Russia’s Grinding Economic Stagnation

By Chris Miller, Assistant Professor of International History at The Fletcher School of Law and Diplomacy at Tufts University

Year after year, Russians keep getting poorer. According to new data from Russia’s state statistics agency—an organization that is often accused of fudging data in the Kremlin’s favor—2018 marked the fifth straight year in which Russians’ inflation-adjusted disposable incomes fell. Since Russia annexed Crimea in early 2014, in other words, Russians have gotten steadily worse off.

There are several causes, not all of which are in Russia’s control. The country depends heavily on oil and gas exports, so when prices for those fall—as they did in 2014 and 2015—the country’s economy slows. But as oil prices climbed in 2016, Russia’s economy started growing again. Last year, oil prices were relatively high, hovering around $70 per barrel. Thanks largely to that hike, total exports increased 27 percent. That didn’t mean much for ordinary Russians: Oil firms might have done better, but average Russians did worse.

Western financial sanctions haven’t helped. By restricting foreign investment and raising financing costs, sanctions slow business growth. Even so, Russian firms have been doing better than Russian citizens. Industrial production, for example, increased by 2.9 percent in 2018—relatively solid growth. That meant little for individual incomes, though.

Russia isn’t the only country where firms have been doing better than workers. One might see this as more evidence of a global trend of economic power shifting toward big companies. Perhaps it is—but Russia’s government is unique in the vigor with which it embraces policies that everyone knows will make Russians worse off. Russian society is also unique in that no one seems to care.

Consider Russia’s main economic policies over the past year, all of which will continue into the foreseeable future. First, Russia’s government ran a sizeable budget surplus in 2018 and plans to continue doing so through 2021. It fears that the United States will impose new sanctions that cut access to Western financial markets, so it is saving up in preparation.

Budget surpluses are not a bad thing in and of themselves. But the money has to come from somewhere. One method is to cut spending, which Russia’s government has done aggressively. Since shifting from prime minister to president in 2012, Putin has slashed government spending in almost every category, excluding defense, pensions, and (thanks to last year’s World Cup) sports. In health care alone, he reduced spending 16 percent, adjusted for inflation, despite Russia’s mediocre health outcomes and aging population. Education spending is down by 14 percent since 2012.

Even as the Russian government cuts public services, it is raising taxes, most notably the value-added tax, which it increased by 2 percentage points earlier this year. Prices on all goods and services will jump accordingly—even though Russians’ salaries will not. This will make Russians poorer still.

To top it off, last year, the Kremlin pushed through a controversial plan to raise the retirement age. The aim was to reduce spending on government pensions. The decision was probably necessary in the long run given the country’s aging and shrinking population. But almost all Russians rely on government pensions for most of their retirement income. Now they will get less.

Put these policies together, and a trend emerges: Not only is the Kremlin unprepared to pursue policies to raise Russians’ incomes, but it is actually embracing measures that make Russians poorer. Yet Russians do not seem to have caught on, at least not yet.

To be sure, there is plenty of evidence that Russians are disgruntled. In late January, the Russian government’s own pollster found that only 33 percent of Russians say they trust Putin, down from 70 percent after he annexed Crimea. In several high-profile regional elections last year, the Kremlin’s preferred candidates lost, thanks to protest votes against Putin’s United Russia party and the country’s ruling elite more generally.

This piece was republished from Foreign Policy.