Is the Russian Economy Stagnating?

STAGNATION has a particularly unpleasant resonance to the Russian ear, conjuring up memories of the ossified gerontocracy of the Brezhnev era. But with year-on-year GDP growth at just 1.2% last quarter and growth in investment and industrial production nearing zero, stagnation seems to be the most apt description of the Russian economy. Speaking at an investment forum last month, Alexei Ulyukayev, the economic-development minister, paraphrased an old joke: “Practically, there is no economic development,” he said, “but the economic-development minister is here in front of you!”

Throughout the 2000s, the Kremlin funnelled profits from oil and gas into the rest of the economy, largely through state-led investment projects and increases in wages and pensions. Consumption soared. Spare industrial capacity left over from the Soviet era meant that firms did not have to invest to produce more. They could simply unlock capacity that had been sitting unused.

That model is now outdated. According to the World Bank, the Russian economy “could be running very close to its maximum capacity”. Manufacturing is slowing and private consumption is also starting to cool, despite higher levels of household credit, unemployment of only around 5% and wage growth.

High prices for hydrocarbons will not solve this, because the economy has now “adapted” to expensive oil, says Natalia Akindinova of the Higher School of Economics. Future growth will require investment in new technology as well as gains in efficiency and labour productivity.

Yet state-driven investment is tapering off as big projects such as the preparations for the Winter Olympics in Sochi near completion. Private investment is flat. Relatively high wages mean that Russian firms struggle to compete on price.

The trouble is that Russian businesses cannot compete on quality either, since they are not investing in technology and equipment. This is related to the uncertainty of the business climate and the attractiveness of imports thanks to the strong rouble. According to a survey by the Gaidar Institute, 43% of businesses say they have kept investment levels static and another 33% have invested even less than they did last year.

The lack of opportunities has led to capital flight. This amounted to $48.2 billion in the first three quarters of the year, as firms took their savings abroad. An underdeveloped financial system offers no efficient way to channel surplus savings to the small and medium-sized businesses that need them.

The Kremlin seems to have decided to put those who rely on state munificence at the head of the queue. Regional governments were forced to raise salaries at the expense of their investment budgets. A country of 140m people, Russia has 20m state-sector workers and 40m pensioners. The Duma recently passed a law that calls for what is technically a temporary confiscation of $7.6 billion in individual pension savings, but which many fear may be used to plug the growing hole in the pay-as-you-go portion of the pension system.

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