Russia, a nation accustomed to navigating through tumultuous waters, finds itself at a critical juncture as internal divisions among its top brass threaten to destabilize its already fragile economy. Igor Sechin, CEO of Rosneft and a close confidant of President Vladimir Putin, recently vocalized criticism of the central bank’s high interest rates and its alleged shortcomings in establishing a cross-border payment system amid the current sanctions.
This discord at the upper echelons, particularly between Putin’s security circle and economic technocrats, is not a new phenomenon. However, its emergence into the public sphere amidst an ongoing crisis and the upcoming presidential election in 2024 casts further shadows on Russia’s economic strategy.
The Crux of the Crisis
The roots of Russia’s current economic predicament can be traced back over 15 years, through a series of global and local upheavals. Starting with the 2008 financial meltdown, followed by a plunge in commodity prices in 2014-15, the imposition of Western sanctions post-Crimea annexation, and the crushing impact of the Covid-19 pandemic, Russia’s economy has been in a near-constant state of flux.
The situation further deteriorated after the 2022 invasion of Ukraine led to a new round of severe sanctions. This relentless sequence of crises has left Russia’s economy lagging significantly behind its peers. In 2022, its GDP per capita plummeted to 35% and 32% lower than Poland and Turkey, respectively, a stark contrast to its 2008 standings.
Putin’s strategy for economic management has always involved a delicate balance. He has allowed former security service colleagues to amass influence and wealth through corporate control while entrusting the economy’s reins to cautious technocrats like Anton Siluanov, the Finance Minister, and Elvira Nabiullina, the Bank of Russia governor. This approach facilitated a semblance of stability, adhering to global fiscal standards and market-based economy principles. However, successive crises have forced a shift from principled policy-making to makeshift solutions.
The Impending Economic Storm
The current scenario in Russia is one of policy improvisation under duress. The nation’s ‘rainy-day fund’ has been depleted to support increased defense spending, diminishing by $65 billion since July 2022. The central bank’s independence has been compromised, evidenced by its reactive measures like the abrupt interest rate hikes to salvage the falling rouble. Moreover, the government has introduced novel concepts like “voluntary” taxes, effectively pressuring corporations into unscheduled state contributions.
Putin’s directive for “manual control” in times of crisis, issued post-Crimea annexation, has resurfaced, manifesting in an absence of clear policy guidelines. This ad-hoc approach to crisis management is compounded by disagreements among Russia’s top officials over handling Western sanctions, budgetary allocations for the war in Ukraine, and the need for increased social spending to quell potential public unrest.
With Russia’s presidential election looming, economic policy differences may be momentarily subdued as Putin sets the agenda. However, critical decisions await post-election, including strategies to finance the looming budget deficit, the possibility of stringent capital controls, and determining the lead role in combating rampant inflation. The IMF estimates a 2.5% GDP deficit for the next year, with oil prices reverting to January 2021 levels, posing further challenges.
In essence, Russia stands at a precarious economic crossroads, with its future policy direction hinging on the whims of the latest influencer in Putin’s inner circle. The lack of a cohesive, principle-driven economic strategy in these turbulent times is not just a concern for Russia but a warning sign for the global economy. As the country navigates through these choppy waters, the world watches, anticipating the impact of Russia’s internal tiffs on its economic destiny.
