The Russian Challenge

The Russian Challenge
An Enfeebled Economy
The most immediate source of risk, then, is bank and
corporate debt to the outside world. But that in turn creates
additional risks for the public finances. There have been
headaches over redrafting the 2015 federal budget to cope
with an oil-price assumption of $50/b instead of $100/b.
One draft produced a deficit equal to 3.8 per cent of GDP,
requiring substantial drawing-down of the Reserve Fund.
The proposed cuts were resisted, but might not be enough. 82
In this situation, and particularly in the wake of the
rapid rouble depreciation of late 2014, Russian banks have
got into difficulties. The CBR relaxed capital requirements in
December; there have been runs on some banks, a couple of
bank bail-outs and plans for extensive bank recapitalization.
A banking crisis at some point in 2015–16 cannot be
ruled out. 83
It looks as though, in the short and medium term, market
conjuncture and geopolitical conflicts could create serious
problems for the Russian leadership. Default on external
debt is unlikely but recession and continued financial
turmoil are probable. The main question is how long the
recession will last. A stabilization of the oil price around
$60/b, a slowing of inflation and some easing of Western
sanctions are all possible during the course of 2015. A
combination of those developments would indicate an
early exit from recession in 2016. But none of these events
is guaranteed. Confidence in Russia is fragile at the best of
times, and these are not the best of times.
Political implications for Russia’s Great
Power ambitions
The present Russian leadership seeks to make Russia
a dominant regional power (at least), able to bend its
neighbours to that leadership’s will. Keir Giles, in his
chapter, sets out the means by which it has pursued this
aim. Some of these do not, in macroeconomic terms,
amount to a significant burden: cyber warfare, some forms
of hostile messaging, purchasing the influence of individuals
and information warfare, for example. Others could in some
cases entail significant costs but do not necessarily do so
in all instances: energy cut-offs, for example, may in the
medium term even help a Russian supplier to charge high
prices after the cut-off, and the conversion of a neighbour’s
debt to a stake in its infrastructure may also pay off in
commercial terms, even if that was not its main purpose.
Other means of influence, and military power in particular,
have high costs that are significant at a national level. Is the
enfeebled Russian economy capable of supporting them?
It should be borne in mind that military strength, though
most conspicuously exemplified by the United States, is not
the prerogative of rich nations. The Soviet Union, though
much poorer than the US and its allies and lagging behind
in technology, was able to maintain some sort of military
balance with them up to its demise. It did this, moreover,
with very little help from its Warsaw Pact allies. So Russia
is not necessarily debarred by its moderate level of per
capita GDP from pursuing what appear to be substantial
military ambitions.
The weak state of the Russian
economy will at some stage set limits
to the scale and pace of the Russian
state armaments programme. Exactly
how the conflict over that programme
between (broadly) the economic bloc of
the government and the military will be
resolved remains to be seen.
Pursuing them it certainly is. Military expenditure rose by
20 per cent a year in the four years between 2011 and 2014.
That is in nominal terms, and it is likely that inflation in
military hardware procurement is higher than in consumer
prices. Even so, there has been a substantial increase in real
terms, to over 3 per cent of GDP. 84
Will the government be able to maintain such increases in
military spending, and in the ambitious state armaments
programme? First indications are that it will at any rate
try. The original budget plan for 2015 envisaged a nominal
increase in military spending of 33 per cent, moving the
total to 4 per cent of GDP. 85 In early March 2015 the cuts
(in the form of postponements) in military expenditure
favoured by the Ministry of Finance were still being resisted,
but a federal budget deficit of 5.2 per cent of GDP was
a possible corollary. 86 That would be extremely difficult
to finance and would erode what little confidence the
markets retain in Russian policy-making.
The weak state of the Russian economy will at some
stage set limits to the scale and pace of the Russian state
armaments programme. Exactly how the conflict over that
82
Tat’yana Nedovina, ‘Byudzhet ne soshel’sya v raskhodakh’ [‘The budget didn’t match up on the spending side’], Kommersant’, 5 March 2015.
83
Oxford Analytica Daily Brief, ‘Russian financial system will be increasingly fragile’, 6 March 2015.
84
BOFIT Weekly, 6 March 2015.
85
Ibid., 10 October 2014.
86
Nedovina, ‘Byudzhet’. There had been some earlier compromises, however. See Ivan Safronov and Dmitrii Butrin, ‘Vozrazheniya vstupili v boi s vozrazheniyami’
[‘Objections went to war with objections’], Kommersant’, 19 February 2015.
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