'Putinomics' Has the Russian Economy in a Tailspin

The bad economic news has rolled over Russia this month in a manner as devastating in a financial sense as the tsunami that struck the Philippines was in the physical. No matter where you turned, if you were a Russian there was only a gigantic wave of red ink rushing at you full speed.

In a move some called unprecedented in Russian history, Economic Development Minister Aleksei Ulyukayev openly admitted that over the next fifteen years the Kremlin expects Russian economic growth to be over 25% less than the world average, with the result that by 2030 Russia’s share of the world economy will have declined by at least a stunning 15%, from 4% today  to just 3.4% fifteen years from now.

The stunned editors of the leading Russian newspaper Nezavisimaya Gazeta stated in an editorial: “Neither the tzars, nor the Bolsheviks, nor the statists ever once told the population that their country did not have greater prospects.” It was jarring indeed to realize that things might be so bad that not even the Kremlin would take the chance of lying about them.

In other words, the days of Vladimir Putin strutting about the world stage boasting of his economic achievements have come to an abrupt and ignominious end.

Then came the Economist magazine, with a hard-hitting feature item on the collapse of Putinomics provocatively titled “The Crumbling Kremlin.”  The piece almost seemed to be mocking Putin, the former KGB spy, taunting him with the dreaded word “stagnation” that wrought so much despair in Soviet times.

The magazine’s data show that the Russian economy never recovered from the 2009 global economic meltdown. Its post-crisis growth level is consistently a pale shadow of what it knew before.  The magazine shows that Russia experienced nearly $50 billion in capital flight in just the first three quarters of this year alone, and posits that Russia is facing a collapse of a state pension system which it can no longer afford to fund.

And worst of all it notes: “The oil price at which Russia can finance budgeted spending without borrowing has increased from just $34 a barrel in 2007 to above $100 for the years ahead.”

Putin’s country stands totally at the mercy, in other words, of a world oil price over which it has no control.  Ironically, Putin’s main foreign policy objective seems to be undermining the economies of the West, a policy which if successful would only lead to reduced demand for oil with brutal consequences for Russia.

Already beleaguered by illness of every kind imaginable, including a horrific AIDS crisis, Putin’s Russia is not prepared to sustain the type of draconian cuts to pensions and social services that are clearly now in the offing.  A major demographic debacle is inevitable.

Finally, the boot was put in by the financial consulting firm Z/Yen, which annually prepares a listing of world cities ranked by their financial clout.  In 2011 Z/Yen put Moscow at #61 on its list of about 80 major metropolises. Pretty feeble stuff.  But for wretched Moscow, now it’s the good old days.  The 2013 study places Moscow #69, after falling to #64 in 2012.  Despite Putin’s bold pronouncements that Moscow would soon become a leading financial center, backed up by massive skyscraper construction projects, the capital city is going backwards not forwards.  One Western banker working there told the New York Times: “Moscow was never going to be an international financial center. That was a joke.”

The tone in all this adverse reporting is crystal clear:  The neo-Soviet arrogance and even petulance which Putin has adopted towards the outside world was not just unjustified, it was fraudulent.  Putin benefited from the accidental spiking of the price of oil and a temporary uptick in childbirth, neither of which had anything at all to do with his policies. Now, the neo-Soviet chickens have come home to roost. The world now sees Putin’s Russia for what it truly is, like the infamous emperor without his “new clothes,” and the world is jeering.

A good case study for understanding the sorry plight of the Putin economy is tourism.  Putin’s English-language propaganda screed Russia Beyond the Headlines recently touted a UN report showing that Russia was in ninth place worldwide for visitation by tourists. But as is so typical for RBTH, one of the worst sources of information about Russia that there is, the real story, extremely negative for Russia, was left out of its pages.

Russia does not rank anywhere remotely close to the top 10 when it comes to receipt of tourist dollars.  It had a paltry $12 billion in tourist receipts compared a whopping $30 billion by Australia, which rounds out the top 10 list (the USA tops the list with $125 billion in tourist receipts, ten times more than Russia has and five times more per capita).

The reason for this is simple:  The “tourists” who visit Russia have little or no money, mostly coming from the impoverished nations of the former USSR.  When it comes to competing for the attention of sophisticated tourists who do have money and the PR clout that goes with it, clout that might influence international attitudes towards Russia, Russia doesn’t compete, it simply fails.

This is confirmed by the World Economic Forum, whose most recent data show that Russia ranks an anemic #63 in tourism competitiveness.  Sophisticated tourists are going to tend to shy away from the horrific issues that plague Russian society, from rudeness to corruption to illness and safety risks. And without genius-level marketing, they’re not going to find Russia’s relatively modest attractions very beguiling.

But Putin’s response to all this will be the RBTH response:  deception and diversion.  He will not seek reform, but he will put a great deal of energy, just as in Soviet times, into creating the illusion of success and liquidating anyone within Russia who tries to tell a different story.