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FT: Russia’s Bear is a Cub

Over the weekend, the Financial Times ran a piece by Stefan Wagstyl on Russia’s economic situation that focuses on the contradiction of “serious weaknesses” at work behind the external image of its booming economy. The article may help to balance some of the more paranoid popular opinion regarding Russia’s increasing economic clout. “As Mr Medvedev says: “Russia today is a global player.” But, even a decade after 1998, Russia is not as strong as its rulers think. Only in the past year has economic output recovered to 1989 levels. Millions live in poverty, dragging average annual income per head down to $14,700 in purchasing power parity terms, compared, for example, with $16,300 in Poland.” Read the full article after the jump.

FT: Weakness in the midst of Russia’s strength

Ten years ago this month, the Russian financial crisis hit world markets. On August 17 1998, President Boris Yeltsin froze the domestic debt market, tightened currency controls and allowed the rouble to devalue. Millions lost their savings, western bankers turned their backs on the Kremlin and Russia seemed bankrupt politically as well as financially.A decade later, everything appears to have changed. Russia is booming, its debts repaid, its foreign currency reserves climbing and its hotels full of western business people. President Dmitry Medvedev and Vladimir Putin, prime minister, strut their stuff at summits proclaiming that Russia is back at the world’s top table.The reality is not so straightforward. While Russia has transformed itself since 1998, it is still wracked by serious weaknesses. While it has recovered some international influence it is far from re-establishing itself as a superpower.Russia’s post-1998 transformation began even as the crisis was unfolding. After a few weeks of intense uncertainty, devaluation stimulated domestic production. Then, after Mr Putin took power as president, the Kremlin imposed stability at the cost of an aggressive assault on civil liberties. Finally, and most importantly, oil prices rose from an average of $12 a barrel in 1998 to over $125 now. The resulting surge in oil and gas export income has largely been channelled into the Kremlin through tax payments, creating unprecedented opportunities for public spending and for private graft.After plunging 5 per cent in 1998, economic output has grown at a rapid average rate of over 6 per cent ever since. The benefits, initially limited largely to the rich, are spreading to a growing middle class. Not for nothing are Mr Putin and Mr Medvedev more popular at home than their western counterparts.As well as consolidating their domestic authority, they are keen to assert their power abroad, particularly in the former Soviet Union. As Mr Medvedev says: “Russia today is a global player.” But, even a decade after 1998, Russia is not as strong as its rulers think. Only in the past year has economic output recovered to 1989 levels. Millions live in poverty, dragging average annual income per head down to $14,700 in purchasing power parity terms, compared, for example, with $16,300 in Poland.With poverty go huge deficits in education and healthcare. The 143m population is declining so fast that demographic recovery is a national priority. While Russia’s position is similar to western Europe’s, it is less open to immigration and even more scared of the consequences, especially in sparsely populated Siberia, with 1.3bn Chinese across the border.Also, despite its diversification policies, Russia remains dependent on oil and gas, which account for around 20 per cent of economic output and over 60 per cent of exports. The dream of a knowledge-based economy based on an army of well-trained scientists remains a dream. To be fair, Russia is managing its windfall better than many oil-rich states. But that is a low standard for a nation that wants to compete for influence with the US.The Kremlin’s ability to project power beyond Russia’s borders are limited. Despite increases, military spending is 5 per cent of the US’s, and the armed forces need modernisation. Even Russia’s nuclear superpower status is in question as it struggles to replace ageing Soviet-era missiles.Russia’s strongest card is its role as an energy supplier, notably to the European Union. The Kremlin has made great efforts to enhance its position, launching pipeline plans and seeking co-operation deals with other suppliers. But energy is a double-edged sword. The EU relies on Russia for over 25 per cent of its gas, but Russia depends on the EU for over 60 per cent of its gas revenues. Poor east European countries without suppliers are vulnerable, but not the EU as a whole.Even in its backyard, Moscow faces challenges. Much has been made of Russia’s sabre-rattling in the former Soviet Union, including interruptions to energy supplies to the Baltic states, Ukraine and Georgia and meddling in their domestic politics. The worst example is the support given to the Georgian breakaway territories of Abkhazia and South Ossetia, with Moscow last month admitting its warplanes entered Georgian airspace.But the Kremlin has not gained much from all this activity. By contrast, the west has made big advances. Since 1998, Nato has been enlarged twice, with three ex-Soviet republics, Estonia, Latvia and Lithuania, among the new members. Now Ukraine and Georgia hope to join. The EU has expanded eastwards and developed co-operation policies as far away as Azerbaijan. Meanwhile, in Ukraine’s Orange Revolution and Georgia’s Rose Revolution, pro-west democratic leaders have won power from Moscow-style authoritarian predecessors.Further afield, Russia’s capacity to project its power is even more limited. With the cold war over, there is no east-west ideological conflict through which Moscow can gather client states opposed to the US. With China rising and India emerging, competition for influence is growing. While there are opportunities to make life difficult for the US and the EU, notably in Iran, the Middle East and Kosovo, there are few prospects of solid political gains. In Africa, declining western influence has opened the way for China, not Russia.So, the Kremlin is left in the frustrating position of being far more powerful than it could have expected a decade ago – but not nearly as powerful as it would like to be.