Russia's Economy in Steep Decline, Yet U.S. Passes on Chance to Crush Putin

The Russian economy has recorded its sixth straight quarter of declining economic growth. A year and half ago, Russian GDP growth was above 5%; now it’s barely above 1%, and the worst appears yet to come.

Ironically, as second quarter 2013 performance results came out last week, the truly frightening news for Russia was how well the country’s stock market was doing. It shrugged off news of the sixth straight quarterly decline, and it shrugged off the fact that the Q2 growth of 1.2% was more than a third less then the Kremlin had predicted. The only way the Russian market could ignore news this bad? By already being dead.

Pavel Demeshchik, a dealer at ING Bank in Moscow, told the Wall Street Journal: “The market is thin, volumes are low. All went to dacha after lunch on Friday.” The market doesn’t care how bad the news is because hardly anyone is trading.

At the start of the year, the Kremlin rosily predicted 3.6% growth for 2013 -- the same level Russia had in the first half of 2011. By April, the Kremlin was already backing away from that prediction, cutting the forecast by a third to 2.4%.

The Russian economy is spiraling helplessly into recession even though the price of crude oil, its lifeblood, remains strong. The reason is simple: Putin’s draconian neo-Soviet policies are choking off foreign investment and causing domestic capital to flee at an alarming rate. There simply is no money available for building factories and creating jobs. Last year, foreign direct investment (FDI), already at anemic levels even for Russia, plunged by 15%. In 2008 at the start of the global economic crisis, Russia raked in $75 billion in FDI. By 2012, Putinomics had established Russia as the worst-performing major economy post-crisis: FDI had fallen by more than half to $31 billion.

For comparison, Ireland attracted that amount despite having just 3% of Russia’s population. Brazil, to which Russia is often compared, has more than doubled Russia’s FDI at present.

But even if there was reasonable cash flow, Russia could not make use of it for two profoundly worrying reasons.

One is corruption: Transparency International calls Russia the most corrupt major civilization on this planet. Because of corruption, the 2014 Olympic Games are costing Russia at least double what they should, as the Kremlin has to throw two dollars in to get one dollar’s worth of work back out.

The other is lack of innovation. Putin is squeezing the life out of Russian society, denying citizens the chance to be enterprising. Further, higher education is dismal. Russia doesn’t have a single school ranked among the world’s top 75. Professors are poorly paid, facilities are poorly funded, and research is profoundly constrained by politics, just as in Soviet times.

When American gay advocacy groups recently considered boycotting Russian goods over Putin’s homophobia, they were unable to identify a popular Russian good worth boycotting. Stolichnaya vodka was considered -- but no, it’s not Russian.

In 2009, Russia’s stock market lost 75% of its value, and the economy contracted by a brutal 7.5%. The ruble collapsed, and Russia had to burn through a gigantic portion of its cash reserves to prevent catastrophic freefall. Putin had previously depicted Russia as a “safe harbor” immune from the problems of mismanagement and debt plaguing the West. In 2009 this claim was unmasked, and the Russian economy hasn’t been the same since.

Putin has claimed that, under his leadership, the disastrous economic performance of Boris Yeltsin was reversed. This claim is simply not true: in Yeltsin’s final year of rule, Russia had 6.4% GDP growth, and the following year -- before any policy of Putin’s could have been implemented -- GDP growth was 10%. After Putin’s policies became operational in 2001, Russia has matched or beaten the Yeltsin benchmark of 6.4% only five times. During the other seven Putin years since 2000, economic performance has been worse than under Yeltsin, often significantly worse, and Russia is now headed for its second brutal recession of the decade.

Perhaps fear of these lies being exposed explains Putin’s impulse to arrest his economic critics. His first major rival, businessman Mikhail Khodorkovsky, has been cooling his heels in Siberia for years. His second major rival, anti-corruption attorney Alexei Navalny, has just been convicted on similar political charges and is likely joining Khodorkovsky.

Condoleezza Rice recently told Charlie Rose:

The Russia of today is a diminished power. It still has nuclear weapons. It still has a security council veto. But it is, on any given day, the 14th, 15th, or 16th largest economy in the world, in a world in which economic power matters.

Despite Russia’s turmoil, President Barack Obama has not shown any signs he will take advantage of Putin’s feeble economic position to pressure his tyrannical behavior: see his limp response to the Edward Snowden asylum provocation.

Similarly, Republicans show little signs they will pressure Obama over his soft touch with Putin. And so Putin remains at the helm, driving Russia further into economic oblivion.