We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.

Bottom of the slope

7 Feb 2014 By Pierre Briançon

Sochi may become a metaphor for modern-day Russia, but not the one Vladimir Putin was thinking of. The Russian president made the Winter Olympics a personal project, designed to showcase his country’s ability to compete in prestige with the world’s major powers. It has not worked out as he wished.

Sochi became a global window on Russian corruption and inefficiency when it appeared that they cost more than four times as much as the previous Winter Games. After the brutal January shakeup in financial markets, which hit Russia as hard other emerging economies, the Games, designed to project Russia’s power, will instead remind the world of its inherent fragility.

Sochi itself will not help Russia’s economy. The Winter Games attract smaller audiences than the Summer festivities, and the trickle-down effect of the huge spending-and-wasting on infrastructure will not be felt much beyond the slopes of a few Caucasus mountains.

From an economic standpoint, the real event in 2014 will come towards the end of the year, when Russia’s current account surplus – which ran as high as 11 percent of GDP in 2005 – will turn into a deficit. Not many oil-exporting countries have managed that feat. Yet in and by itself, it would not be an insurmountable problem – save for the fact that the surplus’s disappearance in the space of ten years is a result of the country’s long-standing vulnerabilities, and of Putin’s unwillingness or inability to address them.

Russian markets have been hurt as other emerging economies by the U.S. Federal Reserve’s “tapering” of its loose monetary policy. The ruble has fallen 5 percent since the beginning of the year against the euro/dollar basket that the Central Bank of Russia uses as a reference. In the short term, the devaluation will boost the country’s import bill, since it relies on foreigners for most manufactured goods.

The currency weakness has a fiscal upside, because the state derives much of its revenue from dollar-denominated oil exports. But budget discipline isn’t yet Russia’s problem – the government’s deficit is only at 0.5 percent of GDP.

In theory, a cheaper currency should also help develop the weak domestic manufacturing base. But that rebalancing of the economy can only happen in the longer term – and only if the political context is right.

In short the ruble devaluation will not solve Russia’s most serious problem – stalling growth. GDP increased by paltry 1.3 percent in 2013 and will not expand by more than 2 percent this year, according to most forecasts. That’s in spite of oil markets entering their fourth consecutive year of high prices. The reality is that growth is held back by the Russian system. And the Putin regime is unwilling or unable to implement serious reforms.

Foreign investors who are willing to take risks have long been used to dealing with two different Russias. There is the open Russia of Western-looking bankers, businessmen and bureaucrats eager to attract long-term foreign capital with the lure of reforms and promises that property rights will be protected at last. And there’s the shady Russia of corruption and graft, where no investment is ever safe since anything can be confiscated overnight.

Russian investors, for their part, are voting with their feet. Capital outflows amounted to $63 billion last year, 10 percent more than in 2012 – for a total of more than $400 billion in the last six years. Oligarchs or small businessmen, honest or not, who wants to keep his money in a country where it is never safe?

The list of reforms Putin would need to implement is well-known. It would start with a serious crack-down on corruption, through the creation of an independent and powerful judiciary. That will not happen, because the current system benefits the president’s cronies and associates.

The bitter irony is that Russia could afford reform. It still has robust finances – a tiny fiscal deficit, little foreign debt – and Putin, in spite of his recent authoritarian crackdown, still enjoys the support of two thirds of the population, according to independent polls.

The problem is that Putin needs the other third – the educated, urban middle class – to unleash the potential of Russia’s economy and bring Russians the prosperity they deserve. Sochi will just help the world realise the extent of the wasted opportunity.


Email a friend

Please complete the form below.

Required fields *


(Separate multiple email addresses with commas)