Russia Seen “In Denial” As Economy Stagnates
Policy + Politics

Russia Seen “In Denial” As Economy Stagnates

Hobbled by international sanctions, low energy prices and a currency that has lost much of its value in the past year, the Russian economy will likely see virtually no economic growth through 2017, according to the country’s central bank.

The country’s faltering economy raises questions about how long Russian President Vladimir Putin can maintain his current sky-high favorability rating with the Russian people in the face of increased economic privation.

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The Russian leader is currently in a double bind: the very thing that is insulating him from negative public opinion about the economy is contributing to making the economy worse.

Polls indicate that much of his support derives from nationalist sentiment ignited by the invasion of Ukraine’s Crimean peninsula earlier this year and a continuation of what amounts to civil war in Ukraine, where the Russian military is supporting separatists. But it is Russia’s insistence on escalating the Ukraine crisis that is driving the economic sanctions that have so damaged the Russian economy.

“To some extent the Russian government is in denial about how bad things could potentially get,” said Jeffrey Mankoff, deputy director of the Russia and Eurasia Program at the Center for Strategic and International Studies in Washington.

“Part of what is going on, in Ukraine in particular, is an effort by the Kremlin to deflect attention from what’s happening to the economy – which was already slowing down before the sanctions were applied,” said Mankoff.

Related: Russia Hikes Interest Rates as Sanctions Slam Economy

Monday’s gloomy outlook came as part of the Bank of Russia’s annual report on the country’s monetary policy. It found that international sanctions imposed on Russia for its invasion of Ukraine’s Crimean peninsula and its continued support of separatist rebels in eastern Ukraine have created a major drag on the economy, as have declining oil prices. The Russian government gets nearly half its revenue from taxes on oil exports.

The central bank also revealed that it now expects $128 billion in capital to flow out of the Russian economy in 2014, as investors look for better, more stable opportunities elsewhere. The net outflows in 2013 totaled only $61 billion.

In a separate announcement, officials said they would abandon attempts to keep the value of the ruble within a certain “corridor” but would instead allow it to float freely in the foreign exchange market. This was, in effect tantamount to conceding defeat. Russian officials have been spending tens of billions of dollars a month in an effort to prop up the ruble, to no avail.

Russian officials did, however, say that they remain prepared to intervene in the currency markets if they believe speculators – who the government is officially blaming for the ruble’s fall – drive the exchange rate much lower.

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The ruble made modest gains against other foreign currencies on the news Monday.

Meanwhile, according to various wire reports, Russian President Vladimir Putin, who is attending the Asia-Pacific Economic Cooperation Summit in Beijing, said the ruble’s slide is “absolutely not connected” to the state of the Russian economy. “We have seen speculative fluctuations of the rate, but I think it will end soon in the face of action taken by the central bank in response to action by speculators,” he said.

Similarly, Russian Finance Minister Anton Siluanov said that the ruble is currently undervalued and added that he expects it to rise against foreign currencies again by yearend.

However, Russian officials have reported a massive effort among Russian citizens to exchange the ruble for dollars and euros, in the hope of preserving the value of their savings. In addition, sanctions have sharply raised food prices and made some good Russian consumers have become accustomed to unavailable.

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What this means for Putin and his government is unclear.

“Russia and the Soviet Union before it managed to go on for quite a while in pretty parlous economic conditions,” Mankoff said. “What’s different is that expectations have changed. People have experienced a decade of economic growth. How much privation people are willing to accept and for how long is an unknown and it is something that must be on the mind of Russian leaders.”

Why This Matters: The continued decline of the Russian economy could deliver some political cushion to President Obama, who next year will have to face a Republican-led Congress with influential members who have criticized his approach to dealing with Russia. Further evidence of economic turmoil, or a continued slide for the ruble would be an effective counter to arguments that the administration’s response to the Russian aggression in Ukraine was not forceful enough. 

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