Russia Could have Been an Island of Stability but Kremlin Doesn't Understand the Situation, Inozemtsev Says

Paul Goble

            Staunton, April 14 – The Russian Federation really had the resources to be an island of stability in the current world economic storm, a notion that many people laugh about, Vladislav Inozemtsev says. But it isn’t because Vladimir Putin and his entourage do not understand the nature of the economic system and the way the resources they do have could be deployed.

            As a result, the Russian economist says, 2020 is going to be a very dark year in the economic history of the country; and succeeding years may be dark as well (spektr.press/god-ischezayuschih-nadezhd-vladislav-inozemcev-o-tom-pochemu-rossiya-ne-sumela-vospolzovatsya-preimuschestvom-vo-vremya-krizisa-iz-za-koronavirusa-i-padeniya-neftyanyh-cen-i-chto-v-rezultate-pro).

            Three developments this week, Inozemtsev says, make that dire prediction all the more likely. First, after foolishly launching an oil price war with Saudi Arabia, Russia stands to lose more than any other country from the deal that was reached and to see the oil revenues on which its leaders depend more than on anything else fall precipitously.

            Second, it has become clear that the pandemic is not ebbing but growth and that Putin will not be able to stage anytime soon the two events on which he has so long counted, the referendum on his constitutional amendments and the commemoration of the Great Victory. Instead, he will be forced to deal with a social problem he is ill-equipped to address.

            And third, the finance ministry has reported that in the first quarter, the state budget was fulfilled almost “in an ideal way,” and the economic development ministry put off making projections for the future. The combination means that the powers will avoid moving quickly to address the crisis because they will assume that there isn’t one as far as they’re concerned.

            That is a horrific mistake, especially given the resources the government has at its disposal to deal with the situation, the economist says. The collapse in oil sales abroad and of economic activity will drive Russia’s GDP down by around 15 percent – and that decline will feed on itself, promising even further declines in the future.

            On the basis of what they have done so far, Inozemtsev continues, “the reaction of the powers that be” is easy to predict: Despite having the resources in the reserve funds to respond by boosting demand as Western governments have done by borrowing, the Kremlin appears set to do very, very little of that.

            Putin and his entourage are unwilling to use these reserve funds because they believe they were built up for “a rainy day.” Tragically, they don’t recognize that the rains are now coming down hard.  They also don’t see the value of borrowing because they are lobbied by groups that like the current arrangements.

            Moscow could easily, using the reserve funds and borrowing inject the kind of money into the pockets of consumers that Western governments have done. Indeed, in some ways, because of its reserves, Moscow could have done that at lower cost and with fewer collateral problems than they face.

            Instead, the powers that be are drawing things out and not taking action when it could be most effective. “The fundamental cause of what is happening,” Inozemtsev argues, “lies in the extremely unique perspective of those in the Kremlin about the Russian economy.” They assume that the only thing that matters are the major players.

            “Unfortunately, they do not understand that the Russian economy like any other is based in the end on the demand of the population and small business which satisfies the needs of major corporations.”  As a result, he says, the Kremlin isn’t inclined to help the population or small business but only the big players, an approach that won’t save the situation.

            The authorities may take some palliative steps but they won’t make the major policy moves that would prevent disaster.  As a result, the Russian economy will decline and quite likely by more than the economies of other countries. And “2020 almost certainly will go into the economic history of Russia as one of disappearing hopes.”

            Whether 2021 will be different is hard to predict; but one thing is certain. The Kremlin which could have given real content to its claims of Russia being an island of stability has acted in ways to ensure that it won’t be and that instead, it will be a source of growing instability not only at home but abroad.