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Russia’s Troubles: The Road Ahead

 7 min read / 

Russia is a nation with huge potential. They are blessed with an abundance of natural resources, including vast amounts of oil, gas, coal, and timber reserves. They are the second largest exporter of oil in the world, distributing roughly $73.7bn of the commodity across the globe annually, whilst they are also a member of the E7 group; a group of countries labelled as major emerging economies. It is thus a great shame that this frightening potential has been restricted and contained through a number of economic and political issues.

Economic Turmoil: Problem after Problem

Having experienced a major recession in 2015 and 2016 as a result of a global fall in oil prices, Russia’s economy has only just started to recover, with the World Bank forecasting that the economy will grow by 3.5% over the next year – an uninspiring margin.

Alongside this, the Russian economy is burdened by a number of structural and demographic constraints. Firstly, the presence of a long-standing tradition of political corruption has been reflected in drastically low investment figures. This can be seen by the fact that in 2016, investment formed just 18% of total GDP, the 5th lowest out of the selected economies. Even more worrying is the fact that PwC has forecasted that this will remain at the same rate until 2025. Such a lack of investment is a major constraint on the Russian economy as it restricts the development of new practices and production methods, whilst also restricting any potential divergence away from the economy’s reliance on oil exports.

Aside from this, although the overall Russian economy is now starting to experience positive economic growth following the recession, the nation is suffering from severe regional economic problems. This can be illustrated by the fact that a report by the Higher School of Economics found that 49 out of 85 Russian regions are still suffering from negative growth, as of April this year. Alongside this, just 12 of these 85 regions experienced recoveries amongst 4 of the economies’ 5 major sectors, whilst Standard & Poor’s have forecasted that 1 in 4 Russian regions may be facing the real prospect of default and economic collapse by 2018. Putin has recognised this issue, acknowledging its severity and significance at his annual press conference in December of last year, yet he rejected a proposal by the Ministry of Economic Development to implement a 9% increase in financial support to a select number of regions.

Additionally, Russia is also suffering from a rapidly ageing population, which could pose huge economic and social challenges in the future. The issue has been recognised by Putin who described demography as Russia’s ‘most acute problem’ in 2006.  Statistics from the Russian Federal Service show that as of 2014, 23.5% of the Russia’s total population is in the retirement age bracket, with this expected to further rise to 28.5% by 2030. This foreshadows a daunting economic future for Russia, as it has been estimated that the nation’s labour force could contract by over 20 million people before 2050, a colossal margin. This is likely to heavily disrupt both output and economic growth, whilst also place a severe burden on the state to cater for the growing number of elderly people.

Cause for Optimism: Cryptocurrencies and Trade Recovery

With regards to the positives surrounding Russia’s economy, there are a few areas of optimism. First of all, the economic burden of the sanctions imposed by the EU on 19th March 2014 has been largely dispelled, with Eurostat Data showing that the decline in trade between Russia and the EU has stopped this year. This can be highlighted by the fact that, although EU- Russia Trade fell from €285bn in 2014 to just €181bn in 2016, trade has increased by €27bn in the first half of this year compared to the first six months of last year, with particular increases in trade between Russia, Germany and the Netherlands. This is hugely encouraging for the Russian economy, perhaps indicating that their future economic prospects are less bleak than initially thought.

Aside from this, Russia’s pharmaceutical market is growing at a frightening and rapid rate, with GlobalData predicting that it will reach a value of $36.6bn by 2021. This offers a fair degree of hope in regards to the short-term future of Russia’s economy, as they are likely to become major global players in this industry.

Furthermore, an exciting recent development for Russia is the introduction of a national cryptocurrency, proposed by the state as they aim to attain supremacy in this highly profitable and encouraging market. An example of such a development has been Russian Miner Coin’s advances towards introducing a cryptocurrency that will enhance their energy efficiency and give them a competitive advantage in the global mining market.

The cryptocurrency has been labelled as the ‘CryptoRuble’ and is set to be launched in October 2018. Moreover, its distribution will be monitored and controlled by the Russian government in order to tackle potential fraud and money laundering issues. The imposition of a 13% tax levied on owners who fail to declare the source of their coins is thought to act as a significant deterrent to such activity. Cryptocurrencies are expected to be hugely profitable and influential in future economic markets and thus Russia’s decision to invest in the field offers encouragement, alongside an element of excitement.

Politics: Same Old Story

As mentioned previously, Russia has been burdened with political corruption and confusion for many years. Putin has been in power for 17 years and has built a dynasty; no one can challenge his authority. This seems unlikely to change in next year’s election as potential candidate Ksenia Sobchak, whose decision to run is being seen as a Kremlin-backed move intended to establish a degree of competition and legitimacy into the vote, lacks significant support to be victorious. This can be highlighted by the fact that she would need to accumulate 300,000 signatures from the public in order to participate in the ballot – an unlikely feat. Her campaign is likely to end in the same manner as Mikhail Prokhorov’s, a politician who won just 8% of the vote in 2012.

The same can be said about PM Dmitry Medvedev and the leader of the opposition, Alexei Navally, who also lack significant public support, with the latter being further restricted as a result of his criminal conviction. Thus, it seems Putin will continue to reign Russia, foreshadowing a bleak economic and international future for the nation.

Aside from this, Canada has recently passed its version of the U.S. Magnitsky Act, sanctioning and punishing Russia for its human rights abuses. The Act will allow for the freezing of assets from Russia, alongside preventing Canadian businesses from dealing with Russian firms who have committed and partook in human rights offences. This will place further strain on the Russian economy and their international relations. Moreover, the fact that on the 19th October, Putin announced that Russia would retaliate if U.S. officials put restrictions on Russian media in the US, further emphasises how public relations between Russia and major global players are strained and faltering.

The Future of Russia

The aforementioned issues reiterate the hard and brutal truth for Russia – their economy is faltering and their political system is corrupt and uncompetitive. However, there is cause for optimism with regards to economic developments, and in particular their advances in the cryptocurrency market, which Russia must seize and take advantage of to retain their label as a global economic force.

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