Russia

My Impressions...

Russia.

“I love Russia.”

“Why?”

“I just do.”

I just do... it is such a fascinating country, with such a traumatic, turbulent, emotional and important political history. The Russian Revolution was hands-down my favourite topic during my high school history lessons. Why? Because I really felt those words I wrote above – the trauma, the turbulence, the emotion and the importance, it all reverberated through me from out of the pages of my school textbook. Russia was also a symbol for me – cold but beautiful. The image of Bloody Sunday, red drops of blood in the pure white snow. What more potent image could you ask for? At the turn of the nineteenth century, women in luxurious furs, grand balls and banquets - aristocracy at its most opulent – destroyed in a blur by men from the underground, installing a grey, metallic vision of factories and engines...

… but the romantic vision I had of Russia has long since faded. The medium of the written word can only have a limited effect. As human beings, we need to engage all five of our senses to understand something fully. In the lead up to the Russian Elections last weekend, I went to a screening of two documentaries on the country in which faces and voices spoke new volumes to me. I saw the toothless faces of babushkas who melted snow for water when the only water tower in their village froze for months on end, I saw the black-ringed eyes of young men in Moscow holding placards condemning ‘enemies’ of the motherland.  I saw the fear, I heard the anger, I became aware of a Russia I had been completely ignorant of.

All the Russians I have met in London have been dressed in designer clothes, watches and jewellery that sparked obscenely, and all educated at the best British boarding schools… What was this Russia that I was seeing now where wizened old women drank vodka with their lunchtime picnic and youths took it upon themselves to shit on the cars of Putin’s political opponents? I did not know this Russia.

The Russia I knew was a tragic one, built on waves of dreams and beautiful ideology – red drops of blood in the pure white snow. I always felt sorry for the Tsar, modern media always seems to portray him as a bumbling fool, out of his depths and out of control. I imagined him to be a pampered rich boy who arranged his precious toy soldiers in neat lines but didn’t know a thing about leading real men, a man who could host a lavish party with the most exotic spices, but couldn’t solve the problem of getting bread to his starving people. Do I think he was cruel? No. Foolish and ignorant with no understanding of the real world? Absolutely – but you could say the same for the majority of people born into wealth in any society throughout history.

Perhaps the reason why I hold so much sympathy for the Tsar and his family is that I abhor murder – and yet why do I not feel sympathy for Bin Laden or Gadaffi? History, I think, remembers the Tsar romantically. The story of him and his family being shot by the Communists is always told with sadness; perhaps because with hindsight, we know that in many ways, the Communist rule was crueller and more deceiving. The Tsar was not evil; he was incompetent. And while the suffering and hardship of the people may terrible under either type of autocrat, I believe the way you dispose of the autocrat responsible should be. Many of Russia’s leaders in recent history will be remembered negatively by history books. What will be the deserving fate of Putin? I wonder how much history is offering us a premonition for this current Russian era.

Impressions from history...

Leaders such as Khrushchev were committed to creating utopia, believing that the future had to be wonderful as it was the only thing that could justify the past. Soviet Russia was supposed to be the realisation of Marx’s dream of a ‘land of plenty’, but this naive optimism of a country already on its knees only faded into a worse reality of famine, slaughter and senseless massacres. The Soviet plan to reach utopia neglected the suffering of the present and committed itself to a form of industrialisation which was hopelessly and fundamentally tyrannical. It was a world in which there was plenty of room for steel and concrete but very little room for intellectual ideas and debate. The failure of the Soviet dream was proof that an economy could not be run by scientists and engineers alone but requires human needs and social considerations to play a key part in the ideology.

Soviet economists were the first to apply mathematics to national economic planning and Leonid Kantorovich, a mathematician and economist during Khrushchev’s leadership, won the Nobel Prize for Economics in 1975 for creating the mathematical formula behind ‘linear programming’ which was designed to aid the output of the perfect planned economy. Soviet ideology believed that the absence of ‘free market’ operations could be compensated for by a centrally planned Soviet economy. The idea was based on optimal inputs and outputs – aiming to introduce frugality into the planned economy and finding a logic which could be exploited to get the most out of the least. Throughout 60 years of central planning, all economic policy and activity and all decisions regarding investment, production, and consumption were made by the state and after Communism finally collapsed in 1991, the country has struggled to evolve into a market based economy with steady economic growth. When Russia’s new non-Soviet president, Boris Yeltsin, came to power, he brought in reform through market-determined prices and fiscal and monetary policies to promote economic growth in an environment of stable prices and exchange rates. As well as setting up commercial and institutional entities, the domestic market was opened up to foreign trade and investment.

However, after six years of economic reform and almost immediately after recording its first year of positive economic growth since the fall of the Soviet Union, in August 1998, Russia was forced to default on its sovereign debt, devalue the ruble, and declare a suspension of payments by commercial banks to foreign creditors. While the collapse of the ruble strengthened exports, imports remained low and direct investments into Russia have continued to be inconsistent. Although many saw the crisis as proof that Russia would never successfully reform its economy, significant improvements have been made under President Putin, much of which can be attributed to the import substitution effect after the devaluation; the increase in world prices for the country’s oil, gas, and commodity exports; and stronger monetary and fiscal policies.

Political impressions...

When Putin came to power in 2000, he was a symbol of renewed hope, stability and growth to the Russian people. Since 2000, Russia has had an average annual growth rate of over 5% and inflation has fallen from over 20% to single digit figures. The persistent budget deficits that plagued the economy throughout Yeltsin’s leadership have been replaced with surpluses – primarily the result of high and continually rising oil prices, but arguably significantly helped by Putin’s fiscal reform and wise management.

12 years on from his first election, many Russians have maintained their allegiance to Putin for fear of losing what has been achieved under his leadership, particularly in the face of no credible alternative candidate. Many argue that much of Putin’s campaign is based on the idea that his departure will throw the country back into the economic chaos that it had known for so many years previously. Fear and paranoia purposefully resounded through his victory speech last week, in which he claimed that the country had overcome “political provocations that aimed at only one thing – to destroy Russian statehood and usurp power”. This imaginary external (read Western) threat to Russia is reminiscent of the fascist movements that believed that war and fear of a common enemy could rally domestic national sentiment and unite people behind the party who would fight and suppress this imaginary threat.  My eyes were opened by the new documentary film “Putin’s Kiss” to a barrage of frightening similarities with an era I thought had long been banished from Europe. The film focused on Nashi – widely referred to by commentators as the Russian Hitler Youth – an organisation in which young Russians gathered at political Summer Camps, singing of their love for the Motherland and pledging to fight against all her enemies. An attempt, I fear, at brain washing the next generation and encouraging angry youths to channel their violent tendencies towards ‘enemies’ of Putin/Russia.

According to Putin, this was “not just an election for president. It was an important test for all of us…a test of political maturity, of self-sufficiency, of independence.” I am in no position to repute the idea that perhaps these were the fairest elections that Russia had ever seen – but the point of true ‘political maturity’ should only be an election in which everyone is uncertain of the result. Not so in Russia - every newspaper in the world was writing about Putin’s victory even before the polls opened – even if there were no stuffed ballot boxes or forged voting papers, the election was overtly skewed in Putin’s favour from the start. But similarly, newspapers have been quick to cover the growing discontent on the streets of Moscow since the claims of vote rigging during the elections for the Duma at the end of 2011. Reporters did not overlook the temperatures of -22°C which were braved by 100,000 protesters on 4th February, indicating that these were a people whose anger and resolve should not be taken lightly. While a final result of 63.7% may be a big drop from previous election figures, the cynics among us could say that anything well above 60% would probably have resulted in an increased number of opposition protests and outcries of fraud, thus driving away foreign investors to a greater extent than a clear whitewash victory would have helped reduce political risk.

Macroeconomic impressions...

One story from rural Russia that particularly moved me was that of elderly people being stranded and forgotten about in villages as the snow fell and they became cut off from resources. The authorities would not clear the roads and so doctors and food supplies could not reach them in time. Where is the infrastructure in this country to ensure that all villages are accessible and where are the facilities to run electric currents through water towers to stop them freezing over? This is the country that made billions of dollars of profits from the oil price rises in 2010. Where did those profits go? The wealth made from its domestic energy resources is not filtering down to the general Russian population and the polarisation of wealth and the gap between the rich and poor is greater than ever. Something in the Russian system is wrong.

High oil prices boosted Russian growth in 2011 and helped Russia reduce the budget deficit inherited by the 2008-09 global economic crisis when oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up. Shale-gas discoveries elsewhere in the world are pulling down the price of gas and demand for these resources are particularly at risk in the short term as a result of the ongoing crisis in the Eurozone and expectations of slower growth in China. Over the long term, Russia will need to diversify its economic plan into more innovative sectors such as technology and encourage investment in sectors not based on natural resources. The reliance on commodity exports – notably gas, oil and steel - makes Russia vulnerable to the volatile boom and bust cycles of global commodity prices and it is well known that Russia's budget balance is dependent on the oil price. Reducing the public budget’s dependence on oil revenues would further modernise the Russian economy, but doing this will require a wider political agenda.

Russia still has an image problem – corruption, red tape, political uncertainty and instability are still at the forefront of foreign investors concerns. These are long term concerns which need to be tackled by Putin perhaps by strengthening the judicial system and rule of law to start root out the widespread corruption and encouraging a more business-friendly environment and effective social policy reforms to reduce income inequality. As well as plans for the part-privatisation of state assets and announcements of new spending initiatives, the government will need to attract foreign investment to raise capital for these major infrastructure projects. While the government understands the importance of FDI, it continues to struggle to attract the levels it needs to modernise the economy and move it away from its long-standing dependence on oil and gas revenues.

Mr Putin's extravagant pre-election promises include wage and pension increases for public sector workers and increased spending on defence and police services. These initiatives will add as much as $160 billion to the budget, which will push the current ratio of 40% of GDP on public spending even higher. With the federal budget already requiring oil prices of $120 a barrel to stay even, the risk of the government trying to buy popularity with a spending spree of this scale could mean that the federal budget could need oil prices close to $130 a barrel in the year ahead. This could begin to eat away at Russia's hard-earned fiscal credibility, particularly if investors worry about the integrity of the new political cabinet. However, with oil prices remaining near this level and with a strong sovereign wealth fund built from previous oil revenues to provide injections into the economy when needed, Russia’s fiscal sustainability is unlikely to be greatly at risk for the time being.

In fact, I think the overall short term economic outlook for Russia is likely to remain sustainable. Inflation has been continuing to fall and hit an all-time post-Soviet low of 3.7% y-o-y in February, remaining well below the central bank’s full-year target of 5-6%. Although prices are likely to spike when the pre-election utility price freezes are lifted later this year, the weak global economic picutre means these spikes are unlikely to be maintained. Low inflation gives the Russian Central Bank the freedom to significantly cut interest rates in order to encourage banks to boost lending and boost internal demand and overall economic growth. Russian assets will benefit from declining interest rates and strong foreign investor interest off the back of higher oil prices. Furthermore, as Russia’s stock market rose to a 7 month high after the weekend of Putin’s victory, it confirmed views that the markets will take comfort from Putin’s win, seeing it as a sign of stability in the short-term. However from a purely economic perspective, the long-term focus will be on whether or not Putin will deliver on his economic and political promises. This is what will make or break Russia.

Impressions for the future...

In the absence of real democratic institutions, Russia is run by oligarchs, security forces and bureaucrats, all consolidated by Putin. Corruption is at the core of the Russian power system, and the path to reform will not be easy and will require many, including Putin to give up much of the power they currently enjoy. However, repression could be just as harmful to their hold on power. If promises of change are not realised, Russia will continue to be a country built on repression and economic stagnation and filled with disillusioned citizens. History tells us these people are not afraid of a revolution when they find a new figurehead.

For many readers outside Russia, Putin has become laughable. He is no longer a respected, credible candidate for Presidency but a Berlusconi-type character hanging on as his unpopularity grows and economic problems worsen. Whether he will respond to protestors by trying to repress them or by giving in to their demands is still difficult to call, but what is certain is that the history books will not remember him kindly if he makes the wrong choice.

I have written about both Egypt and China with a positive and hopeful view on their respective futures, but I struggle to find the same kind of hope for Russia. The people of Russia have not been able to choose between parties with competing views on governance or policy issues for so long, and I fear that this is highly unlikely to change. Elections have merely become a method for reasserting power over the people by forcing their hand to vote, but the international community who they are trying to appease with a phoney democracy are not fooled. If the oil prices were to collapse next year, Russia’s economy and leadership would collapse with it. No one has yet to provide a plan for the country which will bring about sustainable domestic growth and demand. The country is fragmented – too fragmented socially to stage a resolute revolution like Egypt - and too fragmented ideologically to build prosperity and commercial and industrial success like China.

Recommended for your own impressions...

Red Plenty by Francis Spufford

Our Newspaper – Eline Flipse

Putin’s Kiss – Lise Birk