Putin’s Economy May Be in Even Worse Shape Than It Looks
Policy + Politics

Putin’s Economy May Be in Even Worse Shape Than It Looks

The Russian economy is in a full-blown recession and, according to analysts that study it, may be in even worse shape than is apparent to outside observers.

Last year, in addition to harsh international sanctions imposed over the invasion of Crimea, the Russian people suffered a massive devaluation of the ruble against international benchmark currencies. It took 30.4 rubles to buy one U.S. dollar in January 2013. By the end of January 2015, the price had more than doubled to 69.5 rubles to a dollar. Much of the fall was driven by the decline in oil prices, which are key to Russia’s energy-heavy economy.

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The Kremlin spent tens of billions of dollars in foreign currency reserves in a largely futile attempt to prop up the ruble, and was eventually assisted by a firming of oil prices in the early part of this year, which drove the exchange rate down to about 50 rubles to the dollar. Now that oil prices have fallen, the ruble has hit the skids again as well, returning to 65.5 to the dollar, the same territory it was in during the worst of its slide earlier this year. (One of the reasons for the slide in oil prices is the prospect that Iran will be released from sanctions that limited its ability to sell oil. Russia, ironically, helped broker that deal — a good argument that the Kremlin acted as a global citizen first and an economic power second in that case.)

The economic pain is being felt across the vast country. Russia has 83 different regions with local governments that are capable of taking on debt, according to Lauren Goodrich, senior Eurasia analyst for the business intelligence firm Stratfor. “The Russian economic minister has suggested that possibly 60 of those 83 regions are in crisis mode at this time, and there's even speculation that 20 of them are already defaulting on their debt, even though the government itself doesn’t want to make it really public yet,” Goodrich says. Those regions were already in crisis before last year, she adds. “We've had close to 100 to 150 percent rise in debts within the Russian regions just over the past few years,” she says.

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The International Monetary Fund expects that the Russian economy will contract a total of 3.5 percent in 2015 and that, while it will begin to grow again in 2016, that growth will be anemic. “Investment and consumption are likely to remain sluggish and the effects of sanctions in terms of external access to financial markets and new investment technology will linger,” a recent report found. “IMF staff expect weak GDP growth of around 1.5 percent in the medium term.”

Russian President Vladimir Putin, meanwhile, reportedly faces substantial concern from his supporters that the regime he has built largely on the strength of his own personality and his popularity with the Russian people may struggle to survive if he continues what’s been described as a trend toward increasing disengagement, or if the standard of living of the Russian people, which has risen almost continually during his hold on power, continues to decline.

Putin on Monday began a visit to Crimea, the Ukrainian region that his forces invaded last year and which Russia subsequently claimed to have “annexed.” People there wanted to know what he was planning to do to revive the region’s shattered economy, which has lost some 70 percent of its revenue from tourism due to a de facto boycott by Ukrainian tourists and terrible publicity resulting from the ongoing battle between Russian-backed separatists and the Ukrainian government nearby.

The Russian leader made promises about increasing the flow of tourists from other countries by making it easier for citizens of other developing economies, like China and Brazil, to travel to Crimea. The Kremlin has also been shipping in Russian tourists to the Crimea’s largest resorts on heavily promoted holidays.

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The effort so far hasn’t been enough, though, and Putin was forced to address the concerns of multiple ethnic groups, chief among them the Crimean Tatars, who feel that they are being particularly burdened under the new system of Russian control.

Without a trace of irony, Putin, who justified the invasion of Crimea and its continued occupation on the grounds of addressing the concerns of ethic Russians who live there, told representatives of various ethnic groups they shouldn’t cast the region’s problems in ethnic terms.  

“Inter-ethnic relations are a delicate matter,” Putin told them during a meeting Monday. “I see any speculation on any sort of special rights for one particular ethnicity as extremely dangerous.”

The question now is just how dangerous Russia’s economic strife will be for Putin.