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What Will Russia’s Recession Look Like?

Russia entered 2015 on some extremely shaky ground: a full-scale currency crisis has seen the ruble’s steady depreciation against the dollar turn into a rout. The Russian authorities, and particularly the beleaguered Central Bank, have been falling over themselves in a scramble to respond to the crisis. They’ve been forced to bail out the suddenly-insolvent banking sector, they’ve instituted a series of “informal” capital controls on large state-owned exporters, and they’ve (already!) had to spend tens of billions of dollars worth of hard-won foreign currency reserves.

Russia’s overall economy is clearly not immune from these negative  external shocks, and GDP expectations for 2015 and 2016 have been revised downwards with frightening speed. The Russian Central Bank now forecasts a GDP contraction of between 4.5 and 4.7% in 2015 and between 0.9 and 1.1% in 2016. Those estimates, which like all estimates of Russian economy growth are heavily dependent on oil prices, don’t appear to be unduly rosy: based on  what I’ve read, they are roughly in the middle of the pack and they seem reasonable in in terms of creating a baseline scenario.

What would a recession of this magnitude amount to in practice? Well it would take Russia’s GDP roughly back to the level of mid 2011

Now, as should be clear, two years of negative economic growth, particularly in a “performance legitimacy” regime such as Putin’s, is really, really dangerous. The 2009 recession was sharper, but a two year period of negative economic growth would be by far the longest period of economic distress over which Putin has presided. I can’t see how the sky-high popularity ratings of recent months would endure such a prolonged economic swoon, and the longer the recession lasted the greater the risk of political turmoil.

But, at the same time, the graph suggests that we probably shouldn’t be making any exaggerated comparisons to the collapse of the Soviet Union or to the “end of Russia” as a meaningful international actor. If the forecasts are correct, and as noted previously they’re reasonably middle-of-the-pack forecasts, Russia’s economy by the end of 2016 will be about the same size as it was in the middle of 2011. Russia in 2011 certainly wasn’t any kind of overawing economic superpower, but it was a reasonably important country on the world stage. I don’t see any reason to suspect that the Russia of 2016 will be any different, even with all of the economic troubles. Anyone expecting Russia to simply disappear in a puff of smoke will be disappointed.

The political challenges of the recession, though, are going to be positively enormous. Absent a rapid rebound in oil prices, which shouldn’t be ruled out but which does seem unlikely at the present time, the Russian authorities are going to have to make some kind of dramatic policy shift in terms of their economic policy. Whether that shift is towards autarky or towards liberalism remains to be seen, but in its current contours the system will have trouble dealing with the stresses now confronting it.

 Mark Adomanis



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