Macro-stabilization
When Vladimir Putin returned to the presidency in 2012, after the Medvedev interregnum, Russia’s economy appeared stable, though growing more slowly than in the 2000s. Average inflation came down to 5.1 per cent in that year, from 8.4 per cent in 2011, while gold and foreign exchange reserves at year-end stood at more than $537 billion, around three times the annual import bill.4 There was a small general government surplus – i.e. the combined revenues of federal and regional budgets, plus the revenues of off-budget funds such as the Pension Fund, slightly exceeded their combined expenditure. This was not an unusual state of affairs for a major oil-exporting country at a time of historically high world oil prices, but it nonetheless also reflected a general stance of financial prudence.
In 2013 the general government balance became marginally negative, annual inflation accelerated to an average of 6.8 per cent, and gold and foreign reserves decreased slightly. 2014, with the start of sanctions and the – more immediate – impact of a steep fall in the oil price, brought the beginning of recession and very slow growth, combined initially with high inflation and a large drop in the exchange rate.
The response of the Russian authorities was orthodox – in a Western, liberal sense – and decisive. The Central Bank of Russia (CBR) switched from exchange-rate targeting to inflation targeting in November 2014, letting the rouble sink and setting interest rates clearly above the rate of inflation. The annual average of the consumer price index rose to 15.5 per cent in 2015, but came down to 3.7 per cent in 2017. Public spending was cut in real terms, affecting even defence spending from 2016.5 By 2018, with a modest recovery under way and the oil price volatile but on average higher, the government was back in surplus (see Figure 1).
Figure 1: General government revenue, spending and balance, 2012–18 (trillion roubles, current prices)
— Source: Ministry of Finance of the Russian Federation.
Figure 1: General government revenue, spending and balance, 2012–18 (trillion roubles, current prices)
The austerity campaign was pursued comprehensively and determinedly, with major constituencies badly affected. For instance, in 2016 state pensions were indexed according to the CBR’s inflation target of 4 per cent, rather than, as is customary, the rate of consumer price inflation in the preceding year – which would have meant an increase in double digits.6 For those 9 million pensioners who were still working, pension increments were suspended altogether.7 Yet pensioners did not storm the Kremlin, nor were their complaints as vocal as, for example, they had been a decade previously over benefit reform.
Federal budget transfers to the regions were cut. The value of transfers to the regions in 2015, in constant prices, was only 77 per cent of their equivalent in 2009 – also a recession year.8 Regional real-terms spending on health and education was reduced, and poorer regions’ bank debt increased.9 That the regions suffered harsher treatment in 2015 than was the case in 2009 may be explained in part by the existence of sanctions this time around, but the difference is still striking. All the same, no region attempted to secede from the Russian Federation.
There were real-terms cuts in spending on ‘national defence’ – the official Russian designation, which is about 1 per cent of GDP less than the standard Western definition. If the fulfilment of past credit guarantees in 2016 is excluded, there was a clear fall – in both nominal and real-terms – from 2015. In real terms, Western-definition defence spending fell by about 8 per cent year on year.10 One account, from 2016, of a clash over military spending states that in a discussion of the draft military modernization programme for 2018–25, the defence minister, Sergei Shoigu, ‘yelled’ at the finance minister, Anton Siluanov, accusing him of undermining the modernization of the military and threatening national security.11 A Kommersant report of the same incident refers rather more euphemistically to ‘raised tones’.12 At all events, there was no military coup.
Russia’s business community complained about high interest rates, but got nowhere with the central bank. Elvira Nabiullina, the CBR governor since 2013, had Putin’s explicit endorsement; in March 2017 he confirmed his intention to appoint her for a further term of office.13
An important legislative restriction on federal public spending came into effect in 2017: under this new ‘budget rule’, tax revenue from oil at prices above $40 per barrel (this threshold rising at 2 per cent a year from 2018) is not available for budget expenditure but is instead paid into the National Welfare Fund (NWF).14 There was some grumbling, but as at late 2019 the rule has held.
There is one disagreement over the budget rule between the IMF and the Russian government. The government plans to make available some NWF money for domestic infrastructure finance, over and above a minimum level (7 per cent of GDP) of the liquid resources of the NWF; the IMF would prefer that the whole of the NWF be invested in foreign assets, completely sterilizing the inflow of petro-dollars – i.e. excluding this revenue from the domestic flow of money.15 In June 2019 CBR governor Nabiullina notably also suggested that the threshold of 7 per cent of GDP should be reconsidered.16
One bit of intra-elite fighting – albeit only indirectly related to austerity – did become visible with the arrest of the economic development minister, Aleksei Ulyukaev, in November 2016. Ulyukaev had apparently displeased Igor Sechin, the boss of Rosneft, by objecting to Rosneft in effect ‘privatizing’ the smaller state oil company Bashneft. The link to fiscal austerity is that the sale of a controlling stake in Bashneft and of a minority stake in Rosneft was a device to boost the public finances.17
All in all, Russia’s austerity campaign was pushed through more easily, as far as outside observers can judge, than such programmes usually are in Western countries.
All in all, Russia’s austerity campaign was pushed through more easily, as far as outside observers can judge, than such programmes usually are in Western countries. The main constituencies ultimately proved biddable and obedient. That is not to say that such passivity has no limits: the subsequent raising of pension ages may have pushed at those limits. It seems reasonable, however, to conjecture that Putin’s own support for financial prudence sent a pretty clear message to the political and business elite. An authoritarian system has advantages when it comes to implementing austerity measures.
Can the macro-stabilization effort be described as a success? Yes, in so far as inflation has been brought down, public finances are in good order,18 and there has been a recovery in economic activity – albeit a recovery that leaves the Russian elite and many ordinary Russians dissatisfied.
4 Bank of Finland (2019), Russia statistics, https://www.bofit.fi/en/monitoring/statistics/russia-statistics/ (accessed 22 Oct. 2019).
5 A one-off settlement of defence industry bank debts by the state in 2016 complicates the picture; new resources committed to the military fell in real terms.
6 See criticism by Maleva, T. (2015), ‘Obrushenie dohodov naseleniya – bolshaya oshibka vlastey’ [Collapse of household incomes is a huge mistake of the government], Novaya gazeta, 21 October 2015, https://www.novayagazeta.ru/articles/2015/10/17/66043-171-obrushenie-dohodov-naseleniya-8212-bolshaya-oshibka-vlastey-187 (accessed 22 Oct. 2019).
7 Kuvshinova, O. (2016), ‘Rabotayushchie pensionery ne poddalis’ uchetu’ [Working pensioners were not taken into account], Vedomosti, 8 August 2016, http://www.vedomosti.ru/economics/articles/2016/08/08/652052-rabotayuschie-pensioneri-poddalis-uchetu (accessed 22 Oct. 2019).
8 Development Center of the Higher School of Economics (2016), Noviy KGB, 221, https://www.hse.ru/pubs/share/direct/document/194866051.pdf (accessed 22 Oct. 2019), p. 53.
9 Zubarevich, N. (2016), ‘Deneg net – no net i svobody’ [There’s no money – but there’s no freedom either], Vedomosti, 29 December 2016, http://www.vedomosti.ru/opinion/articles/2016/12/29/671648-deneg-net (accessed 22 Oct. 2019).
10 Cooper, J. (2017), ‘Russia’s Military Expenditure in 2015, 2016 and in the 2017 Federal Budget’, unpublished paper, 14 February 2017. Cooper uses Russian budgetary data to reconstruct a Western-definition military budget, slightly larger than the official ‘national defence’ category. (This includes, for example, expenditure on the border guards and on military pensions.) He uses the GDP deflator to adjust for inflation in defence spending.
11 Felgenhauer, P. (2016), ‘Russia’s Relations with West Deteriorate as Military Prepares for “Resource Wars”’, Eurasia Daily Monitor, 13(177), https://jamestown.org/program/russias-relations-west-deteriorate-military-prepares-resource-wars/ (accessed 22 Oct. 2019).
12 Safronov, I. (2016), ‘Esli ne skhod, to razval’ [If not convergence, then collapse], Kommersant, 17 September 2016, https://www.kommersant.ru/doc/3092628 (accessed 22 Oct. 2019).
13 Tanas, O. and Kravchenko, S. (2017), ‘Putin nominates Bank of Russia head Nabiullina for new term’, Bloomberg, 22 March 2017, https://www.bloomberg.com/news/articles/2017-03-22/putin-nominates-bank-of-russia-head-nabiullia-for-new-term (accessed 22 Oct. 2019).
14 See Sanghi, A. and Kojo, N. (2017), ‘Will Russia’s new fiscal rule end its oil and gas dependence?’, Brookings, 6 December 2017, https://www.brookings.edu/blog/future-development/2017/12/06/will-russias-new-fiscal-rule-end-its-oil-and-gas-dependence/ (accessed 22 Oct. 2019).
15 IMF (2019), ‘Russia: Staff Concluding Statement of the 2019 Article IV Mission’, 23 May 2019, https://www.imf.org/en/News/Articles/2019/05/
23/mcs052419-russia-staff-concluding-statement-of-the-2019-article-iv-mission (accessed 22 Oct. 2019).
16 Kholovno, A. et al. (2019), ‘TsB predlagaet priderzhat’ sredstva FNB’ [The Central Bank advocates holding back FNB funds], Vedomosti, 16 June 2019, https://www.vedomosti.ru/economics/articles/2019/06/16/804283-tsb-priderzhat-fnb?utm (accessed 22 Oct. 2019).
17 For a little more detail, see Hanson, P. (2018), ‘Managing the Economy’ in Sakwa, R., Hale, H. E. and White, S. (eds) (2018), Developments in Russian Politics 9, London: Red Globe Press, p. 145.
18 The planned federal-budget balance for 2019 is a surplus of 1.9 per cent of GDP. Ciechanowicz, A. and Wiśniewska, I. (2018), ‘Russia’s budget for 2019–2021: increasing reserves, decreasing transparency’, OSW, 28 November 2018, https://www.osw.waw.pl/en/publikacje/analyses/
2018-11-28/russias-budget-2019-2021-increasing-reserves-decreasing-transparency (accessed 22 Oct. 2019).