Surveys, News, Events

Russia's Economy is Still Growing Faster than Every EU Country

Forbes (???)

By Mark Adomanis

I’ve been pretty persistent in arguing that Russia’s government, corrupt and authoritarian as it may be, is going to last for awhile. This is not because it is a shining example of efficiency and democratic accountability, but because its overall economic and fiscal outlook is, at the moment, surprisingly robust. It’s aso because the top-level elite are, at least for the moment, united in their desire to stay in power.

Midway through 2012, the Russian economy is growing at a reasonable pace, foreign debt is almost non-existent, the budget is, for the moment, roughly in balance, and the opposition is still fragmented and leaderless. This would seem to be a uniquely poor recipe for a successful revolutionary upheaval. Basically, everything hinges on the trajectory of the Russian economy, and it really doesn’t seem to be doing poorly at the moment. This is particularly true when you compare Russia’s decent performance with the consistently awful performance of the EU and the Eurozone, both of which appear to be in outright recession.

I understand that Russia is vulnerable to a collapse in oil prices. Really, I do. But while I’ve seen many predictions that the price of oil will collapse at some point in the future, I’ve also seen quite a few stories like this one from Reuters:

Oil steadied near three-month highs on Thursday, supported by worries over possible disruptions to supply from the Middle East and a steep fall in U.S. oil inventories.

Global crude oil benchmark Brent has risen more than a third in less than two months on escalating worries about a conflict over Iran’s nuclear programme and as investors hope for more stimulus measures from central banks that would boost commodities.

Now the same article notes that “the fundamentals” don’t really justify oil at $116. But I’ve been hearing about how the “fundamentals” of the oil market favor a price somewhere in the $80 range for over a year now. And while I can intellectually grasp the argument that the price of oil is “artificially” high due to tensions in the Middle East, how likely does it seem that those tensions will dissipate anytime soon? I’m not a Middle East expert, but isn’t it at least possible that sustained tensions with Iran will continue for at least another year, and possibly even lead to outright war (which, of course, would send the price of oil rocketing into the stratosphere)? Doesn’t continued tension in the region seem much likelier than a swift resolution of a seemingly intractable problem between a number of countries that, to all appearances, genuinely despise one another? I understand that if the Iran standoff is resolved and that if this leads to a significant reduction in the price of oil then Russia would be in trouble, I just think that, on balance, it’s far likelier that things will continue on essentially the same track.

The people predicting immediate upheaval in Russia, people like David Satter, whose latest article I reviewed a little more than a week ago, also spent quite a lot of time talking about Russia’s supposedly weak economic performance. In this understanding, Russia is an economic basket case that has never performed particularly well and which is ill-suited for today’s modern and competitive world. While the precise details differ, the essence of the argument is that the demonstration effect of rapid growth in other countries will make the Kremlin appear weak and incapable in the eyes of the Russian populace, roughly what happened during the 1980′s at the tail end of a long period of economic stagnation.

This is a very plausible argument, but to what extent is it actually true? Well as I noted back in May, Russia was actually on pace to outgrow every EU country in 2012.  When we look at new data from Eurostat and from Russia, we find that this is absolutely still the case:

    Russia: 2012 second quarter growth 4%, 2012 projection 3.4%*
    Poland: 2012 second quarter growth unavailable, 2012 projection 2.7%
    Lithuania: 2012 second quarter growth 2.7%, 2012 projection 2.4%
    Latvia: 2012 second quarter growth 4.3%, 2012 projection 2.2%
    Slovakia: 2012 second quarter growth 2.9%, 2012 projection 1.8%
    Estonia: 2012 second quarter growth 2.5%, 2012 projection 1.6%
    Romania: 2012 second quarter growth 1.7%, 2012 projection 1.4%
    Bulgaria: 2012 second quarter growth 0.5%, 2012 projection 0.5%.
    Czech Republic: 2012 second quarter growth -1.2%, 0%
    Hungary: 2012 second quarter growth -1%, 2012 projection -0.3%

As you can easily see, Russia is a positive outlier: its economy is growing more quickly than all of the new EU members. There might have been a time that you could argue that Russia was a laggard, that its dismal economic performance was a testament to its corrupt and inefficient institutions and that, if it only followed the example of countries further to its West, that it would be able to unlock the secret of sustained capitalist growth.

However, in 2012, Russia is performing better than its much more democratic and liberal brethren in the EU. This reflects the near-total failure of the European Central Bank and other European institutions far more than it does any particularly excellent decisions on the part of the Russians, but the EU and its attendant institutional and legal baggage were supposed to help countries achieve economic growth, not bind them in a straightjacket of austerity and recession. Looking at the above figures, why would anyone expect there to be a sustained wave of pro-Western enthusiasm, so that Russia can be more like Hungary and the Czech Republic? Indeed, under the pressure of prolonged economic misery and desperation, democracy is arguably eroding within the EU itself.

All of the above would suggest to me that Russia’s current political system won’t run out of gas anytime soon and that it will be able to broadly maintain the status quo through selective repression and co-optation. It won’t be pretty, there will almost certainly be additional distasteful farces like the Pussy Riot trial as the Kremlin continues its age-old hunt for useful enemies, but in the short term the Kremlin’s position looks quite secure.

 * This is the lowest of the government’s many estimates. As noted in the article to which I linked, the government is considering officially raising its forecast to 3.8%

Source: Forbes (???)

Post-Crisis World Institute