The Causes Of Economical Problems In Russia

Russia has never been on the forefront of innovation in any major field. They are always playing catch up with other super powers, primarily the United States. Some of Putin’s early reforms put them on the right track, but since then, there has not been a consistent pattern of improvement. Their economy is heavily dependent upon oil prices, Russia is not very appealing to outside investment, state owned corporations are discouraging private business, and their unpopular foreign policy decisions and actions continue to hurt the economy, primarily through sanctions.

The Economy Rises and Falls

It is important to note that Putin entered office on an upswing in the Russian economy. While some credit him with fixing the economy, financial stabilization was actually occurring well before he took office. It was still very much Yeltsin running the show. As we've seen in Russian politics, leaders do not give up power until they absolutely have to. Ballard points out that, “The devaluation of the ruble in 1998 strengthened domestic producers, while rising crude oil prices boosted state coffers – two factors that he had no control over. ” In addition to having no control over these economic phenomenons, he was not the president at the time. As mentioned, Putin also had the help of the booming oil markets in the early 2000’s. In his first two terms in office, oil prices remained above $100 a barrel. This was truly an unprecedented gift being handed to Putin to start his presidency. With all this money, Russia could afford to take more risks politically around the world, and ultimately, the country could spend its way out of trouble. When the oil markets are good, the Russian economy is at its peak, but when they are bad, Russia’s economy goes into freefall. This is because oil and gas industries make up 68% of Russia’s total exports.

Not to mention these industries also make up a 40% of Russia's federal budget. This does create a volatile situation. A self inflicted wound Russia keeps opening is that they are never prepared for the price of oil to go down. When they have more money, they spend like they will always have that much money. When it goes down, that's when they cut their spending. They are not taking a long term approach. Granted, Putin’s background in the KGB certainly doesn't make him an economics expert. If anything, this is Putin's weak point. This can be seen in a few places after his lucky run in with the economy. Since 2016, the ruble has depreciated by about 25% compared to the US dollar. This was accompanied by a crash in the global oil market in which prices dropped down to $27 a barrel. As mentioned, Russia was not prepared for this and suffered. Today, the average price of a barrel of oil is around $80, still well below what Putin was used to. Like Putin said in his inauguration speech, the worst thing that can happen to Russia is that they get left behind. As of now, their projected economic growth sits at only 1. 4%. That may not seem bad until it is known that the global average for growth is 3%.

Overall, Putin’s economic strategy is just pray that oil prices go up and stay up. No policy he can make will ensure that, so him and Russia must take the blows as they come.

Corruption in Government and Business

Putin wanted to reassert the president's power in Russia. In doing this, he invited corrupt means of government and economic practice. The most notable of his actions to strengthen state control alongside utilizing corruption can be seen in the Yukos situation. The CEO of Yukos, one of the largest and most profitable privately owned companies in all of Russia, was arrested on tax evasion. The company was ultimately broken up and absorbed by state owned oil companies. Many believed the CEO posed a threat to Putin, he was young, popular, and had money to back candidates against Putin. That is why this action is widely seen as a political hit job. This policy hurt Russia however. At the end of the day, corruption inhibits foreign investment. Ballard mentions that, “Increased state ownership has also rendered attempts at institutional reform largely pointless. ” What he means by this is that, odds are if you are running one of these large state owned companies, you are close with Putin. If that is the case, why do things “by the book”? This is why Putin’s friends are the richest and most successful businessmen in Russia. It is simply more corruption that Russia does not need and keeps the Russian economy dependent on the state owned enterprises.

Foreign Policy Decisions and Actions

Just about the only thing Putin can actually do to affect the russian economy, is to enact radical foreign policy decisions. Things that he has done that have hurt the economy include the annexation of Crimea or meddling in the Ukraine. All of these have brought economic sanctions on Russia and decreased foreign direct investment from the United States and some Western European nations. Ballard notes that “The problem of attracting foreign direct investment has been exacerbated by economic sanctions imposed by the US, the EU and many others following Russia’s military intervention in Ukraine in 2014. ” These actions Russia is taking are clearly not popular amongst a majority of the world. This can be seen when foreign investment dropped by 92% in 2015. According to Lilit Gevorgyan, Principal Economist for Europe and CIS at IHS Markit, increasing Russia’s economic diversity depends on reducing political risk in the country. Russia is a very volatile investment due to its unpredictability.

Putin has attempted to implement some economic policies to strengthen the economy. Despite some of these drawbacks, Putin has tried to implement some free market based reforms. For starters, he allowed for privatization of formerly state-owned businesses. Additionally he had widespread tax reform. He replaced the progressive income tax with a flat rate tax of 13%. To help small businesses, he simplified and reduced business regulations and reduced the corporate tax rate from 35%, to 24% in 2001. He cut social security contributions and decriminalized small-scale tax violations. Perhaps Putin biggest step towards reform was allowing for the privatization of agricultural land in 2002. They have even taken steps toward bolstering their economy during a time where oil prices are low. They created the National Wellbeing Fund. With this fund, when oil prices go above $40 a barrel, oil revenu is put into long-term reserves. This is ultimately aimed at lessening their oil dependency. Putin has also for the first time ever, decreased spending on the military by 20% from 2016 to 2017. This is an effort to lower their defence budget to just 3% of their nations GDP. Particularly when foreign businesses remain banned from investing in more than 40 industries for national security reasons. ”