For Russia, A Dark Horizon

Uncertainty is creeping up on Russia. For the first time since Vladimir Putin’s rise to power, Moscow confronts the prospect of real political instability. One of Russia’s savviest politicians, Anatoly Chubais, said last month that the likelihood of serious turmoil — economic, social and even political — is 50 percent.

The current crisis is global, and there is no sure way to forecast its length or depth. Such uncertainty would be disturbing in any country but is especially alarming here. For years, Putin steadily eliminated all political threats to his power, and by the end of his second term as president he enjoyed absolute authority. Now that authority is being challenged by forces beyond his control.

Putin was blessed with rising energy prices that enabled him to build his oil-greased authoritarianism. He delivered generously to the nation, and the people readily withdrew from politics and rewarded him with high approval ratings. Likewise, the Russian elite stayed loyal, since the abundant oil revenue produced lucrative opportunities and comfortable lifestyles. In this environment, any remaining political opponents were easy to marginalize; only in very rare cases did Putin resort to repression.

The price of oil is now about a quarter of what it was only a few months ago, and economic problems are building within Russia. Investors are gone; the stock market barely exists. After nine years of surpluses, Russia will have a budget deficit in 2009, and the solid economic growth of recent years may give way to a contraction. An increasing number of enterprises are shifting to two- or three-day workweeks, sending their employees on unpaid vacations or laying them off. Unemployment, which had been very low in recent years, is rising, and the country lacks an adequate social infrastructure to help those who are losing their jobs. The situation is especially grave in the numerous company towns where new jobs are almost impossible to find. Meanwhile, geographic mobility is strongly limited by Russia’s underdeveloped housing market.

It is commonly believed that we haven’t yet seen the worst. Economists expect Russia to be hit much harder in February and March.

The country’s best nongovernmental pollster, the Levada Center, reports that the public mood has darkened significantly. The percentages of those who think the country is moving in the right direction vs. the wrong direction has shifted from 61 percent vs. 24 percent in September to 43 percent vs. 40 percent in December, it found. People feel insecure.

A major protest took place last month in the Russian Far East. Thousands rallied against a government decision to raise tariffs on imported cars, a measure intended to protect the domestic automobile industry, whose cars are of notoriously low quality. Higher tariffs will have a grave effect on a region where the vast majority of residents drive used vehicles imported from Japan and where many depend on semi-legal sales of Japanese vehicles to Russian regions farther west. The protesters angrily demanded that the decision be revoked. Some even carried signs demanding the resignation of Putin and his Cabinet.

Russia last experienced large socioeconomic protests in 2005, when pensioners rallied against a reform plan that threatened their entitlements. Putin’s government responded by freezing the reform and pouring money into social programs. Today, with revenue so dramatically diminished, Russia can hardly avoid painful measures. The leadership got tough with the tariff protest: Special police brought in from central Russia beat demonstrators and even some journalists; many people were detained. Seeking to keep unrest from spreading, national TV channels — the media with the largest audience — simply did not cover the situation.

Despite public concerns raised by the crisis, Putin’s approval rating remains high: 83 percent, down slightly from 88 percent in September. Putin’s popularity is the very foundation of Russia’s regime, in which government institutions have been emasculated and power is concentrated in the hands of the top leader. This unique advantage placed him above all others among the political elite. But if the economic crisis erodes this broad support, the elite’s loyalty may also be shaken. There’s enough reason for discontent as it is, such as the nontransparent, and probably corrupt, distribution of anti-crisis funds or the suspicion that top government officials are using the crisis to redistribute assets in favor of cronies.

The looming economic troubles pose a dilemma for Russian leaders. Putin believes in “vertical” governance built on secretiveness, subordination and control. This system keeps decision making confined to the innermost circle and is deeply resistant to sharing authority. Such a rigid system of governance is inherently inefficient. But to Putin, a firm grip on power has always been a priority, and oil prices surpassing $140 a barrel made up for the poor quality of governance. Today, though, such inefficiency is unaffordable. The logic of Putin’s governance pushes for tighter controls while the logic of the crisis demands flexibility, effective feedback with business and others in the elite, and broad dialogue with the nation.

As Yegor Gaidar, Russia’s first post-communist prime minister, and a brilliant economist, has noted, a crackdown may be successful in the short run, but “in the long run this policy can only pave the way to new turmoil.”

* Masha Lipman, editor of the Carnegie Moscow Center’s Pro et Contra journal, writes a monthly column for The Post.

The Washington Post, 03.01.2008

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One Comment
  1. Actually, the revenues from oil trade has declined much more than the world market price – there is also a cost involved in producing oil. This cost is dependent upon many factors, an average of 10-25 $ a barrel is sometimes mentioned. The Russian domestic oil price is said to be 12 $ per barrel, it’s hard to tell how realistic this figure is.

    The Ural Crude is a bit cheaper than the average oil price on world market. The peak price in July was 137,61 $ and the price in end of December was 34,81 $, a quarter of the peak price. However, if we estimate production costs to equal 15 $ a barrel, then the net revenue from Russian oil export has fallen not 75 % but 83 % per barrel.

    However, the peak price of July is much higher than the average price during the year 2008, which was about 93 $ a barrel for Ural Crude.

    The oil price just now may be “artificially low” (well, it was 10 $ a barrel in 1998) but a significant rise can’t be predicted before the present global recession in economy is over.

    Maybe the price will never reach the peak level again? At the time of the last energy shock in the 1970s, Sheikh Yamani, the shrewd Saudi Oil Minister, famously told his greedier Opec colleagues that they would encourage replacement of oil by other energy sources and kill the golden goose that had made them wealthy if they kept pushing the oil price too high. “Remember,” he said, “the Stone Age didn’t end because the cavemen ran out of stone.”

    Russian oil production declined by around one percent in 2008, official data showed last week. This is the country’s first annual decline in a decade. The decline is widely expected to continue because of ageing reserves and plunging oil prices, which combine with heavy taxation to leave producers with limited cash to invest in maintaining production and opening new fields.

    Today Russian oil export is about 7 million barrels a day, which equals an export value of 100 billion dollars a year with an oil price of 40 $ a barrel. Russia is essentially an exporter of raw material.

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