A Dark Cloud Is Descending Over Russia's Economy

http://www.realclearworld.com/blog/2016/01/a_dark_cloud_is_descending_over_russias_economy_111657.html

Posted by Samuel Bendett on January 14, 2016

Russians are increasingly concerned with their country's economic situation, and despite high levels of support for President Vladimir Putin and his policies, many are worried about their economic future.

Deputy Prime Minister Olga Golodets recently said in an interview with Russia-24 TV that according to the latest estimates, Russia has 22 million poor -- much of that number includes families with children. Golodets said authorities will do everything to turn that around. Golodets also reported that government programs meant to facilitate employment and labor mobility helped keep unemployment numbers relatively low, but the still-depressed economy has led to a drop in wages.

Statements like these are not making Russians feel any better, especially as other forecasts paint an even darker picture. As reported by the Russian daily Komsomolskaya Pravda (KP), young economist Vladislav Zhukovsky startled many Russians when he recently predicted that within 1.5 to 2 years, 80 percent of Russians will live in a state of chronic poverty. Zhukosvkyspared no words in describing how the current economic crisis will morph into a large one, calling it "Russia's most serious [crisis] since the Civil War (of 1918-1921)," pointing out that this government's economic policy will accelerate the "death of the Titanic." Complicating matters is the continued slump in oil prices, which will lead the Russian economy into a dead end since it is a "raw materials-dependent, feudal-oligarchic, offshore-comprador form of capitalism in its primitive forms of primary accumulation of capital," the newspaper said.

According to KP, there is a glimmer of hope: that this is not the 1990s. Here is the opinion of Mikhail Belyaev, chief economist at the Institute of Stock Market and Management:

"I agree that the roots of our current economic situation go deep enough -- the problems began not yesterday, but are a logical continuation of the liberal economic model inherited over the past 20-25 years. There is now hope that this model will still be replaced by one that allows our economy to grow. If we assume that we will continue to do what we are doing without any changes, just sit back and watch as it all falls apart and comes to a standstill, and pray for the price of oil and other goods to rise, then the most dire apocalyptic predictions are certainly justified. But there are already signs that we are slowly beginning to move away from this model -- though we do not admit it to ourselves yet. Today, the situation is different than in the 1990s. Back then, our economy and, in particular, scientific heritage, were deliberately killed off because that was advantageous to the West. Now there are glimmers of hope."

KP notes that such "glimmers" include increases in Russian exports not related to oil and gas, such as grain and pork products. "The processes related to our military-industrial complex," notes Belyaev, "this is a spiral that slowly unwinds to become more and more diversified, allowing greater variety in production for producers of copper, plastic, for example. This in turn drives more job creation in single-industry towns. These are, of course, very fragile 'sprouts' and the government and, in particular, the Central Bank, should have to support them more actively. But there is hope."

KP also cited a recent report titled "Economic Crisis -- the Social Dimension," prepared by researchers at the Institute for Social Analysis and Forecasting of the Russian Presidential Academy of National Economy and Public Administration. The report forecasts that in the event of a prolonged downturn in the economy, poverty -- meaning the proportion of citizens with incomes below the subsistence level -- could grow to affect around 30 percent of the population. The report notes other tendencies: Russian citizens are not particularly expecting "mercy from above (i.e. government intervention)," and are actively preparing for possible economic disasters. The report notes indicators such as the increased "propensity to save to create a safety cushion." In 2015, the volume of savings deposits increased by 14.2 percent across the country, along with increases in other savings and investments, such as real estate, livestock or poultry. The interest in consumer loans, by contrast, fell sharply -- a reasonable trend in the current economy.

The researchers noted another trend: Despite the crisis, unemployment remains relatively low across Russia. Experts attribute this to what they call the Russian adaptation model: Rather than reducing staff, companies transferred them to part-time positions or reduced their working weeks. This allows companies to save on payroll without causing rapid social discontent, which certainly would have spread if people took to the streets to vent their frustrations. KP notes what researchers see as the pros and cons of such a model. In the current economy, this approach, while keeping everyone more of less content, nonetheless prevents the reduction of inefficient jobs and blocks the restructuring and modernization of various industries: "The passive adaptation of the population to the given circumstances may turn out to be the worst-case scenario for future development."

In fact, Russia has now reached a point in its economic development not dissimilar from that of advanced Western countries. In a number of key industries that grew as a result of import substitution following the imposition of international sanctions last year, key skill and qualified workers are sorely lacking. This, according to some economists, is slowing economic growth no less than the lack of direct investment and the nation's continued dependence on imported materials and components.

At the same time, many people cling to familiar jobs where they are no longer needed and that keep them lashed in poverty. KP opines that much depends not only on the economic policy of the government, but on the citizens themselves, and their desire to take economic and professional risks. KP states that "even if the most ambitious and optimistic forecasts come true and Russia indeed reforms its economy, some people will still remain overboard. A number of economic bubbles, created when the economy heavily depended on oil and gas for its well-being -- such as for example, in real estate -- will burst sooner or later, leading to the collapse of the well-being of many of those who used to consider themselves the Russian middle class."