Friday, 23 January 2015 00:00

Russia’s Fall From Glory And Dark Clouds Ahead

Russia’s economy is facing a precipice. Food shortages and much lower standards of living for ordinary citizens lurk on the horizon. Inflation is mounting. There is dark foreboding about the country’s future. In the face of ongoing standoff with the West over Ukraine and very low oil prices, there is no discernible way out.

 

Last week I participated at the annual Gaidar Forum in Moscow, which brings together government officials, business elite, and the policy community. The theme of Russia’s economic challenges dominated the discussions. In his remarks Prime Minister Dymitry Medvedev acknowledged that the country faces economic challenges ahead, but underplayed their seriousness.

 

In my conversations with Russian scholars and professionals, it became apparent that there are mixed feelings about the current state of the economy. A number of young and educated Russians are already contemplating emigrating, ironically, to Western countries, as their country sails close to danger. This would further ransack the country of its human capital - a vital resource that it sorely needs to build a different and more enduring future beyond reliance on oil and gas. These cynical Russians expressed deep anxieties about the future of their children in a country fraught with uncertainties.

 

Yet many other professionals, seized with patriotic fervor, view Putin as a hero whose effort at restoring Russia’s glory on the global stage is seen as being thwarted by the West. Currently Putin enjoys high popularity rating in Russia, defying logic in the context of economic headwinds.

 

For many Russians, the only glaring reference marker of Russia’s economic prosperity and potential greatness in modern times is the period between 1999 and 2007 when Putin lifted the country out of the doldrums and brought economic stability. He helped to efface the humiliation Russia suffered during the tumultuous years of Boris Yeltsin whose reign had America’s seal of approval. To them, Putin is a savior.

 

Russians’ mistrust of the West, their acute and correct perception of double standards in US foreign policy, and their resentment at what they consider Western encroachment in their region push them to Putin’s bosom. Lack of imagination on the part of the US has seen it seen it rely on the blunt instrument of sanctions, and squandering an opportunity to project soft power in that country, and make a persuasive case for different politics.

 

Russians view sanctions as a punishment meted out to their country for staking its place as an equal player amongst great powers in global affairs. Many Russians will interpret Obama’s ill-advised gloating over Russia’s economic tailspin during his State of the Union address as yet another evidence of splendid arrogance. Obama quipped: “Today, it is America that stands strong…whilst Russia is isolated with its economy in tatters”. Is that what the Americans want?

 

At the Gaidar Forum, Medvedev displayed a mixture of realism and populism. He was at once addressing the domestic constituency, reaching out to sympathetic Western business leaders, and sending cryptic messages to Western countries he considered hostile. He talked tough on Ukraine, threatening to complicate its economic life by calling on it to fulfill its debt obligations to the tune of US$3bn.

 

Medvedev announced a set of policy steps that government will take in the next coming months in response to economic challenges: implement import replacement strategy in sectors such as pharmaceutical and medical equipment; offer government support to agriculture for food security; strengthen macro-economic stability; diversify the economy away from oil and gas, and provide financial support for the development new industries; and recapitalise banks so they can help boost the economy.

 

In light of constrained fiscal space, these goals are unlikely to be achieved. Structural weaknesses in Russia’s economy go much deeper, compounded by infrastructural bottlenecks, corruption, and poorly developed market institutions. Basking in the glory of oil and gas windfalls, Russia has for many years neglected to undertake the necessary reforms to modernise its economy and put it on a competitive footing.

 

There are three lessons that the Russian crisis holds up for other countries including South Africa. First, macro-economic stability is important for sustaining confidence in the economy. Second, institutions matter. Countries that have weak institutional foundations will always find it difficult to show resilience in the face of economic storm. Improving institutions also entail dealing decisively with corruption.

 

Third, foreign policies should be designed to serve long-term national economic interests rather than pursuing wooly ideologies. Importantly, in an interdependent global system, it helps to build bridges across a diverse set of countries than taking exclusivist and hostile approaches.

 

Qobo was a panelist at the Gaidar Forum in Moscow.

This article was first published in the Business Day, 23 January 2015