How Stable is Russia? Part 2

Read what Russian officials are saying about the economy, and you’ll notice a pattern. Unlike some western analysts, none are worried about making ends meet through the year. Nor are they particularly worried about next year either. It’s 2018 and 2019 (and beyond) that has them worried. In my last piece, I took a look at the sources of Russia’s stability. This time around, I’m going to be a bit more pessimistic, and examine what’s making Russia unstable. There are a fair few factors at play here, but there’s an important point here: most all of them are a problem in the middle term, not the short term. That’s to say, the things that are making Russia stable are doing so today, while the things making Russia unstable do so in about three+ years. And interestingly, some of these factors are one and the same.

What’s Making Russia Unstable? 

1) Putin is very popular and very much in command.

How could a leader with an 82% approval rating be a source of instability? As noted above, for now it is not: Putin’s near unlimited capacity to implement policy, including measurably bad economic policy, knows almost no institutional limitations. However, the dismantling of institutions is a significant risk to a Russia beyond Putin, especially if that move beyond Putin were to happen unexpectedly. The short version of the problem here is that for a system built around one person to function well, that one person needs to function well – and more broadly, be there.

There are a couple of important points here, and most of them deal with elites rather than Putin’s base of support among the population. The rise of a new generation of leaders who have no political capital beyond their closeness with Putin presents a future challenge, particularly in a system of governance being streamlined. Take for example Oleg Belozyorov, the new head of Russian Railways (RZhD): he was an unknown technocrat and it seems the reason for his promotion was through connections to the Rotenbergs, oligarchs and close friends of Putin. Take also Viktor Zolotov head of Russia’s in development National Guard, who rose the ranks due to his proximity to Putin, and will now answer directly to him. But what’s the problem here?

First, there are already reports of a confirmation bias problem within the Kremlin: people do not want to share bad news with the boss. It’s hard to think of many officials who have enough standing to share a truly honest pessimistic take with Putin. Alexei Kudrin, maybe? Many who do are getting old and retiring at any rate. That bodes poorly for governance, and has had near-catastrophic consequences for humanity in the past. Putin is quite good at balancing elite interests, but there’s less to suggest he likes his worldview to be challenged.

Second, the consolidation of Putin’s personal power at the expense of institutions has manufactured new players. See Zolotov, mentioned above, who will soon have effective control of every police officer in Russia. It’s certainly nice to have direct control over the security apparatus, but with Putin out of the picture some day, Zolotov will have his own gravity, perhaps to the detriment of the next president’s authority. The overall trend is short term consolidation at the potential cost of long term stability. But on to the next topic, before I get too bogged down in Kremlinology. And anyway:

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2) The long-term economic picture is bleak. 

This is something that could be written about – and something I will write about – for a long time. To make a long story short, Russia needs an oil change: the oil-sector-driven model of economic growth has been exhausted. Critically, the economy started sputtering before the Ukraine Crisis. See the graph below, based on data from the IMF’s World Economic Outlook (April 2016).

economic-growth

There are a couple of interesting places in this graph. First, note how the financial crisis hit Russia (on the lighter line): a steep drop from 2008 to 2009, followed by a rebound that was just about as steep. Compare that to what is happening now: a not-all-that-terrible drop for 2015 and 2016, followed by stagnation. Many have argued that stagnation isn’t merely secular stagnation, but a structural limitation on the rate at which Russia’s economy can grow. Again, the sputtering began when oil was over $100 per barrel and there were no sanctions in place against Russia. As Vladimir Milov memorably put it, the sanctions merely “pushed a flightless bird off a cliff.”

How Russia can break this cycle is a story for another post (many posts, in fact), but suffice it to say it will cost significant financial and political capital: the reform entailed will be painful, which is why it is being put off. The main point is the light at the end of the tunnel is stagnation, not the roaring growth of the early 2000’s. Indeed, per these projections, GDP will catch up to where it was in about 2014 only in 2020 (see darker lnie). The narrative that Russia is under siege has worked until now, but will it work after five years without growth, and relaxed sanctions? That’s at least somewhat doubtful.

3) What’s in an Approval Rating, Anyway? 

Do 82% of Russians really support Putin? It’s an interesting question. Certainly, a majority do. As noted in Part 1, Russians have done well under Putin, and Russia is now a more influential global player with a much more credible military. But what does ‘support’ mean. First, to most Russians, the alternative to Putin isn’t another person, its the chaos of the 90s. Largely by design, there are no credible alternatives to Putin’s governance. Ask a Russian “вы Путина поддерживаете?” (Do you support Putin?) and you may well hear in response, “а кого еще?” (well who else?). Opposition hero Boris Nemtsov wasn’t a credible alternative to Putin, and neither is Alexei Navalny (who, by the way, is pretty nationalistic). To an extent, asking about support for Putin is a futile exercise, much like asking a Russian in 1987 whether they supported the Soviet Union. The support is there now, but it could well evaporate quickly under the right conditions. Russians have done well under Putin, despite recent turbulence, but does not mean their support is unconditional. Indeed, an example from the early 2000’s shows the risks of some of the reforms Russian officials have spoken of.

Between December 2003 and February 2005, Putin’s disapproval rating rose from 13% to 32%. Part of that increase was the protracted Second Chechen War and Beslan School Seige. But a rarely mentioned event in early 2005 was the passage of a reform measure that monetized social benefits for pensioners (and others dependent on the state budget) in an effort to alleviate budget pressure. The act sparked fairly massive protests by senior citizens and others across Russia – indeed, many who have lived over there (myself included) can tell you what happens when you cross a бабушка (grandmother). While Putin’s grip on Russia wasn’t in doubt then – though it was certainly weaker than it is now – this demonstrates the risk posed by unpopular reforms. And unpopular reforms (which are a common grievance that unites Russians in many cities and regions) with economic stagnation in the background could well spark unrest.


So, how stable is Russia? Right now, despite reports to the contrary, it is stable. Its economy is not about to collapse, and neither is Putin. The problem Russia faces is not the ongoing “crisis” so much as the crisis of stagnation and need for painful reform that follows. Over the next five years, Russia will find itself increasingly poorly equipped to deal with a sudden downturn should one arise. It’s not a particularly likely risk, but its a definite possibility.

More coming soon! Hoping to take deeper dives into various economic sectors, what structural reform is on the agenda (and what that even means), and feature some guest pieces.

 

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