Oil and gas sales have brought in more than anyone expected, and the Russian government has had remarkable success in bringing the shadow economy into the taxable range and in increasing taxes on the population while reducing spending on the people and even on the siloviki.
Countries which have this experience in general see their international standing rise, their national currency strengthen, and their business climate improve. “But not with us. And here is why.” And it is this: the regime’s behavior caused “a sharp reduction of financial economic trust in the country” both abroad and domestically, Shelin says.
New sanctions make growth problematic, as does the tripling of capital flight from the country compared to 2017. The finance ministry has managed to reduce the ruble’s dependency on the price of oil, but it has not been able to do the same with regard to sanctions. As a result, the ruble has fallen 20 percent against the dollar and the euro in the past year.
This devaluation has led to an accelerated growth in consumer prices, even as incomes continue to fall. There was the beginning of a bank panic but higher interest rates appear to have blocked it for now. And the result of all these things has been economic stagnation of such an extent that all efforts to boost production have failed.
The government has no idea how to cope because its economic program is based on organizing an investment boom, something it cannot hope to achieve without changing other policies, and because it is not prepared to change any of them because it views modifications and concessions domestically and internationally as “unacceptable.”There has been some modest growth in some sectors, but none at all in others, Shelin continues. The standard of living of the population is declining so there is no possibility of a consumer-driven revival, and the oligarchs are prepared to lead it only with government-supplied funds. Thus, the most optimistic projections are that 2019 won’t be much worse than 2018.
But that is the most optimistic, the commentator says; and there are good reasons to think the situation will be worse especially if the government tries to continue exactly the same policies it has been using the past 12 months.
Oil prices are unlikely to rise, although Moscow has enough reserves to weather even a serious decline. “In normal circumstances then, this would not be critical.” But “much more serious misfortunes will occur if there are sanctions on the banking system” and if the regime continues to squeeze population, taking more and giving back less.
Instead, things are likely to get worse across the board. And that is all the more so because “there are today no obvious reasons on view by which trust will be able to grow.” More likely, it will continue to fall. And that will make any step in the future like those the regime has taken already both more difficult and more politically dangerous.
Indeed, Shelin concludes, “to continue into 2019 the economic course which exhausted itself already in 2018 is a quite risky proposition.” The Russian powers that be think that they can do what they have once again because they did it once before, but while it is possible they may be right, it is equally or even more likely that they are not.