Wednesday, July 7, 2021

Barring Radical Policy Change, Russia will Find Itself Where USSR and Latin America were in the Late 1980s, Inozemtsev Says

Paul Goble

            Staunton, July 2 – Short-term commodity price increases combined with long-term declines in demand for them leaves Russia in a dangerous position, one where Moscow will feel free to increase spending now despite the fact that it won’t be able to maintain that or even finance debt in the future later, Vladislav Inozemtsev says.

            That combination could easily lead “to a situation where by the end of the 2020s, Russia will find itself in a kind of ‘perfect trap,’ with consequences comparable to those of the late 1980s” and to those of the Latin American countries at that time as well, the Russian economist says (

            Such trends, he argues, “mean that the Latin American scenario is extremely likely to be repeated in Russia. The current return of high commodity prices for the third time since the 2000s and early 2010s may finally convince Russian leaders that this ‘magic wand’ works without fail.” But they are wrong.

            “The Russian economy and politics in the mid-2020s will be much less flexible than it was earlier. The income of entrepreneurs is shrinking, rent-financed social spending is growing, while populism and the suppression of dissent are becoming the official policies of the powers that be,” the economist says.

            In recent weeks, Russian officials have been celebrating the global rise in commodity prices and especially those for oil. Oil prices have risen 79 percent over the past year, coal prices are up 275 percent over the same period, and natural gas imports in Europe has quintupled. As a result, the Russian government will have a surplus this year.

            But despite what many think, Inozemtsev continues, this doesn’t mean that the Kremlin has been “lucky again.” On the one hand, “the main reason for current price increases is not a fundamental increase in demand but rather speculation triggered by the huge increase in the money supply during the pandemic.”

            And on the other hand, “the world is now witnessing a new industrial revolution, one that aims to change the main source of energy.” Even if many remain skeptical about climate change, governments have forced firms to act as if it is true; and major corporations in the West are acting accordingly.

            Because that is so, the economist says, “the development of alternative energy generation won’t stop even if it suddenly turns out that elevated carbon dioxide levels are less of a threat and more of a necessity for mankind.” That will lead to falling demand and thus falling prices for oil and gas.

            The Russian government and hence Russian firms have not taken note of this and made it the basis of their policies. The government sees the rise of revenues from temporary price increases as the basis for new spending, and Russian companies have been slow to change their energy consumption patterns.

            Both these developments further limit Russia’s options as the current bubble ends, and “while this will not necessarily trigger a political revolution and the collapse of Putinism,” Inozemtsev concludes, it does mean that any notion that Russia can remain a strong economy must be “forgotten.”

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