Kremlin’s Post-Vote Economic Policies Provide No Basis for Optimism, Inozemtsev Says

Paul Goble

            Staunton, July 14 – The July 1 approval of Vladimir Putin’s constitutional amendments has freed the hands of the regime and led to more repression. But it has also prompted the Kremlin to cut subsidies and boost taxes to balance the budget, steps that will not stop economic declines this year or set the stage for growth in 2021, Vladislav Inozsemtsev says.

            Many are now talking about the impact of the July 1 vote, “but the first and most important result of the successfully conducted plebiscite,” the Russian economist says, is that the Kremlin will now view as “impossible in principle” a new outbreak of the coronavirus (https://spektr.press/obnulenie-ekonomiki-i-koncepciya-narod-novaya-neft-vladislav-inozemcev-o-vozvraschenii-k-vlast-vam-nichego-ne-dolzhna-perspektivah-zastoya-i-nalogovoj-discipline/).

            That means, Inozemtsev says, that whatever the reality is, the Kremlin will insist on having the numbers of infections and deaths go down and that it will use its reports to justify ending special subsidies and tax relief it has offered up to now and not extending them to other groups who might need them.

            As the authorities loosen restrictions imposed during the pandemic, there will almost inevitably be a slight “rebound” in economic figures given pent-up demand, but “a rebound doesn’t mean growth” and in any case is taking place from a far lower base than was the case before the onset of the disease.

            And while the Kremlin can be expected to celebrate this small uptick, it will not be able to avoid yet another period of stagnation or more likely decline, which “most probably will begin at the start of the fall,” all the more so because unemployment and wave reductions already growing will only grow worse with little chance of new income from gas and oil sales.

            That will have a devastating effect on the budget, and Putin will be driven to raise taxes on the population and business, especially small business, to make up for the gap, a policy that will have exactly the opposite impact on the development of the economy than he wants but one that reflects his obsession with having a balanced budget or better one in surplus.

            The Russian government should recognize that reality and develop its economic program with those factors in mind. But to date, Inozemtsev reminds, the Russian government has not announced a program, even though “it is already clear that there are no sources of growth in this or next year” unless the regime radically changes course, something very unlikely.

            Moscow should be cutting not raising taxes and borrowing to get the country through this debacle. Instead, it is pushing for higher taxes and cutting back where it can on borrowing, exactly the policies that drove the world into a depression in the early 1930s and that do not promise anything good for Russia anytime soon.

            Given all this, Inozemtsev says, he is prepared to risk asserting that “after the historic annulling of presidential terms, the entire domestic economy has been ‘annulled’ as well.” That doesn’t mean complete collapse but no real possibility of growth next year and only a relatively small one in 2022 – and again from a much lower base.

            “The fundamental cause of this situation,” he continues, “is that for the Kremlin, the economy has never been something with an independent value. It is used no more than as an element in the mythical ‘social contract’” between the people and the powers that guarantees “political stability.”

            “This contract was of interest to the authorities only as long as it needed to have some kind of dialogue with the people,” Inozemtsev argues. “With July 1, that need has disappeared. Putin is convinced that now he has the chance to rule without looking at anyone or anything, including at economic problems.”

            But as he will ultimately find to his displeasure, “objective market laws” continue to operate whether a leader looks at them or not. And those who think they can ignore them as the Kremlin leader clearly does are in for “many surprises.” Unfortunately, so too are the Russian people.