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11 March 2016

Economy of disillusionment vs. economy of hope

One should not count on ‘a return to sluggish growth’ let alone ‘quick rebound’, regardless of oil prices or the duration of sanctions

Today, many experts envision pessimistic scenarios for Russia’s development in the coming years – and there are numerous reasons for this. However, nearly all economists suppose that the economic downturn in the country will not be too severe even if it turns out to be relatively long-lasting. The IMF and World Bank believe that Russia’s GDP will decline by 0.6% in 2016 before it returns to growth in 2017. Moody’s sees prerequisites for a decline of over 0.5%. S&P even concedes a growth of 0.3%. The official forecast of the Russian authorities so far assumes  growth will be at 1%. In other words, everyone believes that Russia has come across another cyclic crisis caused by falling oil prices and aggravated by external sanctions. This crisis, according to the thus far consensual forecasts, will end just as all the previous crises did, starting with the one of 1998. 

I daresay these forecasts might prove inaccurate – for one simple reason.

A substantively new outline of the history of Putin’s Russia which can be broken down into three major periods is unfolding before our eyes.

Evaluating it from today’s perspective, one cannot but notice the difference between the period of 2000-2008 and the subsequent period of 2009-2014. According to Rosstat, Russia’s GDP expressed in 2008 prices, grew by 66.5% during the first period and by only 5.9% over the course of the subsequent period. That being said, one-and-a-half years from now, in 2017, the second phase will be equal to the first one in terms of duration, and it will turn out that the Russian economy (if nothing more unpleasant than what is happening now happens) will be simply ‘drifting’.

This era of treading water is set to precede the third phase of Putin’s reign which is expected to last until 2024 (as no one expects him to vacate the post before then). The main question which arises today is the question of whether the 2008-2009 and 2014-20(??) crises are to be minor collisions followed by resumed growth or, contrarily, are there signs of a transition from a phase of growth to a phase of stagnation to a phase of recession. I regret to say that the latter appears more feasible.

The economy is a sphere not only of strict rules, but also of a plethora of emotions. Expectations play a role no less important than real trends. And even the most superficial analysis shows that it has been, and still is, very typical of Russia. 

During the first of the outlined periods, the Russian economy grew by an average of 6.9% annually. The annual average dollar exchange rate in 2008 was the same as the figure for 1999, down to the kopeck. The income of the population increased by 10-12% on an annual basis. The number of millionaires and billionaires was growing and the Russian middle class became a thing of reality. The RTS index increased 14-fold from 175 points in January 2000 to 2,498 in May 2008 which meant that it was one of the best dynamics globally. The number of Russians travelling abroad annually increased 3.2-fold. Cars sales in the Russian market tripled – up to 2.9 million a year. The developmental vector was obvious in popular opinion: only going forward, and the sky’s the limit.

All this happened largely due to the fact that Russians themselves, as well as global players, came to believe in Russia as a new ‘star’ on the global economic ‘horizon’. This was precisely the hope pinned to the economic growth which was pushing the country forward. Domestic entrepreneurs (SMEs in particular) launched new businesses, while citizens were spending money on current consumption and taking out loans to buy property and cars. Foreign investors built enterprises and loaned money to large Russian companies even more eagerly than domestic banks. Wealth and luxury almost became national ideals in Russia (the latter term was even used to name one of the sections of the now discontinued Russian economic forum in London in the early 2000s).

The faith in Russia as a land of opportunity was the key driver behind growth and development which allowed a wealth of disturbing circumstances to be ignored: from the Yukos case to Russia’s growing resentment towards the West. Even certain re-nationalization and soft expropriation of foreign property (for example, the purchase of shares of foreign investors in the projects in Sakhalin) did not change anything. This was the economy of hope in the fullest sense of the term.

However, the future is now seen in a totally different light from the past. The seven years since the beginning of the downturn in the stock market in the summer of 2008 were primarily used by the Russian authorities to achieve one thing: consistent destruction of the pool of trust built in the early 2000s. The first signs of the 2008-2009 economic crisis coincided with the war in Georgia and followed by the illegal annexation of Crimea, and the wars in Eastern Ukraine and Syria. During these turbulent times, the number of different taxes and levies tripled compared to the first eight years of Putin’s presidency, while the existing ones were not lowered even once. Law-enforcement agencies became the most prominent economic news-makers. Modernization was attempted in such a way that the word – recognized as one of the most important ones in many successful countries – became a curse-word in Russia. Rapprochement with the West prompted a backlash. The government and the State Duma became engaged in activity targeted solely at curtailing both economic and political freedoms. The ruble went through two devaluations. The authorities gave precedence to foreign policy over the economy. The state became convinced that the people were created for the state and not vice versa. Corruption soared to such an unimaginable scale that it no longer surprised anyone.

In 2014, global politics was shaken by the war in Ukraine, and the global economy, by the energy market crisis. However, a far more important crisis – the crisis of trust – unraveled in Russia itself. Never before had well-known brands - Opel, General Motors, Stockmann, Adobe System – left the country one after the other. Danone and Carlsberg ceased production and large European banks closed their branches while airlines announced the termination of dozens of routes. The clock turned back on the stock market: Gazprom is even valued at 1/22nd of the value projected by Alexei Miller in his ‘seven-eight-year perspective’ in 2008, not contested by many equity analysts back then. The country ceases to be attractive both for migrants and for Russian citizens. And it seems, at times, that when it comes to the economy or politics, there is no nonsense that the president is incapable of suggesting before respected Russian lawmakers hurriedly enact it in due form.

It seems more and more plausible to me today that the Russian economy was not so much fighting the crisis as it was preparing to reject accidentally attributed features of normality throughout the last seven years. In this respect, the years 2014 and 2015 are, in fact, very different from how they are generally perceived – not as the next crisis, but as a slip from a plateau, and a downturn as a prelude to a large and lengthy fall.

The reason for this fall will be the complete destruction of hope, replaced with blatant disillusionment. When people stop spending money and stop borrowing, when entrepreneurs are ready to close their businesses, when partners leave  projects without looking back, when investors ‘cash out of’ the stock market, it may serve as evidence that while Russia might not have been written off altogether but no one is willing to wager high stakes on it either. One might not be very proud of one’s country – as  in the 1990s – but one might still believe in its prospects. Or else one may be proud of it, as the average Joe is now, but have no plans for a better future, which can be evidenced by the actions of the business community and ordinary citizens alike.

The economy of hope has been supplanted by the economy of disillusionment. This is a long-term trend - not a short-lived phenomenon. It should not be assumed that this wave of disillusionment will pass just as storms in the stock market do – it is much deeper and all-encompassing. Even if the wars cease and sanctions are lifted, investors will not return to Russia. This is because Russia has given precedence to politics over the economy, geopolitical ambitions over sustainable development, the wealth of the state and convenience of officials over the well-being of the population, and their economic freedoms. This was a conscious decision made by the authorities which could not have been possible had it not been supported by the majority of society that favors the search for an enemy over the establishment of partnerships. The prospect of a win-win game is a thing of science fiction.

One should not count on ‘a return to sluggish growth’ let alone ‘quick rebound’, regardless of oil prices or the duration of sanctions. History abounds with examples of protracted economic downturns triggered by political reasons: recall Argentina of the 1930’s-1970’s or Venezuela of the 2000’s-2010’s. It seems to me that nothing will prevent today’s Russia from following a path to protracted decline of 3-5% a year in the nearest future, while GDP per capita as well as real income of the population in the country by the early 2020s will be far lower than those of 2008 (let’s say that in Venezuela the peak was reached as far back as in 1978). Russia as ‘a land of opportunity’ will remain only on banners along with the logo of the eponymous bank whose opportunities will almost certainly not diminish, at least not prior to 2024. However, it is unlikely this will be a comfort for the majority of Russians…

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