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Russia’s “virtual” economic relief

While both in the United States and Europe, the Federal Reserve, European Central Bank, and Bank of England all rushed to help their ailing economies during the pandemic, the Central Bank in Russia has done nothing except organise small currency interventions supporting the rouble.

May 14, 2020 - 'Vladislav Inozemtsev Vitali Shkliarov - Articles and Commentary

St. Petersburg International Economic Forum plenary meeting 2017. Photo: Russian Presidential Press and Information Office (cc)

Fifteen years ago, Dr. Clifford Gaddy, one of Russia’s most knowledgeable economists, published a book about the economic methods the country used to survive the 1990s. His theory was that Russia has a “virtual economy” based almost entirely on illusions, which makes it uniquely resistant to reform. Today, this same method might be attributed to how the Kremlin is trying to revive the Russian economy from the fallout of the COVID-19 pandemic and staggeringly low oil prices.

Russian leadership stands alone in continuously rejecting pleas for a massive economic relief programme like those implemented by Western economies. Even after President Putin’s promises of government assistance last week, only one trillion roubles, or 0.9 per cent of GDP, has been placed into the Russian economy. Compare this to the US and the EU, who have mobilised economic relief closer to eight to eleven per cent of their GDPs. 

The Kremlin’s tactics seem even more troublesome because Russia has the smallest state debt among G20 economies and its federal budget has a first quarter surplus. Despite such conditions, Russia remains the only major economy where the interest rate has not fallen (still at 5.5 per cent) and no tax relief has been announced. Their only move has been to reschedule tax payments for up to six months for small businesses. 

Since the early 2000s, Russia has become obsessed with amassing reserves that might save the nation in dire times. During the 2008 economic crisis, those tactics proved to be effective. Now, as the deficit is expected to grow up to 5.6 trillion roubles (or roughly 40 per cent of existing reserves), Putin is afraid to announce additional measures. This is because he cares only for his sole financial “cushion” during a crisis that may not end anytime soon. 

This most likely means that there is no hope of the government giving cash to needy people who have been urged to stay at home. Meanwhile, up to two thirds of the Russian population possess absolutely no savings. For these individuals, the president has offered only unemployment benefits of 11.2 thousand roubles (150 \US dollars) per month, which will take another month to claim.

While both in the US and Europe, the Federal Reserve, European Central Bank, and Bank of England all rushed to help their ailing economies, the Central Bank in Russia has done nothing except organise small currency interventions supporting the rouble. 

 While the Western world has moved into action, the Kremlin has taken a wait-and-see approach. The political elite simply does not understand that regular people are unable to survive. The country is also banking on hopes that the quarantine will be lifted, if not in late April then in mid-May, and that businesses will somehow manage to survive this “short pause”. Of course, the Kremlin is also betting on the revival of global economic growth in May or June and as always on the subsequent rise of oil prices. This is despite their continuous downward slide

What lurks behind Putin’s “marvellous strategy”? Two major factors: fear and incompetence.

Over the past two weeks Vladimir Putin has been holding videoconferences almost every day with members of the government. Before this, however, he remained silent while other Western leaders spoke daily to their frightened citizenry through regular press briefings. When he realised the seriousness of the situation, he began – at least in show – to demonstrate his hands-on management of the pandemic in Russia. This is a sharp contrast to his regular leadership style. With the exception of the crisis of 2008-09, when he put on a similar brave act, Putin is not fond of getting involved in Russian domestic matters. He prefers to deal personally with flashy foreign policy issues and leaves interior squabbles to his deputies. Now, however, we can see a personal and constant focus on an anti-crisis agenda.

Some in the opposition may see this as an opportunity to gain some ground while the president is otherwise occupied with a discontented and scared public. We disagree with those opposition leaders and intellectuals who now believe in the imminent collapse of the regime, even though we agree that there are some grounds for concern. Current risks to the Russian political system arise from the simultaneous appearance of the pandemic and economic challenges. The pandemic has brought lockdowns, restrictions, QR-codes that people need to leave their apartments and penalties for non-compliance. Economic challenges are those issues that might affect the wellbeing of Russian households. As long as both factors persist, the regime might be considered under pressure, since the Russian people often react politically to issues regarding limitations of their freedoms. 

While many of the world’s governments have introduced economic relief measures for citizens during the pandemic, they did so in part because they care about political stability. But Russia cares primarily about the social unrest that limitations on freedom might provoke and little about the economic hardships the pandemic might create. If the Kremlin manages to survive this challenge and to lift orders to stay at home, simple economic hardship will not produce a political uprising. One of us long ago called Russia a “society without citizens” and this perfectly applies to economic issues. The people will opt to cope individually with economic problems. This will be done by trying to get additional work, minimising their taxes and saving on everything they can. Despite this, they will not take to the streets to advance their economic rights or protest for financial relief from the virus. Putin recently pretended that “no one is to blame for economic downturn if it’s caused by oil price collapse”. The Russian public seems to agree with this.

In short, it looks like Russia is repeating the same mistakes that it made in 2008. It is relying on reserves instead of loans, hoping the crisis will be short-lived, and neglecting the needs of the people whilst consolidating funds for huge enterprises. You know what they say about doing the same thing over and over again and expecting different results. It is called insanity. “Virtual” economic relief cannot solve real economic problems. But the good news – for President Putin, in any case – is that economic pain will not lead to any real political change in Russia unless such a downturn is accompanied by real restrictions on liberty and movement. It looks like Putin is doing all he can to put on a serious face for Russia and show he is in the trenches, doing all he can to fight the enemy with his own hands. If he can succeed in minimising the psychological damage of social distancing and demands to stay at home, it might not matter that his virtual economy is about to crash.

Vladislav Inozemtsev, Professor of Economics, founder and director Centre for Post-Industrial Studies.

Vitali Shkliarov, Harvard University fellow at the Center for Russian and Eurasian Studies.

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