Staunton, August 20 – Many Russians, encouraged by the Kremlin, believe that the Russian economy can bounce back from the current crisis the way it did after earlier crises in 1998 and 2008, but their faith is misplaced, Andrey Vorobyev says, because the Russian economy is not competitive and doesn’t have the reserves it did earlier.
In a comment for “Novaya gazeta,” the St. Petersburg economist outlines the differences between Russia’s situation in 1998 at the time of default and in 2008 when the worldwide recession began and the situation now which is much less hopeful and from which it will be far more difficult to escape (novayagazeta.ru/comments/69572.html).
With the collapse of oil prices and the fall in the ruble exchange rate, Vorobyev points out, there is now not only a decline in both direct and portfolio investments but a dramatic decline in demand, a new development on the Russian scene in recent times.
In the 1998 crisis, external factors played a large role in determining the movement of capital and changes in prices, and “therefore the economy could quickly begin its return to growth: we had unused productive capacity and a high level of unemployment.” Now, “the situation is completely different.”
Russia today has the same “old basic capital,” that capital is near capacity, and “unemployment is relatively low,” the economist writes. Consequently, even the decline in the value of the ruble “will not become a stimulus for economic growth” unlike the case 17 years ago.
Thus, Russia “must be prepared for the further worsening of the macro-economic situation” rather than expect a rapid turnaround.
Russia’s economic situation is also fundamentally different from what it was in 2008, Vorobyev says. Unlike at that time, the declining price of oil means that the budget “today cannot serve as a stimulus for the growth of demand,” and the size of the country’s reserve fund was “incomparably larger then” than it is now.
While one can point to several specific short-term triggers of the current crisis, it reflects several long-term factors “connected with the disproportions laid up in [Russia’s] economy,” he continues. Among these are an underdeveloped private sector given the growth of state corporations which get funds and “to put it mildly do not always effectively spend them.”
Other factors working against recovery are “the high level of the centralization of government finances which in connection with the decline of oil prices has also suffered” and government employment policy which has sought to keep people at work even though real incomes are falling rapidly.
Unless there is a radical change of course, Vorobyev says, Russia will be able to stay even with or even best the income levels of the BRICS countries, but it won’t be able to achieve the standard of living of even the poorer countries of Western Europe such as Portugal. The best it could might hope for would be to find itself in the situation of Greece.