic dilemma is that the old sources of growth will soon be exhausted. Undoubtedly, some capitalist convergence will continue, but it is bound to slow down.
Unfortunately, it is easy to compile 10 reasons why Russia is likely to have lower growth in the near future than it has had for the last nine years.
In short, Russia is set for a sudden and sharp fall in its economic growth. It is difficult to assess the impact of each of these 10 factors, but they are all potent and negative. A sudden, zero growth would not be surprising, and leaders like Putin are not prepared to face reality. Russia's economic situation looks ugly. For how long can Russia afford such an expensive prime minister?