Medvedev on Why Russia's Near Term Outlook Is Grim

Dmitri Medvedev stepped up what can only be considered his campaign against Putin and Putinism by emphasizing Russia’s dismal economic performance in 2009, and placing blame for the country’s economic malaise on its energy export dependence:

Russia’s economy may contract by a “very serious” 7.5 percent this year as dependence on energy exports left the country more vulnerable to the global financial crisis than expected, President Dmitry Medvedev said.

“I must admit that we sunk below our lowest expectations,” Medvedev said in an interview to be broadcast today at 9 p.m. Moscow time on state television. “The real damage to our economy was far greater than anything predicted by ourselves, the World Bank, and other expert organizations.”

Initial forecasts indicated the economy may drop between 3 percent and 3.5 percent this year, Medvedev told Channel One. The government predicted last month that the economy will shrink 8.5 percent this year, the most in a decade. Russia will return to growth in 2010, the government forecast in a report published on its Web site.

. . . .

Russia needs to modernize the economy and reduce reliance on oil and gas exports, to protect it against financial crises, Medvedev said. This may take as long as 15 years, he said.

“Once a significant portion of our revenue is generated by something other than energy exports, let’s say at least 30 or 40 percent of it, then we would already be living in a different economy and in a different country.”

Russia should pursue energy efficiency, including creation of new fuels and energy saving, develop nuclear power, information infrastructure, and produce its own medicines, the president said.

“Everything was okay as long as prices for energy and raw materials were high,” Medvedev said. “Then those prices fell. Our economy was hit hard. Our citizens were hit hard.”

Several comments.

First, the tone and tenor of Medvedev’s remarks contrasts starkly with the happy talk that has been Putin’s staple for over a year.

Second, the repetition of the theme that it is imperative to wean Russia from its dependence on raw material exports is by now so frequent, and so contrasting to Putin’s position as the de facto Prime Minister of Gazprom (”Gazputin,” remember?–he’s now off to China to do more gas deals), that these statements must be considered as Medvedev’s framing of his challenge to Putin. Blood brothers? Really? So were Cain and Abel, if memory serves. It still remains to be seen, however, whether Medvedev has the personal steel and the political support to challenge Putin successfully.

Third, with respect to the economics, even if Medvedev did not face a political battle over the future of the country, comparative advantage is what it is, and will inevitably affect the structure of the Russian economy. That said, the wealth consequences of Russia’s natural resource factor intensity, and the susceptibility of the country to terms of trade shocks could be mitigated to the extent that these risks could be shared through the financial markets, e.g., by exchanging claims on Russian natural resource endowments for claims on capital assets in other countries. The inability of Russia to precommit credibly not to expropriate foreign natural resource investments limits, however, the potential for this potentially beneficial exchange. This will continue to shackle Russia to the vicissitudes of commodity prices, and perpetuate its status as a very high beta (that is, high risk) economy.

Fourth, and relatedly, this inability to precommit in large part reflects the political obstacle that Medvedev is unlikely to overcome. Skimming resource rents is very lucrative to the siloviki elements, and they are almost certainly unwilling to constrain themselves institutionally and legally even though such constraints would increase Russian wealth–because it would reduce the siloviki wealth. They are perfectly happy to have a big piece of a smaller pie than a small (or non-existent) piece of a bigger one.

There’s one last thing in the article that deserves comment:

The jobless rate fell to 7.8 percent in August, lower than previously estimated, from 8.3 percent in July on rising seasonal demand for agriculture and construction. The number of unemployed was 6 million, the Federal Statistics Service said.

It is very hard to square the relatively low (compared to the US, for instance) and falling unemployment rate with an economy that sank “below [the] lowest expectations.” This translates into plunging productivity, and means that true unemployment is almost certainly masked, probably by companies under state pressure and receiving state support continuing to pay unutilized or heavily underutilized workers.

Big Russian companies are almost certainly serving as de facto providers of a social safety net, which does not speak well for Russian state capacity. Moreover, it means that either (a) these companies will be badly positioned financially to recover, or to exploit a world rebound, or (b) the government will likely provide additional support to these companies going forward, thereby impairing the state’s fiscal condition. Either alternative, or a combination of both, will serve as a drag on Russian economic performance in 2010 and beyond.

Comments

[Jasper M:]

Wow!
I have long been negative on Russia (and every other commodity dependent nation), but this was an eye opener.

I think "BRIC" may end up just "I"

Oct 13 04:20 AM

[bluesky123:]

Medvedev can restructure Russia. Putin cannot. The country must end beating up its citizens, putting them in jail, extorting them and otherwise crushing all the hopes and dreams of ordinary Russians with government mandated and orchestrated thuggery. When Russia realizes its citizens are its greatest asset, Russia will bloom. There are a lot of smart, creative, talented people in Russia. I stand with the ordinary Russians. May they have a brighter day. Just to survive in Russia and not be killed for speaking the truth, that's an accomplishment. Russia's talented people deserve better. I look forward to buying well made, clever Russian products which I know Russia is capable of producing. My wallet sits on the living room table and I'm waiting.

Oct 13 04:49 AM

[Alan von Al...:]

Well made, clever Russian aircraft? tractors? shoes?

Oct 13 08:17 AM

[Tony Petroski:]

I thought Medvedev was Pinochio and Putin was Geppetto. Is this an attempt by Medvedev to cut the cords, (seems almost suicidal) or is Medvedev being set up to accept the blame for the Russian woes?

Oct 20 07:03 PM

[RussianEqui...:]

Thumbs up for this coverage, Craig! My view is that the biggest Russia's drawback is not even about its excessive reliance on commodity exports, but in its Government frugality. Russia is the only country among G-20, which has not adopted any tangible consumer stimulus plans.

Oct 29 11:16 AM