Tsushima—2018

The Russian economy is drifting towards a new global crisis, and the authorities have neither the ability nor the desire to prepare for the storm, states economist Vladislav Inozemtsev

Thinking about the past year, I tried (partly inspired by Alexander Morozov , who compared the Russian leadership to an airplane crew, capable of lifting a car into the air, but untrained to land it) to find some kind of allegory for the economic policies that the authorities pursued in 2018. And the most obvious one seemed to me, inspired by the book “Tsushima” by Alexey Novikov-Priboy. I re-read this book several times as a child - and it seems to me that today much is reminiscent of its plot.

To retell it very briefly, the presentation consists of two parts - a description of the campaign of the Russian squadron from St. Petersburg to the Far East and the actual panorama of the famous naval battle. The first part is mundane - from a description of food purchases in ports to the death of Admiral von Felkersam three days before the battle, which was reported to the flagship with a pre-agreed signal “the davit on the ship has broken.” The second is dramatic and tells about the epic defeat of the Russian fleet.

"Achievements" of Rosstat

Why did I remember this book? Because the past year looks exactly like its first part. The Russian economy practically did not develop in 2018. The unobvious growth was primarily due to Rosstat, which detected inexplicable jumps in production in certain industries, unobserved investments and rapid growth in income against the backdrop of stagnant demand. Steadily rising oil prices until October brought the Russian budget the most significant surplus in its history (almost 4 trillion rubles), which, however, did not in any way affect the well-being of citizens. Despite the gigantic current account surplus (almost 7% of GDP, one of the best indicators in the world ) at the end of the year, capital outflow will apparently reach $70 billion compared to the $7 billion that the Bank of Russia spoke about in the spring. The outflow of investment continued both from debt securities and from the stock market.

Citizens sought to save, and a sharp increase in spending at the end of the year was due to the expected increase in VAT and rising mortgage rates. The state continued its bold experiments with the economy, imposing additional taxes on the self-employed, regulating mobile communications and the Internet, increasing the retirement age and concentrating on financing projects that could not bring any return.

The situation in the social sphere was worsening frontally - which became especially noticeable where, for opportunistic reasons, the authorities decided to demonstrate the real picture, free from postscripts

The external background was determined by sanctions - after April, this process took on a completely new quality, and in the near future the flow of restrictive measures from Western governments will definitely not decrease.

The situation in the social sphere worsened frontally - which became especially noticeable where, for opportunistic reasons, the authorities decided to demonstrate the real picture, free of postscripts. The country was steadily plunging into an environmental nightmare and was preparing for protests due to unbearable living conditions in an increasing number of regions.

However, all these circumstances - and I never tire of repeating this from year to year - are not capable of themselves undermining the economy so that the economic situation provokes political upheavals in the country. Although in recent months there has been constant talk about the return of the potential for widespread protest, it is difficult for me to imagine that macroeconomic problems will be the trigger for this. The country is in a situation where the people no longer expect anything from the authorities, do not count too much on improvements and limit themselves only to wishes that things do not get worse.

Stock markets around the world are finishing the year at lows, and American indices on Wednesday only by chance avoided falling into the bear market zone. Even after this week's impressive rebound, oil is losing about a third of its yearly highs.

Towards a crisis

Just as the Russian squadron one hundred and fifteen years ago was slowly moving to the other side of the Earth, so the Russian economy today is capable of “smoking” in its current form almost indefinitely. During the phase of relatively high oil prices, the government will accumulate reserves, and during periods of difficulties, it will spend them, but it is not ready to make any changes. Everything can change only in the situation described in “Tsushima” - when smoke appears over the horizon from the chimneys of the ships of the enemy squadron, against which there is no means to fight. The analogue of the Japanese fleet in our case is the global economic crisis, which, in my opinion, is inexorably approaching. The American economy expanded for the 115th month in a row, despite the fact that the average expansion lasted only 71 months over the past 60 years. Stock markets around the world are finishing the year at lows, and American indices on Wednesday only by chance avoided falling into the bear market zone. Even after this week's impressive rebound, oil is still down about a third of its yearly highs.

An extremely difficult situation has developed in China with its galloping rise in prices for capital assets, the incredible debt burden of the corporate sector and high uncertainty on the fronts of the “trade war” with America, which Beijing considers it right not to mention at all. Of course, more or less professional actions of politicians and financial authorities can delay the onset of the crisis, but they are not able to prevent it - and here Russia faces a new Tsushima.

"Growth" according to Putin

The fundamental problem with the Russian economy - and it has only become more pronounced in the past year - is that the state sector, which is constantly expanding, is relatively successful in collecting and redistributing rent, but is completely incapable of producing a multiplier effect. Government investments generate primary demand for some investment goods, but do not create businesses that can exist without further budget expenditures (this applies to almost everything that the authorities create - from sports facilities to enterprises of the military-industrial complex, from “bridges to Sakhalin” to more local infrastructure facilities).

The public sector, which is constantly expanding, is relatively successful in collecting and redistributing rent, but is completely unable to produce a multiplier effect

Economic growth “according to Putin” is growth carried out in the hope of future budget revenues, and they are possible only with relatively high oil prices, stable financial market conditions and the presence of optimism among the main global players. The Kremlin cannot guarantee all this.

Actually, that’s why I can once again only repeat the obvious: even though the authorities have done a lot, if not everything, to ensure that 2019 in the Russian economy is not easy and problem-free, serious shocks can only be a consequence of the global crisis. Against which we are powerless, just as the Russian Second Pacific Fleet was against the squadron of Admiral Togo. And in the coming year, we can only hope that the captains of the world economy will be smart enough to prevent a recession - simply because our leaders have neither the ability nor the desire to prepare the Russian economy to withstand possible negative trends and will not appear.

Read about why even serious economic problems do not make the regime less stable.

Read about what to expect from the current autocratic regime in Russia here .

*Vladislav Inozemtsev Doctor of Economics, Director of the Center for Research on Post-Industrial Society