July should have been a very good month for Russian President Vladimir Putin. He presided over a successful World Cup soccer tournament and held a summit with U.S. President Donald Trump that could only be called a triumph for Putin. And yet the Russian president’s popularity is falling, the result of domestic policies and an economy that will worsen over the long term. Putin’s strongman persona can only take him so far as his domestic foundation weakens.
Putin’s approval ratings should be surging. The 2018 World Cup was a staggering success with games going off without a hitch and Russia’s team turning in a surprisingly strong performance. Fears of an international boycott proved groundless and visitors contributed an estimated $1.5 billion to the economy, a much-needed boost.
Hours after the tournament concluded, Putin met Trump for a long-delayed summit in Helsinki on July 16. The impact of the encounter continues to be felt, but by most measures it was another win for Putin. It followed a NATO summit at which Trump’s commitment to the alliance was questioned. By all appearances, Putin dominated Trump at their meeting, arriving late, and then being calm, confident and controlled at the subsequent news conference. Trump appeared to reject his own intelligence agencies and backed Putin’s claim that Moscow did not meddle in U.S. elections. Putin’s concern now is that he was too domineering, which risks a backlash against Russia in Washington.
And still, Putin’s popularity is falling. A recent opinion poll shows support for the president plummeting 14 percentage points — from 78 percent to 64 percent — since mid-June, when the World Cup began. The plunge reflects the decision, announced on the first day of the tournament, to reform the national pension system. Change is overdue. Russia has one of the lowest retirement ages in the world, and, as a result, the pension system has run an annual shortfall of about $45 billion.
Legislation being considered by the parliament would fix that by raising the retirement age for men from 60 to 65, and for women from 55 to 63. That move makes economic sense — more people will pay into the system and it will boost the country’s workforce by 1.8 million people within six years — but it means that most Russian men will not collect their pensions, as their average life expectancy is 66.4 years. (Russian women live longer: Their average life expectancy is 77.2 years.)
That decision has sparked a flurry of protests. One petition generated 2.5 million signatures and there have been demonstrations in dozens of communities and cities across the country, despite a ban on political rallies. Russia’s parliament routinely rubber-stamps legislation, but unease accompanying this bill could prompt revision.
Ultimately, however, pension reform is a bandage on an economy that needs systemic reform. Russian GDP reached $1.58 trillion in 2017, marking 1.5 percent growth, and it is expected to grow 1.7 percent to 1.8 percent in 2018. The ruble has depreciated nearly 25 percent against the dollar since January 2016, economic expansion is predicted to average 1.5 percent over the next five years and 14 percent of the population lives below the poverty line.
Russia’s limited prospects reflect a tightening oil market: Oil and natural gas comprise 60 percent of Russian exports and contribute nearly 40 percent to the national budget. Unfortunately, energy prices are extremely variable and dependence on them is a risk. Russia must diversify its sources of growth. The country needs entrepreneurs and innovation but they are difficult if not impossible to develop in an economy dominated by state-owned enterprises (responsible for between 25 and 70 percent of GDP), crony capitalism and corruption.
Russia needs foreign investment, but international sanctions prevent it. According to the Central Bank of Russia, the country received $70 billion in foreign investment in 2013, but that figure plunged to $7 billion in 2015, following its annexation of Crimea and the Ukraine crisis. Foreign direct investment (FDI) recovered to $28 billion in 2017, but that is still a fraction of the pre-crisis total.
This parlous state of affairs has implications for Japan. It means that Japan has some leverage in relations with Moscow but it is limited. In 2016, Japanese firms accounted for 0.2 percent FDI in Russia — meaning there is room for growth — and the two countries set up the $1 billion Russia-Japan Investment Fund in 2017 to find opportunities. It made its first investments last December, spending around 10 billion rubles ($170 million). Sanctions and opacity in the business environment will constrain investment opportunities, however.
Domestic weakness means Putin will likely compensate with the nationalist card. Compromise on the territorial row with Japan over the four Russian-held islands off Hokkaido, the biggest item in Tokyo’s agenda with Moscow, is increasingly unlikely. There is also the very real danger that Putin will take even more extreme action to distract his public and assert Russian national interests. Trump may not acknowledge it, but Russia has meddled in the domestic affairs of its rivals. More worrisome is the attempted assassination of a former Russian spy in England, the latest in what can only be viewed as a series of acts of aggression. This could become a new normal in Russian behavior as its leader is increasingly besieged.
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