Russia’s bearish economy | The Japan Times
WASHINGTON – Just a few years ago, investment bankers were bullish on emerging markets, which they saw as undervalued and doomed to rise. And yet, after recovering slightly, growth rates in Latin America, the former Soviet Union, the Middle East and Africa are returning to a state of near stagnation. In this regard, Russia is a pioneer, having recorded no real growth since 2014.
According to an old Soviet saying, agriculture suffers from four problems: spring, summer, autumn and winter. Following the same logic, Russian President Vladimir Putin blames “outside forces” – notably world oil prices – for his country’s slump, even though unhealthy economic policies and Western sanctions are no one’s fault. than his.
It is no coincidence that there has been an economic divergence in Central and Eastern Europe. The countries that joined the European Union improved their economic governance and the GDP began to converge towards Western Europe. Between 2014 and 2019, Hungary, Poland and Romania grew at an average annual rate of 3.9%, 4.1% and 4.7%, respectively.
Meanwhile, Belarus and Ukraine experienced minimal growth during this period, and the Russian economy grew at an average annual rate of just 0.7%. Although Russia had a higher GDP per capita (in terms of purchasing power parity) than Croatia, Poland, Romania and Turkey in 2009, all of these countries have since exceeded it. Russians today are shocked to learn that they are worse off than Romanians and Turks. Among the EU Member States, only Bulgaria is even poorer than Russia.
Given its proximity to the EU’s single market, Russia could have experienced higher growth if it had pursued sound economic policies. Instead, Putin completely squandered the country’s abundant human capital through corrupt cronyism and systematic deinstitutionalization. Its politicization of courts and law enforcement has eliminated any pretext for the rule of law – a prerequisite for private investment and business development. Apparently, Putin thinks the economy is less important than the ability to kill opponents like Boris Nemtsov and Alexei Navalny (who was recently transferred from prison to hospital, which is said to be on the verge of death).
Transparency International’s Corruption Perceptions Index illustrates the depth of Putin’s kleptocracy. In 2020, Russia ranked 129th out of 176 countries, while Poland ranked 45th and Romania and Hungary were tied for 69th. None of these Central European countries is, of course, a stronghold of its own governance; but the difference lies in the respect of property rights by a country.
In the absence of secure property rights and subject to Western sanctions, Russia can only attract fools and crooks. Between 2008-13 and 2014-19, the average annual inflows of foreign direct investment fell from 3.1% of GDP to a paltry 1.4% of GDP.
In his annual speech to the Federal Assembly on April 21, Putin, as usual, pledged that “macroeconomic stability and control of inflation … will be definitively accomplished”. To be sure, investment banks and the International Monetary Fund view Russia’s conservative macroeconomic policies with sympathy.
Isn’t it wonderful that the country has $ 573 billion in international currency reserves, a federal government debt of only 18%? 100 of GDP and a regular current account surplus? In fact, macroeconomic stability does not mean much, because it is only a means of achieving constant growth; it is not an end in itself. The goal of any government’s economic policy should be to maximize the well-being of its citizens. But Putin’s explicit aim is to maximize so-called Russian sovereignty – that is, his own dictatorial power.
The position of investment bankers is understandable enough, given their interest in selling Russian bonds. The question is why the IMF would agree. While the IMF has recently moved away from fiscal conservatism to support more stimulus around the world, the Russian government has done the opposite. Obviously, the IMF needs to understand what it really represents.
Another problem attributable to Putin is the skyrocketing Western sanctions. On April 15, the US government banned financial institutions under its jurisdiction from purchasing Russian ruble-denominated bonds, after sanctioning Russian Eurobonds denominated in foreign currencies in 2019.
The Central Bank of Russia insists these bond issues are minimal, amounting to only about $ 61 billion in a $ 1.5 trillion economy. But that ignores the implications of US policy. While investment bankers can still buy Russian bonds in secondary markets, they will need to consider the risk that the next round of sanctions will target those purchases as well.
Moreover, while it is normal for a large emerging economy to hold hundreds of billions of US dollars in government bonds, Russia does not have this option. The costs of US sanctions are therefore higher than they appear. Russia’s inability to trade in dollars severely restricts its investment opportunities and hampers its growth. Meanwhile, thanks to Putin and his extreme austerity policies, Russia’s standard of living has fallen 11% in the past seven years.
How can we praise such inhumane policies? While economists typically focus on real economic growth (adjusted for inflation), what matters to foreign investors is the value of the country’s GDP in US dollars. In Russia’s case, that figure has dropped by more than a third – from $ 2.3 trillion in 2013 (before sanctions) to $ 1.5 trillion in 2020.
In current US dollars, the Russian stock market is valued at just 53% of its May 2008 peak. What serious investor would bet on such a rapidly shrinking economy?
To what extent has Russia’s underperformance since 2014 been caused by falling oil prices and to what extent by Western sanctions and the Kremlin’s own anti-growth policies? In a forthcoming report from the Atlantic Council, Maria Snegovaya and I argue that Russia’s potential growth since 2014 should have been 5% per year, and that about half – 2.5 to 3% of the GDP per year – was eliminated by Western sanctions.
Granted, Russia isn’t the only struggling emerging economy these days. But none owe their current struggles to a similar level of self-harm.
Anders Aslund is a senior fellow at the Atlantic Council in Washington. His latest book is Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy, Yale University Press, 2019. © Project Syndicate, 2021
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