Putin’s Stagnant Year? Economic Headwinds Challenge Kremlin Ambitions In 2020 And Beyond
(Article text ©2020 RFE/RL, Inc., Radio Free Europe/Radio Liberty – rferl.org – Mike Eckel – January 7, 2020 – article text also appeared at rferl.org/a/putin-s-stagnant-year-economic-headwinds-challenge-kremlin-ambitions-in-2020-and-beyond/30364177.html)
For 45 years, Ivan Shadryn has waited for the bridge over Siberia’s mighty Lena River to be built.
In the winter, it’s not so bad. Subarctic temperatures freeze the Lena, enabling long-haul truckers like Shadryn to drive across the ice, making the journey to bring, say, construction goods from his native city of Yakutsk to the Pacific port of Magadan, 2,000 kilometers to the east, easier.
In the summer, the river crossing is worse: It takes up to two hours to cross by ferry, and cargo-truck traffic in and out of Yakutsk, the largest city in Russia’s Far North, slows dramatically. And the shoulder seasons of late spring and early winter mean there is no cross-river truck traffic at all, for about 150 days of the year.
President Vladimir Putin has now given a green light to the 83-billion-ruble ($1.3 billion) plan to finally build the Lena River bridge. It is scheduled to be completed in 2025, according to the business daily Kommersant.
“No question, it’ll make everything easier,” Shadryn, who retired from driving last year, told RFE/RL. “Not just for truckers. It’ll make life easier for everyone in Yakutsk. The city has changed a lot already, but this will be something entirely new.”
If Yakutsk is hoping the new bridge will change the city, the Kremlin is hoping a series of similarly ambitious plans labeled National Projects will transform the economy once and for all — from resource-dependent and hydrocarbon-fueled to technology-driven and powered by the country’s vast and underutilized scientific and academic potential.
Whether that can really happen is an open question.
The six-year, $400 billion National Projects effort — which targets areas including education, health care, science, roads, and infrastructure — comes at a time when a growing number of economists and researchers have been sounding the alarm, saying that Russia’s economy is in danger of slipping into stagnation. Some warn that the way the National Projects are being implemented may only exacerbate the problem.
“There’s all this talk about National Projects being needed to facilitate growth,” said Laura Solanko, a specialist on the Russian economy at the Bank of Finland’s Institute for Economies in Transition, but the main problem is that private firms are not investing because they have little to gain, she suggested.
“The [obstacle to] growth isn’t lack of public spending,” Solanko said. “The real constraining factor is the overall business climate in Russia.”
“Who are they supposed to help? What are they supposed to achieve?” Jakub Kluge, a senior researcher at the German Institute for International and Security Affairs in Berlin, said of the National Projects. “They are trying to motivate the bureaucracy, to set some clear goals, but it will not be much help.”
“The general trends underlying Russia’s economic development point to economic stagnation, with significant risks to the downside,” he said.
One of the paradoxes of Russia’s economic situation, analysts say, is that fiscally, the government is one of the strongest in the world: budget surplus, huge reserves, conservative budgeting targets.
In 2019, Russia for the first time succeeded in having its public debt fully covered by public savings — something that no other emerging economy has managed to do.
At a meeting November 12 in Brazil, Putin touted his government’s economic policies, highlighting what he called “a responsible approach to public finances, maintaining the stability of the banking and credit markets, and striving to help strengthen key sectors of the economy.”
“Of course, we do not believe that the current GDP growth rate is sufficient, so we are trying to create the most supportive conditions for new investments,” he said.
Yet, the economy continues to grind along at a subpar pace, and average Russians are increasingly the ones suffering.
Disposable incomes are falling. When adjusted for inflation, the average amount of money Russians bring home is less than it was in 2014 — the year that Western countries punished Moscow with sanctions for its seizure of Ukraine’s Crimean Peninsula.
In the first half of 2019, the World Bank found, real disposable incomes fell by 1.3 percent from the previous year.
Public opinion surveys from the independent polling agency Levada Center show that around 65 percent of Russian households have no savings whatsoever.
Bankruptcies are on the rise, with a 50 percent increase in Russians filing for bankruptcy between 2016 and 2018, according to government statistics. And they were on track to be still higher in 2019.
State statistics also show that overall poverty has increased from the beginning of 2018, rising to 14.3 percent — or about 20.3 million people.
After growing by 2.3 percent in 2018, the economy looked set to grow by 1 percent in 2019, the World Bank forecast, well below the targets the Kremlin and government officials have set.
Add to this the fact that pensions have been effectively cut for coming years — as the government raised the age when Russians can start receiving the pensions, a highly controversial step that was met with widespread protests. And taxes were hiked, with a 2-percentage-point increase in the national value-added tax (VAT) that officials project will generate revenue — 600 billion rubles ($9.4 billion) — to pay for the National Projects.
The National Projects were announced in 2018 and launched in 2019. More than a year in, figures from the Audit Chamber showed that less than one-third of the funds allocated for them in 2019 had been used as of the end of June.
That has perplexed analysts and frustrated government planners, said Ivan Tkachyov, the economics editor at the Russian business newspaper RBK.
“The government…faces such chronic problems as poor management, tons of paperwork and bureaucracy, and the additional layer of multiple clearances and approvals when you allocate money from the federal budget to the regions,” Tkachyov told RFE/RL.
“But for the sake of objectivity, a positive aspect is that instead of ‘dropping money from a helicopter’ like they used to do, the Finance Ministry is taking it very seriously and now frees up money only when it’s 100 percent sure it will be spent efficiently.”
Still, corruption remains entrenched and is getting worse, according to some polls, and analysts warn that massive infrastructure projects are ripe for contractors to skim off budget funds. The Vostochny Cosmodrome, a space-launch facility whose construction has been hampered by large cost overruns, long delays, and rampant graft, is Exhibit A for anti-corruption crusaders like opposition gadfly Aleksei Navalny.
“A failed project that is still being built years after its deadline has passed, with a budget that has doubled, during which billions were stolen — of course it should be named after Vladimir Putin,” Navalny said in a mocking video released November 21. A handful of launches have been conducted but the facility is still under construction — at an already astronomical cost of $7.65 billion and rising.
‘Looking For Growth In The Wrong Places’?
The Kremlin has discussed proposals for ambitious, potentially economy-transforming projects since early in Putin’s presidency in the 2000s. But it was only in 2018 that the National Projects finally took shape.
The Economic Development Ministry has estimated that investments related to the National Projects will result in an 85 percent increase in the rate of growth over six years.
But the problem with the slow start in spending is the danger that the projects could become a drag on the economy, instead of a boon to it, according to an analysis released by Oxford Economics in October.
“The National Projects are no breakthrough for Russia’s growth model, as long as institutions continue to constrain productivity and the working-age population declines. Russia is still looking for growth in the wrong places,” wrote Yevgenia Sleptsova, who led the research.
That conclusion was echoed in part by the state-owned bank VTB in a report released on November 20, which found that most of the National Projects were not on target to meet their goals.
Part of the issue is the question of ambition, Solanko said: The Kremlin aspires to put Russia on par economically with the United States, Germany, France, and other members of the Group of Seven industrialized nations. That requires at least 3 percent annual growth.
“Russia wants to be a high-income country, so stagnation is certainly not a choice at all,” she said. “In that sense, stagnation is a disappointment. It would be a disappointment anywhere, but it is certainly for a country that aspires to be a high-income country.”
Georgy Bovt, a Russian political scientist and Kremlin critic, argued that government efforts to boost GDP through massive spending programs like the National Projects were misguided. The entire system needs to be reformed, he said.
“This would have to begin with judicial reform, with the aim of genuinely achieving the equality of all before the law, dispensing with the principle ‘for my friends, everything; for my enemies, the law,'” he wrote in an op-ed article. “We are talking about a whole range of political reforms.”
“For now, everyday life in Russia is more reminiscent of a ‘fortress under siege,’ whose inhabitants are asked time and again to make more holes in their belts, the better to tighten them with,” he wrote.
That poses a new problem for Kremlin planners: the 2021 elections for the lower house of parliament currently controlled by the Kremlin-allied United Russia party, whose popularity ratings are abysmally low. The State Duma elections will set the political stage for 2024, when Putin — in power as president or prime minister since 1999 — is constitutionally barred from seeking a third straight term.
Some forecasters predict that the backlog of spending for the National Projects will give way to a burst of activity in the first half of 2020, as planners rush to spend the allocated funds.
That could give the economy a boost. For political planners trying to generate sympathy among the electorate, however, the problem is that the National Projects are not the best instrument to do that. Big spending on bridges and roads, for example, will benefit steel mills, asphalt companies, and heavy vehicle manufacturers more than voters.
The Kremlin will face the temptation to indulge in populist spending to bolster a sagging election campaign that could drain the National Projects.
“If you want to get political support, you raise salaries for state-sector workers,” Kluge said.
The Lena River bridge isn’t formally part of the National Projects plan. But government planners have been talking about building it since the early 1980s, according to truck driver Shadryn.
Earlier in the past decade, the project seemed to get approval to move forward, finally. But according to news reports, the bridge was downgraded in priority after the Crimea annexation in 2014 and the Kremlin’s push to build a bridge over the Kerch Strait, linking the peninsula with Russia.
Now, the proposed 3,000-meter span over the Lena, one of Russia’s longest rivers, will finally link Yakutsk, a city of 300,000, with the national highway system. It’s not formally part of the National Projects, though it falls into one of the plan’s 12 categories, for roads and transportation.
If it’s built, Shadryn said.
“It’ll be really difficult” to build the bridge, he said. “The river banks, the ice — we have 40-below [Celsius] cold here.
“And then who knows if someone will try and steal” the funds, he added, laughing.