The Russian Challenge

The Russian Challenge
An Enfeebled Economy
tagged as liberals, captives of the rules of the game. 69 There
are powerful incentives for all members of the elite not to
challenge those rules: they keep subordinates vulnerable to
selective use of the law, and therefore under control; at the
same time they provide those subordinates with the means
to acquire some of the illegal or semi-legal gains that the
system allows; and their own past behaviour, since they
ascended through the same system, would under a rule of
law be open to scrutiny.
It follows that the system would not easily be changed
peacefully and from within, though peaceful change
cannot be ruled out entirely. One ray of hope is the
growing readiness of business associations to stand up for
fair treatment under the law. 70 But the long-run prospects
of successful pressure from an emerging class must be
somewhat dimmed by the slow pace of development of
that class, illustrated in Table 2 above. The idea that a
growing middle class in general, and a growing business
class in particular, will want and will press for improved
civil rights, including the rule of law, is a familiar one. In
Russia it comes up against a Catch-22: a weak rule of law
discourages many people from entering business, so the
Russian business community grows slowly, weakening
the growth of a constituency for the rule of law.
It is for this reason that change in the Putinist system is
unlikely in the near term. Two questions follow about
the conjunctural and geopolitical burdens on the Russian
economy: can the existing system cope with them in
the sense of maintaining itself; and will they advance
or retard the process of reform?
The conjunctural and geopolitical problems
of the Russian economy
The common ingredient in the most immediate economic
concerns of Russian policy-makers is uncertainty. There
is great uncertainty about the future oil price, the future
exchange rate of the rouble, the prospects of the war
in Ukraine, the duration and future severity of Western
sanctions, and the likely scope and duration of a policy
of state-led import substitution. (There is no uncertainty
about the long-term outcome of such import substitution:
it won’t work; it may, however, provide a temporary boost
to production levels.)
All economic activity is conducted under conditions of
uncertainty. The immediate problem in Russia now is
that uncertainty is unusually high: plausible scenarios
are constantly being changed and, at any one time,
are widely dispersed over an unusually broad range of
outcomes. This situation is exemplified by the CBR’s
guidelines for monetary and credit policy, published in
November 2014. 71 This text drastically revised a previous
document published only two months earlier; it contained
no fewer than five main scenarios; in addition, a sixth,
gloomier than the gloomiest of the five, was mentioned
in the text as a ‘stress scenario’, based on oil at $60/b.
Something close to this has subsequently become the
CBR’s chosen view. 72
How much of a problem, however, is posed by the gloomier
scenarios? By mid-December 2014 (after the rouble had
briefly fallen to 80 to the dollar), a decline of perhaps 4–5
per cent in GDP from 2014 to 2015, followed by stagnation
or a small further drop, had become a mainstream view;
this might be followed by a rebound in 2017 (see Figure
1 above). In February–March 2015, as the oil price and
the rouble seemed to stabilize, the forecasters’ visions
of the future lightened: MinEkon, for example, came up
with a baseline scenario of a 2.5 per cent fall in GDP in
2015, followed by a recovery to +2.8 per cent in 2016. 73
In either case, its longer-run expectation would be for
growth varying around the slow trend rate of about 2
per cent a year that was dictated by the limitations of
the ‘old growth model’. 74
Western sanctions, despite bravado to the contrary, are
seen as part of the problem. The CBR’s main projections
in November 2014 were differentiated according to what
happened to the oil price and the duration of Western
sanctions (see Table 3). For each oil-price assumption
there is a GDP projection that assumes sanctions are ended
in the third quarter of 2015, and another GDP projection
that assumes they are maintained until the end of 2017.
The differences between the two are, by implication, the
CBR projection of the effect of sanctions on the level of
economic activity. What evidence these were based on
has not been divulged, and the oil-price projections now
look highly optimistic, but at least the numbers offer a
clue to the bank’s thinking about the scale of the effects
of sanctions.
69
See Philip Hanson and Elizabeth Teague, Liberal Insiders and Economic Reform in Russia, Chatham House Russia and Eurasia Programme Paper 2013/01 (January 2013).
70
See Hanson, Asset-Grabbing, and Andrey Yakovlev, Anton Sobolev and Anton Kazun, ‘Mozhet li rossiiskii biznes ogranichit’ davlenie so storony gosudarstva?’
[‘Can Russian business limit pressure from the state?’], Moscow Higher School of Economics, preprint WPI/2014/01 (2014).
71
‘Osnovnye napravleniya yedinoi gosudarstvennoi denezhno-kreditnoi politiki na 2015 god i period 2016 i 2017 godov’ [‘Main directions of the single state monetary
and credit policy for 2015 and 2016–2017’], http://cbr.ru/today/publications_reports/on_2015(2016-2017).pdf.
72
US–Russia Business Council Daily Update, 16 December 2014.
73
Ibid., 26 March 2015.
74
Kudrin and Gurvich, ‘A new growth model’, p. 18.
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