Putin’s Economic Views Keep Russia Poor but Stable

Russia’s economic performance has not looked encouraging for the past eight years. GDP has grown a meager 0.2 percent a year on average between 2009 and 2016. The country’s GDP has declined from its peak of over $2 trillion to $1.3 trillion now, while the per capita GDP is down to its 2007 level of $9,000. The difference is the economy was on the rise back then. The year 2007 saw Russian IPOs making headlines, business and consumer confidence growing, and foreign investment pouring in.

Nothing of the kind is happening today, though the situation is far from critical. The federal budget is reasonably balanced and debt levels are low. Russia’s public debt is at an enviable 4 percent of GDP ($46 billion). Even adding in the corporate debt of all the companies and banks in which the government has more than a 50 percent ownership would not bring that figure above 21 percent of GDP. Foreign currency reserves are far from their heights of 2008 but, at $385 billion, they are sufficient to maintain a confident monetary policy. They have not been falling because the Kremlin has decided not to prop up Russia’s ailing currency. The ruble has gone down but the reserves are at confident levels.

To Putin, money equals power. He is fundamentally opposed to building up debt because that puts power in the hands of one’s creditors. Putin prefers cutting public spending to borrowing because borrowing undermines a country’s “sovereignty.” 

This state of affairs could be ascribed to President Vladimir Putin’s peculiar economic views. They could be called mercantilist as they represent the kind of understanding of a nation’s economy that was common in early modern Europe. To Putin, money equals power. He is fundamentally opposed to building up debt because that puts power in the hands of one’s creditors. Putin prefers cutting public spending to borrowing because borrowing undermines a country’s “sovereignty.” In a similar vein, he treats the nation’s financial reserves as a rainy day stash, not as instruments of monetary and fiscal policy.

Money, in Putin’s view, is a prize in itself. When a country imports goods it is doing its counterparts a favor because they get paid. On the contrary, when a country exports goods it enjoys an advantage over the importing countries because they pay. This is why when Putin thinks of countermeasures to Western sanctions he bans imports, even if they happen to be basic foodstuffs; he does not stop his exports of oil, gas, or metals because they bring in money. In his view, being dependent on imports is a bad thing while being dependent on exports is a norm.

Many watched in disbelief when Putin performed a fundamental about-face and changed the country’s economic course from integration into the world economy to relying more and more on domestic resources. Because he sees imports as essentially a waste of money, he has been an enthusiastic supporter of import substitution. The Kremlin is ready to spread this strategy to all sectors: foods, oil extraction, defense, cinema, software. This strategy has failed so far: manufacturing is not growing, society’s well-being is neither increasing nor decreasing. The only sector that has benefited from import substitution is agriculture, but this accomplishment has led to rising prices and declining quality of the foods that people get. And even here there is no boom: agricultural producers are not sure whether the current rules of the game are stable. If the Russian leadership reconciles with the West in two or three years, foreign food producers will flood the Russian market with cheaper and better products. 

The opinions expressed here are solely those of the author.