 "President Putin faces 'new reality'")
President Vladimir V Putin grew wildly popular by making Russians richer every year and by vowing to restore their country's great power status. But now, with the government predicting Tuesday that the battered economy will fall into recession next year, that formula is in jeopardy.
Every day brings a barrage of woeful economic news. World oil prices just hit a five-year low. The Russian rouble is down 40 per cent against the dollar so far in 2014. Inflation is due to rise 9 per cent this year and to continue climbing. Capital flight is expected to reach $128 billion.
The Kremlin suffered the collapse of the Soviet state and a government default during previous extended declines in oil prices, so the changing fortunes potentially pose extreme challenges. Experts underscore, however, that the country is far more resilient now than in the 1980s or in 1998, the previous times of crisis, particularly its stout private sector.
Putin has already shelved planned megaprojects, like the South Stream pipeline to ship gas to southern Europe, which was canceled on Monday, and a high-speed railway from Moscow to Kazan, a city east of the capital.
Some analysts say the changes may be felt in the policy area, where Putin may feel compelled to tone down his aggressive, anti-Western stance. But others worry that he may do just the opposite, saying that his need to divert attention from economic problems might inspire further nationalistic adventures abroad, akin to the annexation of Crimea.
Russia is heavily dependent on oil, which constitutes some 60 percent of its exports. With the collapse in prices coinciding with severe economic turbulence caused by Western sanctions over destabilising Ukraine, Putin risks losing the engine that was supposed to power Russia back onto the world stage.
Financial experts say Russia's most pressing problem is not the sinking rouble, despite its potential to prompt a run on the banks, nor the falling price of oil, though the annual budget was based on a price of $96 per barrel, which is now hovering around $70.
"This is all peanuts compared to the financing crisis," said Vladimir Milov, a former deputy energy minister turned opposition politician. Nearly $700 billion is owed to Western banks, economists said, much of it by the giant state-run companies that constitute the heart of the Russian economy. But sanctions imposed by the United States and Europe over Russia's annexation of Crimea and adventurism in southeastern Ukraine have blocked access to Western financing.
Despite Moscow's plans to turn East as an alternative, China's banks just do not have the capacity. Instead, the debt threatens to drain the Kremlin of its $400 billion in foreign currency reserves.
Among the companies with their hands out are Rosneft, Novatek, VTB Bank, Rusnano and Russian Railways, asking for sums well beyond the $90 billion held by the National Welfare Fund, a sovereign wealth fund for rainy days. Putin has yet to express publicly how he expects Russia to emerge from its financial problems. At a news conference last month, he addressed concerns about oil by saying that prices had been high enough in the first part of 2014 to finance much of the Russian budget, and that the country would just have to "wait and see" about next year.
He also tried to portray the large drop in value of the rouble as useful. "We used to sell by the dollar and get 32 or 35 roubles in return, but if you look at today's exchange rate, we get 45, 47 or 48 roubles for every dollar's worth of what we sell," he said, and the rouble has reached 54 to the dollar since Putin spoke. "In that sense, budget revenue has even increased."
Vedomosti, the main business daily, published an excoriating editorial on Tuesday comparing Putin to President Robert Mugabe of Zimbabwe, who the editorial said did basically nothing as the exchange rate there fell to four trillion Zimbabwe dollars for one American dollar. While noting that Russia was in far better shape, the editorial said that "the biggest problem of Russian leadership is inability to admit mistakes."
"The economy is seriously ill, and the rouble rate is one of the indicators crying about the illness," the editorial said. "Russia's leadership refuses to admit there is an illness and pushes it into the depths."
Anton Siluanov, the Russian finance minister, called the report predicting a recession a "preliminary assessment" and said it had not been approved by the entire cabinet. Siluanov also argued that the rouble was now undervalued after its long slide.
Putin is due to deliver his annual State of the Nation speech on Thursday.
Some economists think that the policy is essentially to wait out the sanctions, with the Kremlin anticipating that they will expire in a year and that then all the financial problems will diminish.
The crisis is still likely to force significant cuts in public spending. The Ministry of Economic Development, which publishes the government's economic outlook, on Tuesday revised its 2015 forecast to show a contraction of 0.8 per cent, compared with a previous projection of 1.2 per cent growth. Private assessments said there could be a drop of 2 per cent.
The setbacks have slowed or eliminated goals to achieve higher wages, better health care and cheaper housing, ambitions laid out in a series of populist decrees
The 11 decrees described a "transformation strategy for society" for his new six-year term, including creating 25 million "highly productive" jobs, raising life expectancy to 74 years and raising the birthrate. "Russia is in an economic crisis," said Kirill Rogov, an independent economic analyst. "Of course, all those grand plans are irrelevant now."
It is impossible to predict whether the economic woes might inspire anti-government demonstrations. There have been minor protests in Moscow by medical professionals denouncing the closure of about 28 clinics in the capital and the dismissal of 10,000 medical staff members.
But the effects of the economic crisis are just starting. Once constituents like pensioners realise the rouble is losing its purchasing power, they can be expected to demand raises so they can buy as much as before. But state companies will be first in line.
"The problem is that he cannot deliver on his economic promises, so he has to deliver on post-imperial nostalgia," Guriev said of Putin. "He will say that we are not rich anymore, but we are at least feared." The annexation of Crimea lifted Putin's ratings into the stratosphere, raising concerns that he might try similar moves elsewhere, like Moldova, to distract people if the economic crisis deepens.
The crisis and three rounds of Western sanctions seem to have produced a distinct shift in the propaganda on state television and elsewhere, from triumphalism to a determination that Russians are ready to make any kind of sacrifice to win a showdown with the United States. A billboard on the main Sadova ring road around Moscow recently proclaimed,
"There are more important things in life than the financial market," and made references to Russian history.
"They are moving from greatness to suffering hardship, because we are fighting American domination," Milov said. "It is a totally different definition of the mission."
Every day brings a barrage of woeful economic news. World oil prices just hit a five-year low. The Russian rouble is down 40 per cent against the dollar so far in 2014. Inflation is due to rise 9 per cent this year and to continue climbing. Capital flight is expected to reach $128 billion.
The Kremlin suffered the collapse of the Soviet state and a government default during previous extended declines in oil prices, so the changing fortunes potentially pose extreme challenges. Experts underscore, however, that the country is far more resilient now than in the 1980s or in 1998, the previous times of crisis, particularly its stout private sector.
Putin has already shelved planned megaprojects, like the South Stream pipeline to ship gas to southern Europe, which was canceled on Monday, and a high-speed railway from Moscow to Kazan, a city east of the capital.
Some analysts say the changes may be felt in the policy area, where Putin may feel compelled to tone down his aggressive, anti-Western stance. But others worry that he may do just the opposite, saying that his need to divert attention from economic problems might inspire further nationalistic adventures abroad, akin to the annexation of Crimea.
Russia is heavily dependent on oil, which constitutes some 60 percent of its exports. With the collapse in prices coinciding with severe economic turbulence caused by Western sanctions over destabilising Ukraine, Putin risks losing the engine that was supposed to power Russia back onto the world stage.
Financial experts say Russia's most pressing problem is not the sinking rouble, despite its potential to prompt a run on the banks, nor the falling price of oil, though the annual budget was based on a price of $96 per barrel, which is now hovering around $70.
"This is all peanuts compared to the financing crisis," said Vladimir Milov, a former deputy energy minister turned opposition politician. Nearly $700 billion is owed to Western banks, economists said, much of it by the giant state-run companies that constitute the heart of the Russian economy. But sanctions imposed by the United States and Europe over Russia's annexation of Crimea and adventurism in southeastern Ukraine have blocked access to Western financing.
Despite Moscow's plans to turn East as an alternative, China's banks just do not have the capacity. Instead, the debt threatens to drain the Kremlin of its $400 billion in foreign currency reserves.
Among the companies with their hands out are Rosneft, Novatek, VTB Bank, Rusnano and Russian Railways, asking for sums well beyond the $90 billion held by the National Welfare Fund, a sovereign wealth fund for rainy days. Putin has yet to express publicly how he expects Russia to emerge from its financial problems. At a news conference last month, he addressed concerns about oil by saying that prices had been high enough in the first part of 2014 to finance much of the Russian budget, and that the country would just have to "wait and see" about next year.
He also tried to portray the large drop in value of the rouble as useful. "We used to sell by the dollar and get 32 or 35 roubles in return, but if you look at today's exchange rate, we get 45, 47 or 48 roubles for every dollar's worth of what we sell," he said, and the rouble has reached 54 to the dollar since Putin spoke. "In that sense, budget revenue has even increased."
Vedomosti, the main business daily, published an excoriating editorial on Tuesday comparing Putin to President Robert Mugabe of Zimbabwe, who the editorial said did basically nothing as the exchange rate there fell to four trillion Zimbabwe dollars for one American dollar. While noting that Russia was in far better shape, the editorial said that "the biggest problem of Russian leadership is inability to admit mistakes."
"The economy is seriously ill, and the rouble rate is one of the indicators crying about the illness," the editorial said. "Russia's leadership refuses to admit there is an illness and pushes it into the depths."
Anton Siluanov, the Russian finance minister, called the report predicting a recession a "preliminary assessment" and said it had not been approved by the entire cabinet. Siluanov also argued that the rouble was now undervalued after its long slide.
Putin is due to deliver his annual State of the Nation speech on Thursday.
Some economists think that the policy is essentially to wait out the sanctions, with the Kremlin anticipating that they will expire in a year and that then all the financial problems will diminish.
The crisis is still likely to force significant cuts in public spending. The Ministry of Economic Development, which publishes the government's economic outlook, on Tuesday revised its 2015 forecast to show a contraction of 0.8 per cent, compared with a previous projection of 1.2 per cent growth. Private assessments said there could be a drop of 2 per cent.
The setbacks have slowed or eliminated goals to achieve higher wages, better health care and cheaper housing, ambitions laid out in a series of populist decrees
The 11 decrees described a "transformation strategy for society" for his new six-year term, including creating 25 million "highly productive" jobs, raising life expectancy to 74 years and raising the birthrate. "Russia is in an economic crisis," said Kirill Rogov, an independent economic analyst. "Of course, all those grand plans are irrelevant now."
It is impossible to predict whether the economic woes might inspire anti-government demonstrations. There have been minor protests in Moscow by medical professionals denouncing the closure of about 28 clinics in the capital and the dismissal of 10,000 medical staff members.
But the effects of the economic crisis are just starting. Once constituents like pensioners realise the rouble is losing its purchasing power, they can be expected to demand raises so they can buy as much as before. But state companies will be first in line.
"The problem is that he cannot deliver on his economic promises, so he has to deliver on post-imperial nostalgia," Guriev said of Putin. "He will say that we are not rich anymore, but we are at least feared." The annexation of Crimea lifted Putin's ratings into the stratosphere, raising concerns that he might try similar moves elsewhere, like Moldova, to distract people if the economic crisis deepens.
The crisis and three rounds of Western sanctions seem to have produced a distinct shift in the propaganda on state television and elsewhere, from triumphalism to a determination that Russians are ready to make any kind of sacrifice to win a showdown with the United States. A billboard on the main Sadova ring road around Moscow recently proclaimed,
"There are more important things in life than the financial market," and made references to Russian history.
"They are moving from greatness to suffering hardship, because we are fighting American domination," Milov said. "It is a totally different definition of the mission."
©2014 The New York Times News Service