48 Europe The EconomistMarch 28th 2020
V
ladimir putin is no doubt feeling
smug. The Russian economy ought to
be in crisis, but it is not. Covid-19 is causing
a global meltdown. The price of oil has
slumped below $30 a barrel, half what it
was two months ago. Oil and gas tradition-
ally account for two-thirds of Russian ex-
ports. That has sent the rouble sliding. The
currency has lost nearly a third of its value
since early January.
Yet even as the world’s richest countries
are in turmoil, taking on vast sums of debt
to cushion the blow, Russia’s economy
shows few signs of panic. This is not be-
cause Russia has diversified, defeated cor-
ruption, protected property rights, or
boosted competition, investment or
growth. It has done none of those things.
Rather, the Russian economy is less sensi-
tive to the shock because it has already
been self-isolating for the past six years.
Ever since Mr Putin illegally annexed Cri-
mea and fomented war in Ukraine, the
West has imposed sanctions on Russia and
Russia has imposed sanctions on the West.
Since then, the aim of Russia’s macro-
economic policy has been not to foster
growth but rather to build a fortress econ-
omy that could withstand a severe shock.
Underpinning this policy was a fiscal rule
in 2017 that required the budget to balance
with an oil price slightly over $40 a barrel.
Anything above that figure was funnelled
into a rainy-day fund which had reached
7.3% of gdpon March 1st.
As a result, Russia now sits on one of the
world’s largest gold and foreign-exchange
reserves, worth nearly $570bn. Oleg Vyu-
gin, a former official at the central bank and
the finance ministry, explains the think-
ing: “We’re protected against external
shocks and foreign enemies because we
have modern weapons and rockets, but
also because we have gold and reserves.”
Russia has also raised its pension age and
vat rate, and has boosted its tax take
through digital technology. Mikhail Mis-
hustin, the tax-collector-in-chief, was re-
cently promoted to prime minister.
To be sure, the Russian economy re-
mains highly dependent on energy and
commodity prices. The dramatic fall in the
oil price, partly induced by Russia’s own
decision to break out of its deal with opec
producers, could deprive the government
of about 2trn roubles ($25bn) this year.
Russia’s risky bet that it could increase its
market share and drive American shalefirms out of business may backfire spectac-
ularly if America decides to strike its own
deal with Saudi Arabia at Russia’s expense,
argues Kirill Rogov, an independent ana-
lyst. But for now, Russia has more than
enough reserves to see it through the next
few years. The decline in the value of the
rouble has limited the damage to its public
finances caused by the falling oil price.
Western sanctions have also made it irrele-
vant, in many cases, that foreign goods
now cost more in roubles.
Cut off from international capital mar-
kets since 2014, Russian firms have had no
choice but to deleverage. Whereas Western
firms took advantage of low interest rates
and loaded up on debt, Russia’s corporate
debt as a share of gdphas fallen to below
50%, while the state debt-to-gdpratio is
well under 20%. Given that most of Rus-
sia’s exports are basic, it is also less vulner-
able to disruptions in complex global sup-ply chains. “If you are travelling on a horse,
you don’t have to worry about running out
of petrol,” observes Natalia Orlova, chief
economist at Alfa Bank.
Russia has also become more self-reli-
ant. Its counter-sanctions imposed on food
imports from the euhave boosted domes-
tic agriculture, driving down the share of
food that is imported by a third in the past
five years, to just 24%.
Life in isolation has its downside, as
many people outside Russia have discov-
ered since covid-19 struck. Russia is poorer
than it should be. Its average annual
growth rate since 2014 has been a dismal
0.6%, which is a fifth of the global average.
Small- and medium-sized private busi-
nesses have shrunk. Quasi-state firms con-
trolled by Mr Putin’s cronies have expand-
ed. Rent-seeking is rampant, which means
that opportunities for the honest or dili-
gent are frustratingly meagre.
The economic impact of the new
coronavirus, which may be more wide-
spread than the government claims, is only
likely to deepen Russia’s structural pro-
blems. On March 25th Mr Putin announced
his own response to the virus, a pale imita-
tion of the vast economic packages an-
nounced by western governments. It large-
ly transfers the cost of the adjustment to
Russia’s middle class.
Instead of a lockdown, Mr Putin de-
clared a week-long holiday in Russia. In re-
turn, small- and medium-sized businesses
are to get a corporate-tax holiday for six
months (vatmust still be paid). The social
taxes businesses pay on behalf of their em-
ployees are to be halved, to 15%.
The president’s welfare-support meas-
ures were relatively modest. The govern-
ment is going to increase child benefits by
5,000 roubles a month ($63) and unem-
ployment benefits by a third to 12,000 rou-
bles. Those who fall sick and lose more
than 30% of their income will be able to de-
lay repayments of mortgages and certain
other loans.
To compensate for the hit to the nation-
al budget, Mr Putin increased the tax on
dividends received from offshore holdings
from 2% to 15%, effectively levying a new
tax on the rich. What this package demon-
strates all too vividly is that Mr Putin cares
a lot more about bolstering the state than
about preserving Russia’s market econ-
omy, such as it is.
As Ruben Enikolopov of Moscow’s New
Economic School argues, the biggest risk
that confronts Russia is not an economic
collapse but a social one, with millions of
people losing their livelihoods and belea-
guered private firms shrinking yet further.
Mr Putin has long talked about restoring a
Soviet-style socially oriented state. The cri-
sis risks exposing that what he has built in-
stead is a corporatist state that cares little
about its private citizens. 7MOSCOW
After years of isolation, Russia is only mildly affected by global upheaval—so farRussia’s economyIsolationomics
Measuring PutinSources: Datastream from Refinitiv; IMF *Brent crudeGDP
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