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Russia is a country with a proud military history; to be able to compete, and beat, other global powers has long been engrained into the Russian political philosophy. Although the Stalinist economic model was ‘justified’ in light of the WW2 victory, successive leaders have had the nearly impossible job of sustaining a robust, military-driven rhetoric considering the evolution of global diplomacy.
Now, 25 years from the collapse of the Soviet Union, the Russian economy is running on reserves, but is 2017 the year things turn around for Vladimir Putin and his country?
A Bright Future
Via its ever-energetic propaganda machine, Russia has signalled to the world that it is a resurgent nation heading for strong economic growth in the coming years. The firm Rosstat claimed that industrial production in the first 11 months of 2016 rose 0.8% compared to 2015.
Additionally, the Russian Ministry of Economic Development revised its outlook for industrial production in 2016 to 1% compared to the previous 0.4%. Russia’s Finance Minister Anton Siluanov suggested that economic growth could accelerate to 1.5% in 2017 – nothing too extravagant, but a very positive direction following the negative growth Russia has experienced in recent years.
Although seemingly impressive, these estimates must be treated with great caution. The country always has and will continue to create a sense of calm amongst its people in the face of adversity, predominantly through its military capabilities. The severe battering the economy has faced in the last two years, in particular, will require drastic changes to overcome.
The Times of London recently outlined that the country’s national reserves have shrunk two thirds since the start of the Ukrainian hostilities, dwindling from £67bn in 2014 to £23bn today. The two years of European and US sanctions over Crimea mean that any forecast is likely to remain dreary.
The Two Determinant Factors
Two key factors that will influence the future of the Russian economy are defence spending and oil.
As mentioned, Russian military capabilities continue to burden the economy, and the millions living in poverty are paying the price. Moscow’s support of Syrian dictator Bashar al-Assad’s regime is not getting any cheaper and despite the ceasefire and peace talks with the UN, money is still being drained from the Kremlin’s pockets.
Financial business news agency RosBusinessKonsulting estimates Moscow’s monthly spending in Syria to be 10 billion rubles a month. Russia’s military spending is set to increase by 679 billion rubles ($10bn) despite the welfare budget decreasing by 375 billion rubles ($6bn), as reported by Gazeta.ru.
Russian priorities are crystal clear: defence ahead of the economy, defence ahead of the people. If economic prospects are to improve, reallocation of spending must be implemented and priorities revised. With Trump’s presidency around the corner, it will be interesting to see how spending changes, if at all.
The significant uncertainty surrounding Russia means that it will continue to lack foreign investment which is a great loss, especially considering that many state-owned cooperations are surviving off bailouts from the Kremlin.
The other critical determinant of Russian economic prosperity lies in the form of oil. The collapse of oil prices in 2014 resulted in some 60% of the ruble’s value against the dollar being wiped out. Since then, the sustained dip in oil prices has continued to cause Russia problems.
However, unlike the defence spending, oil may be a cause for optimism in 2017. Russia’s agreement with OPEC to restrict oil production resulted in a price surge, up to around $55 a barrel. This is a marked improvement from the beginning of 2016, where prices were flailing below $40.
In addition to rising oil prices, dividends are expected to increase. This, coupled with Donald Trump’s less hostile approach to the country, could turn out to be the economy’s saviour.
2017 could turn out to be the decisive year for the Russian economy over the next decade. As it stands, the Kremlin has a lot to be concerned about, and it is vital that there is an overhaul in political philosophy if an economic recovery is to occur. Unfortunately, history tells us that this is unlikely.
Propaganda can paper over the severe economic cracks only for so long. Trump’s presidency adds a whole new dimension to the situation, and one has to wait and see the future relationship between Russia and the US. Hope is, therefore, placed on oil prices and predictions suggest that this is likely to swing in Russia’s favour.
The prosperity of the Russian economy is hanging in the balance. The country needs a string of sensible political decisions, as well as favourable markets if the economy is to be rescued from the depths of the crisis.