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Russia’s economic model losing potential for growth

by Andrey Borodaevskiy

During the past three years, the current state and the prospects of Russia’s economy have provoked positive and negative forecasts within the country and among authoritative international agencies. By 2013, however, the arm of the barometer began definitely moving toward the storm.

According to official data, since the last quarter of 2012, Russia’s economic dynamics began slowing down. During the first three quarters of the current year, the growth rate amounted to 1.3 percent only.

A report prepared by the High School of Economics stated that the 3 percent annual growth, which only recently was regarded as “unbelievably low,” looks by now to be “almost unattainable.”

Such a growth rate probably won’t be achieved again for at least 10 more years, economic experts stated in “consensus forecast.”

For the whole current year, evaluations of Russia’s growth rate have been repeatedly reduced to between 1.8 percent (World Bank) and 2.0 percent (Standard & Poor’s), which “for the first time in this century” lags behind the average rate for the world.

In contrast, the expected annual inflation rate is steadily moving up, toward 10 percent and even 14 percent (instead of 1.5 percent promised at the start of the year).

As for 2014, this October the World Bank sharply revised its evaluation of eventual economic growth in Russia to a meager 1.5 percent. In budget forecasts for 2014-2016, typical estimates of revenue growth of about 5 to 7 percent gave way to reductions of about 4 percent.

Recently observers began to note that the budget falls short of ambitious social obligations the government had taken upon itself. President Vladimir Putin himself acknowledged, in a rather naive way, that because the economy was not growing at the rates “we were expecting,” there will not be the revenues “we were expecting.”

It was by the beginning of 2010 that stagflation in Russia caused by the global financial and economic crisis was more or less overcome, partly because of the large-scale rescue operations undertaken by the government.

In April that year, Putin stated that “though the crisis was going on,” the recession in production was over and that the nation had a good start position for moving ahead. He also alleged that the lessons learned during the crisis had confirmed the correctness of the course taken by the government.

In the president’s judgment, in Russia the consequences of the global crisis were “considerably softer” than in other countries of the world. Some scholars with high official positions shared his optimism and spoke of Russia’s “decoupling” from the global financial crisis, although the still rather influential academician and former Russian Prime Minister (1998-1999) Yevgeny Primakov expressed a directly opposing opinion.

At the 11th World Congress of Perinatal Medicine in Moscow, Putin blamed the demographic crisis “of the evil 1990s” for the difficulties the country would have to go through in the next couple of years with regard to “the economy, the social sphere, and industrial development” — as if bad demographics were but a short outbreak of a plight that had long ago been overcome!

As a matter of fact, the population continues to decline. This is, of course, a factor aggravating today’s economic problems, but it sure does not explain why Russia’s economy is losing momentum.

During a recent meeting on Russky Island, Vladivostok, at a luxury complex — which in 2012 housed the Asia-Pacific Economic Cooperation Summit and is regarded as a symbol of high officials’ wastefulness and corruption— Putin gave the government his permission cut budget expenditures. Although the president did not specify which expenditures to reduce, it is obvious that social and ecological programs will suffer.

This summer and autumn, from many sources, there were signals that the falling growth rate is not something transient but is the result of serious problems with structural and political foundations.

Standard & Poor’s experts stated that the growth potential for the existing economic model was becoming exhausted. According to them, Russia’s economy is now growing at the maximum growth rate that it can count on.

Their colleagues from the World Bank confirmed this opinion, while Russia’s minister of economic development, Alexei Ulyukayev, noted that the current economic situation is worse than in any of the last five years since the beginning of the global crisis.

But why the chronically bad demographics as well as low economic performance?

Obviously Putin is inclined to conveniently explain the second phenomenon with the help of the first one.

Yevgeny Primakov believes that all modern Russia’s troubles come from its having given up its traditional principle of state domination of the economy.

Hating the “neoliberals” who allegedly dream of completely driving the state out of economic life, Primakov calls for combining “true liberal values” (which he sees in the independent courts, in fighting excessive red tape and in universal principle of obedience to law) with what he calls “socially oriented policy and economy.”

It is in this combination where he hopes to find a new “national idea” for modern Russia. Perhaps it wouldn’t sound so flat and dangerous if you didn’t know the gentleman’s obsession with the strong state and almighty government stemming from Soviet times.

In my view, the person closer than anybody else in explaining Russia’s current economic plight is Gennady Gudkov, member of the A Just Russia party, who has recently stated that the real cause of the economic stagnation is the “irremovability” of the existing state power.

It sounds pretty convincing. Without true democracy that provides for regular replacement within the ruling elite, abolition of the existing political monopoly in favor of effective political pluralism, and a check-and-balance mechanism for the social order, neither a national revival nor an economic model worthy of a truly great country seems feasible.

In the Russia of the last two decades, when discussing the economic situation and development trends, advocates of the not very promising and badly performing economic pattern routinely give their absolute preference to the term “stability.”

Sure, there are other concepts in use like diversification, modernization and innovation, but they sound like mantra, not like something that should describe the real state of affairs.

Unfortunately the most probable scenario for Russia’s next several years will employ such terms as “stagnation,” “capital drain,” “budget cuts” and “bad demography” — not “high dynamics” and, of course, not “sustained growth” in a pattern of economic development that combines high and steady growth indicators with harmonious and promising structural changes and healthy ecological conditions.

Without genuine political reform, there will be no revival of an entrepreneurial spirit in the population, no proper political and investment climate and thus no grounds for Russia’s eventual partners to sincerely trust in its good will, reliability and actual cooperation potential.

In the absence of positive changes, there will be no end to capital drain and no adequate stimuli for invigorating massive influx of investment capital.

A rule of thumb: Political monopolization leads to economic stagnation and, in the long run, threatens to lead to a national catastrophe.

Andrey Borodaevskiy (annabo36@mail.ru), an expert on world economy and international economic relations, was a professor at Seinan Gakuin University, Fukuoka, from 1994 to 2007.