The World

Top Russian Officials Are Starting to Realize That the Country’s Economy Is in Big Trouble

But Russians shouldn’t worry, because freedom-loving President Vladimir Putin promises “a country that is strong, flourishing, free, and open to the world.”

Photo by Sean Gallup/Getty Images

MOSCOW—You wouldn’t know it from the Chanel boutiques and Maserati dealerships lining the boulevards inside Moscow’s Garden Ring, but economic conditions in Russia are becoming dire. The ruble has weakened to record lows not seen since the 1990s, capital is bleeding out of the country for the first time since the 2008 financial crisis, and the economy is projected to grow a piddling 0.5 percent this year.

You wouldn’t realize any of this from the statements of Russia’s president. At a forum last week, Vladimir Putin ensured investors that the country has enough reserves to implement all of its budget proposals, including an $80 billion increase in military spending next year. The president certainly seemed confident, telling investors that Russia’s “strategic course remains unchanged” and that he foresees “a country that is strong, flourishing, free, and open to the world.”

Putin’s optimism rests on some pretty big assumptions, including 1.2 percent growth next year—the World Bank thinks 0.3 percent is more realistic—and $100-a-barrel oil prices. Despite turmoil in the Middle East, the price fell below $90 last week. Russia relies on oil and gas revenues for about half of its budget.

These trends could be read as a victory for the sanctions regime imposed in recent months by the U.S. and the European Union to punish Russia for its actions in Ukraine. But the truth is that the economy was looking dismal long before the sanctions came down.

“The situation became very complicated before there were any sanctions,” Andrei Nechayev, who served as Russia’s economics minister in the early 1990s, told me in an interview this week. “The main reasons are internal problems of the Russian economy: low competition, low protection of property, a bad investment climate. In 2013 we were like a falling jet fighter.”

Though sanctions against corporations have cut off access to easy Western capital, Nechayev said that Russia’s own sanctions—restrictions on food imports from the U.S. and Europe—are “much more stupid.” While it’s not as notable in Moscow, food prices have been skyrocketing in some Russian regions. The government argues that it can replace these imports by stimulating local food production, but this will take time. “You can’t speed up biology,” noted Nechayev, who is now president of the Russian Finance Corp., an investment bank. “It takes a certain amount of time to make a new cow.”

But again, even if the food restrictions were lifted tomorrow, Russia would still be in trouble. Even under a blue-sky scenario in which all geopolitical tensions vanished, the World Bank sees only 0.9 percent growth next year.

Nechayev believes budget cuts are necessary, particularly to the military, though this seems unlikely given current tensions. The government has also been reluctant to find cuts elsewhere. For instance, a proposal to eliminate the country’s maternity subsidy program, which aims to combat Russia’s demographic decline by awarding lump sum payments to mothers who have more than one child, was shot down by Prime Minister Dmitry Medvedev last week.

But Nechayev says that the most important thing weighing down the Russian economy is corruption. “Russian businesses face two taxes,” he said, “the legal tax and the corruption tax.”

He also feels that too often, Russia’s local and regional governments have been asked to shoulder the burden of budget cuts. “The result is that they declined investment programs, road construction, innovations programs, etc. Now regional governments are a husk just to pay salaries.”

Obviously there’s a political component to this. It’s nearly impossible for regional governors to be elected without the approval of the Kremlin. As Nechayev, who also leads a small opposition political party called Civic Initiative, noted, “Psychologically it’s not so easy to come to the person who made you the governor to say, ‘Sorry, but you have very stupid financial policies.’ The response will be, ‘OK, we’ll find another guy who’ll solve the problem.’ ”

It would be one thing if it were only liberal former officials with opposition ties like Nechayev making these arguments, but they’re increasingly being voiced by the country’s top economic officials. Finance Minister Anton Siluanov said this week that Russia’s high rates of military spending are unsustainable. “We want to reconsider the amount of resources devoted in the course of this new program, so that they are more realistic,” he told the news agency RIA Novosti. The current economics minister and the head of Russia’s central bank have publicly voiced concerns about the drying up of foreign investment.

More dramatically, the head of Russia’s largest bank, Sberbank, said last week that Russia’s current government could be repeating the mistakes of the Soviet Union, which also faced “huge structural problems” and an overreliance on oil prices. “There is one key reason which determined the rest: It’s mind-boggling incompetence of the Soviet leadership. They did not respect the laws of economic development. … We cannot allow the same situation,” said German Gref, whose bank has been targeted by international sanctions. He added that in contrast to Soviet days, today’s Russian government “cannot motivate people through the Gulag.”

The house arrest of oligarch Vladimir Yevtushenkov last month on what are widely seen as politically motivated money laundering charges also doesn’t seem likely to reassure investors that Russia is a safe bet.

As I’ve written before, Russia’s economic woes are unlikely to impact public opinion much in the short term. Putin’s political policies are extremely popular, the media is loyal, and the sanctions give the government a convenient political scapegoat. But the degree of alarm among some of the most senior figures in the Russian economy is striking.

Ultimately, however, these arguments probably don’t hold much sway with the one man whose opinion matters. Nechayev thinks Putin may be overestimating the degree to which Russia can continue to rely on high energy prices—Russian companies are pushing ahead on plans to expand oil drilling in the Arctic—and the ease of substituting trade with countries like China, India, and Brazil for its former partners in Europe and the United States.

But economic concerns may simply not be Putin’s top priority. Putin is “very disappointed with the Western position,” Nechayev said. “Psychologically it’s very appealing to make life unpleasant for his former partners.”

I’m currently reporting in Russia thanks to a grant from the International Reporting Project at Johns Hopkins.