Earlier this month, the Russian government released its latest macroeconomic forecast. It could not have been an easy decision: Whereas Russian President Vladimir Putin and his government campaigned last year on a promise that the Russian economy would grow at 5 percent to 6 percent per year during his six-year term, the growth rate is now expected to average just 2.8 percent from this year to 2020.
Russian Minister of Economic Development Alexei Ulyukaev explicitly acknowledged that achieving the targets set by Putin “will take longer.” In some cases, that means much longer. For example, in May last year, Putin promised to increase Russia’s labor productivity by 50 percent by 2018; the current forecast does not envision this outcome even by 2025.
For independent observers, the ministry’s grim forecast comes as no surprise. Judging by low stock prices and high capital outflows, investors were already betting against high growth rates. Now Putin and Russian Prime Minister Dmitry Medvedev are pessimistic as well. Medvedev, who had been publicly forecasting 5 percent annual growth as recently as January, told foreign investors last month that this year’s growth rate would not exceed 2 percent.
Previously, the government blamed Russia’s economic problems on the global slowdown. Today, that argument makes little sense. The global economy — and the US economy, in particular — is growing faster than expected, and world oil prices are above US$100 per barrel.
The ministry’s forecast answers the perennial “who is to blame” question very clearly: The slowdown reflects Russia’s own “internal problems.” The ministry’s baseline forecast assumes that the price of oil — Russia’s main export — will grow at 9 percent per year in real terms over the next 17 years, or more than three times the forecast for Russia’s annual GDP growth.
A week after the ministry’s forecast was released, the European Bank for Reconstruction and Development — Russia’s largest foreign direct investor — followed suit, cutting its growth forecast for Russia to 1.3 percent for this year and 2.5 percent for next year.
The bank’s view was even more straightforward: The slowdown is the result of the Russian government’s lack of structural reform. Poor governance, weak rule of law, and the assault of state-owned companies on competition undermine Russia’s business climate and cause capital flight.
Russia’s ruling elite understands very well that reforms are needed; indeed, the Putin-Medvedev era, now in its 14th year, has suffered no shortage of reform programs. For example, in 2008 then-president Medvedev was praised for his seemingly credible commitment to implementing the changes that Russia’s economy needed. However, Medvedev’s one-term presidency — like Putin’s administrations before and since — did not deliver on these promises.
The Russian government’s reluctance to fight corruption and strengthen the country’s legal institutions reflects a perverse — yet stable — political equilibrium. In 2010, a “70-80 scenario” was predicted for Russia in the coming years because oil prices, which had plummeted to US$40 per barrel, recovered and surpassed US$70 per barrel, Russia would return to the stagnation of the 1970s and 1980s.
Sure enough, GDP growth from 2010 to last year, though averaging a respectable 4 percent, turned out to have been driven by the post-crisis recovery and the further increase in oil prices to US$100 barrel. Now all of these short-term factors have been exhausted, and a Brezhnev-like period of stagnation has begun.