Challenges facing the Russian economy after the crisis

In 1999–2008, Russia was one of the fastest growing economies in the world. In 2009, it was one of the worst affected by the global economic crisis. Its GDP fell by 8 percent, more than any other economy in the Group of Twenty (G-20)—the group of the world’s largest economies. Does this mean that Vladimir Putin’s “growth decade” of 1999–2008 was just an aberration? That Russia failed to respond to the crisis in a smart and resolute way? That Russia is facing a serious crisis in the near future? The growth in the precrisis decade was not a fluke. The benefits of this growth have trickled down to all parts of Russian society. At the same time, however, the growth decade failed to address several major problems in the Russian economy—most importantly, corruption and dependence on commodity exports. Given these challenges, we argue that (1) Russia’s response to the first wave of the crisis in 2008 was mostly adequate; (2) the dramatic fall was largely to be expected but was exacerbated by poor economic policies in 2009; and (3) the Russian economy is not facing major difficulties in the immediate future. However, our long-term perspective of the Russian economy is not optimistic. We believe that as long as world oil prices
remain high, Russia may suffer from the “resource curse” and follow what we call a “70–80 scenario.” Given high oil prices, Russian elites may prefer to delay the restructuring of the economy and building of pro-growth political and economic institutions. This will in turn slow economic growth and make it very unlikely for Russia to catch up with advanced economies in the next 10 to 15 years. In other words, if oil prices remain at $70 to $80 per barrel, Russia will revert to Brezhnev-era conditions of the 1970s –1980s—a stagnating economy and 70 to 80 percent approval ratings. In the first part of this chapter we provide a snapshot of the Russian economy before the crisis. We summarize the benefits of the growth decade and the problems economic policy failed to solve. We discuss why Russia did not foresee the crisis. We then analyze Russia’s anticrisis policy—both the swift and mostly adequate response to the first wave of the
crisis in 2008 and the “preserving the status-quo” policies of 2009. We pay special attention to the level of decline in 2009 and argue that the poor performance of the Russian economy was due to both its dependence on oil and capital inflows and the burden of the previous lack of reforms and poor economic policies in 2009. Finally, we discuss lessons the Russian government learned from the crisis—and the lessons it should have learned. We argue that Russia is under a “resource curse”—a situation in which resource rents reduce elite’s incentives to reform and where nonresource sectors are unlikely to grow unless reforms are undertaken. We then draft a reform agenda that Russia needs to carry out and analyze the likelihood of its implementation and alternative scenarios.

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