Navigating Russia’s imploding economy

Sanctions will cost Russia $40bn annually, and an additional $90-$100bn will be lost because of tumbling oil prices.

Amid falling oil prices and sanctions, the ruble has lost nearly a quarter of its value so far this year [AFP]
Moscow, Russia – Rising prices plague Alyona Semikhina’s life at work and at home.
When the 37-year-old single mother of two operates a cash register at a grocery store in western Moscow, some elderly customers rebuke her for the new, higher prices on almost everything in the store – from domestically grown buckwheat, a staple of the Russian diet, to imported alcohol, bananas and avocados.
“They think the shop is mine and it’s my whim to just make up new prices,” fumes the plump, dark-haired woman who asked not to be photographed because she is afraid of losing her job. “They take it out on me as if it’s my fault.”
When she goes home, to a two-bedroom apartment in a Soviet-era concrete building, her 14-year-old daughter and 12-year-old son pester her with requests to buy new winter clothes and mobile phones. “They think I print money, though my salary is just 30,000 [rubles] a month,” Semikhina says.
In one year, her monthly salary lost more than one-third of its dollar value – from about $910 in December 2013 to $575 early this week. This is the combined effect of plummeting oil prices, Western sanctions imposed on Moscow in August for annexing Crimea, and supporting rebels in eastern Ukraine – and the deep, chronic problems in Russia’s corruption-crippled economy.

Low oil prices ruined the Soviet economy in the late 1980s causing the USSR to collapse – and prompted Russia’s default in 1998. After 15 years in power, President Vladimir Putin has turned out to be a bad student of history. His nation is still badly addicted to the “oil needle” with hydrocarbons making up two-thirds of Russia’s exports – and a half of its budget revenue.

Downward spriral

Before Crimea’s annexation, Russia was the world’s eighth-biggest economy worth $2.1 trillion – and Moscow was a proud member of G8, the club of the world’s richest nations. At home, the annexation skyrocketed Putin’s approval ratings to 88 percent and was hailed by many government supporters and nationalists as the first step in restoring an empire.
But as Russia’s ties with the West plunged to the lowest point since the end of Cold War, Moscow was kicked out of G8, and the sanctions coupled with lower oil prices decimated Russia’s economy. Finance Minister Anton Siluanov said the sanctions will cost Russia $40 billion annually, and an additional $90-$100 billion will be lost because of tumbling oil prices.
By early December, the Russian economy shrank to the size of Spain or South Korea – a humiliating achievement for a country that spans 11 time zones, has a population of 142 million and desperately wants to be seen as a superpower.
Meanwhile, Putin tries to downplay the panic. Once known for his macho photo-ops, salty language and saber-rattling rhetoric, these days the 62-year-old leader prefers to look like a patriarchal figure who can always find an easy way out of any crisis – or, at least, a convincing explanation.
“Look, we used to sell a product that costs a dollar and get 32 rubles for it. Now for the same product that costs a dollar we will get 45 rubles,” Putin said in televised remarks in late November. “The budget revenues have increased, not decreased.”
Alas, in a week after his speech on December 1, a dollar cost 52 rubles in what was the Russian currency’s worst one-day drop since its 1998 default. The plunge followed a drop in the price of the Urals oil blend, Russia’s main export, below $67 per barrel – and made the ruble the worst performer among some 170 currencies tracked by the Bloomberg financial news agency.

Putin says sanctions are used to undermine Russia [Reuters]
Other top Russian officials were also quick to provide simplistic and seemingly reassuring explanations.
“If you earn and spend rubles, you absolutely should not care what the exchange rate is,” economic development minister Alexey Ulyukaev said in early November. But according to his own ministry’s much less publicized estimate, food prices in Russia will grow 12 percent by the end of this year, and the overall inflation in the first half of 2015 will be at least 10 percent.
Sobering figures

But things can get a lot worse if the Urals price remains this low. Russia’s economy will sink into recession if it falls below $80 per barrel, according to a report by the Bloomberg news agency released in late November and based on a survey of 32 analysts.
The first pessimistic signs were obvious as last year’s economic growth in Russia fell to 1.3 percent – a sobering figure in comparison with the 7-8 percent growth a decade ago during Putin’s first two terms as president – now dubbed “the fat years”.
The miniscule growth was mostly attributed to binge spending – the 2014 Winter Olympics in Sochi cost $51 billion and became the most expensive Olympic Games in history – and a range of economic problems rooted in rampant corruption and a lack of reforms.
“There’s a lack of economic growth, a lack of industrial growth, pressure on business, a lack of competition that has been totally killed, and a complete affixation of the economy to oil prices,” opposition leader Mikhail Kasyanov, who served as prime minister in Putin’s government in 2000-2004, told Ekho Moskvy radio in early December. “There’s been no reforms in the past 10 years. Moreover, the reforms our government started have been stopped.”
In the 2014 corruption perception index by Transparency International, Russia ranked number 136 in the list of 175 nations – right next to Nigeria, Iran and Cameroon.
Many of the former Soviet republics seem to have been deeply affected by Russia’s crisis. Millions of labour migrants from ex-Soviet Central Asia, Ukraine, Belarus and Moldova work in Russia, and their remittances – in dollars or euros – form considerable chunks of their countries’ GDP.
“I used to send $500 to my family, now it’s down to $300,” says Abdusamat Abduvaliev, a scrawny construction worker with two gold caps on his teeth. The 31-year-old father of three comes from Tajikistan, where labour migrants’ hard-earned hard currency form almost 42 percent of the impoverished Central Asian nation’s GDP.
“But I’m afraid of losing this job,” Abduvaliev adds holding a bag stuffed with cheap macaroni, onions and beef bones with tiny scraps of meat – future soup for him and six other Tajiks who share their meals and a single-bedroom apartment in uptown Moscow. “Russians may soon have no money to buy the apartments we build.”

Food shortages
Some of Russia’s ex-Soviet neighbours, however, found a way to profit on the Big Bear’s troubles.

In response to the sanctions, Moscow banned all food exports from the European Union, North America and Australia. In the following months, Belarus, part of the Moscow-dominated Customs Union, a free trade zone, boosted the export of meat, fruit, fish and diary products from the EU – sometimes five or 10-fold.

Most of the food quietly makes its way to Russia – or disappears from trucks transiting through Russia from Belarus to Kazakhstan, another member of the Customs Union. Russia pushed for customs clearance of the trucks, contradicting the very spirit of the Customs Union.
Kremlin-controlled media’s propaganda machine that was so successful in demonizing the Ukrainian government and Western ploys aimed at undermining Russia’s international status is now churning out various explanations to the crisis – including a conspiracy theory about Saudi Arabia’s Washington-orchestrated plans to flood the markets with cheap oil to lay waste to Russian economy.
But propaganda does not seem to be working when it comes to the most basic facts such as the price of bread or meat. According to a late November poll by Levada Center, an independent pollster, 80 percent of Russians agree the country is facing a “sudden increase of prices, a significant worsening of lifestyle and economy”.
Yet, some Russians seem to believe in the archetypal model of their country’s political universe – Putin is the “good czar” surrounded by corrupt ministers who don’t always tell him the truth.
“Somebody better tell Putin about what’s going on,” grocery store cashier Semikhina says. “He’ll come up with a solution.”
Source: Al Jazeera