Economic Darkness Descends on Putin’s Russia

Panic is sweeping Russia. Half of all Russian people believe they’ll lose their jobs in the next three months.  Nice work, Mr. Putin. Time magazine reports:

The friend giving me a ride swapped just a couple of grim words with his wife on his cell phone, then turned to me. “They fired her,” he said sadly. “There go our plans.” The wife, who had enjoyed a cushy bank job, then joined the tens of thousands of Russia’s new middle class who have found themselves newly unemployed.

Later, I found another friend pacing his office atop one of the newly built skyscrapers of “Moscow City,” the real estate symbol of Prime Minister Vladimir Putin’s ambitions of turning the Russian capital into a new world financial center. Several major companies had already moved out of these costly quarters to way beyond the city’s municipal boundaries, where they still can afford the rent. My friend’s company will soon follow. The Vneshtorgbank (VTB), a major state-run bank, has just canceled its long-planned relocation to the Federation Tower, the tallest of the Moscow City towers. Soon they will stand empty, symbols of failure.

In a nearly empty restaurant — which until quite recently would have been tightly packed at lunch by officials, business executives, entertainers and journalists — a key Moscow banker tells me quietly, “They admit privately at the top that the crisis has moved into economics. Their most likely answer is tightening the screws, as they’re running out of other means.” In the near future, he envisages Russia’s becoming a country whose dwindling population is mired in deepening poverty, an increasingly authoritarian state, run by a handful of immensely rich people, their despotism mediated only by their wish to be accepted in the West.

The hydrocarbon windfall that fueled the Russian state’s recent revival appears unable to offer a solution to the crisis. Russian foreign-currency reserves that stood at almost $600 billion last August have shrunk to $485 billion as the state has been forced to spend to bail out state-run banks and prevent abrupt devaluation of the weakening ruble. There is no telling if the policy has worked, though, and there’s worse to come: major state-run corporations such as Gazprom and Rosneft, as well as Russia’s regional governments, have accumulated debts amounting to some $448 billion that can’t be paid without the help of the federal government. Deputy Prime Minister Igor Sechin has just called for another $100 billion to bail out major companies, which can expect to jump ahead of the regions in the line for government assistance. If the federal government declines to bail out the regions, however, the consequence could be the “soft” disintegration of the Russian Federation, says one savvy business executive — the regions could begin to withhold some of the taxes they collect on Moscow’s behalf. Already, some regions in Russia’s far east are more integrated into the Chinese economy than the Russian one.

Privately, bankers and businessmen warn of a lack of currency to import food and the failure of local producers to replace imports. The supplies of foodstuffs available on Moscow supermarket shelves are shrinking as importers struggle to raise credit to replenish their stocks. Even the vodka has disappeared from the shelves of my two village stores — they can’t raise credit to pay their supplier. And at least two major national alcohol producers have recently folded.

Although public talk of a “crisis” is taboo unless applied to “the collapsing West,” one sure sign of the state of things is the fare on offer at local antique stores — usually unimpressive when things are going well. Moscow’s major annual antique fair had stunning pieces on offer last month, though there didn’t seem to be many takers. That’s hardly surprising, of course: while banks and companies are laying off managers and white collar staff by the hundreds, heavy industries are laying off blue collar workers by the thousands. The GAZ auto works in Nizhni Novgorod has shut down its assembly lines; the giant Magnitogorsk Steel Works in the Urals has placed 3,000 workers on forced leave.

Last year, 6.1% of Russians (4.6 million people) were unemployed, according to Yevgeny Gontmakher, director of the Social Studies Center of the Institute of the Economics of the Russian Academy of Sciences. Gontmakher expects this figure to double next year.

Putin’s instinct is to desperately seek to reassert control. Last week he unveiled a plan to stanch the capital flow out of Russia, blocking banks from turning bailout funds from the government into foreign currency. But it’s not clear that such moves will stop the political cronies long installed in key economic and financial positions from prioritizing their own personal interests, and some fear that restrictions now being clamped onto the financial system will harm the business environment in the long run.

In the Siberian city of Barnaul, pensioners, angry with rapidly declining living standards and rapidly rising bills, last week stormed and occupied the Regional Administration Building, demanding more money. Russian sociologists are expecting a massive wave of similar protests and strikes to roll throughout Russia, not unlike those that shook the country in the 1990s, with angry coal miners blocking railways in Siberia and unpaid workers striking in the cities. Now some enterprises are again failing to pay their workers, while others simply go out of business. But disruptive protests would contravene a new labor code passed under Putin in 2001, which sets tight restrictions on the forms of protest available to trade unions. But a Russian state that narrows the options of legal protest available to its people during a major national crisis may be courting serious trouble — it’s certainly a principle that Czar Nicholas II failed to understand.

6 responses to “Economic Darkness Descends on Putin’s Russia

  1. LR. I have grown to hate you. But at the same time i have grown (slowly but steadily) grown to like you.

    I know that you won’t ever tell it, but I would like to know more about your project La Russophobe. Is it run by one person or more, why do you do this and so forth.

    Best regards Risto.

    LA RUSSOPHOBE RESPONDS:

    Love hate relationships are always the most romantic, it is the same thing we have with Russia itself. Your questions were answered long ago, you just need to get out more.

  2. The irony is that the US will suffer a recession, but bounce back because the economy is well diversified. Because of Putin’s paranoia, he concentrated the Russian economy on only a few large industries. Like a few bad spins at the roulette wheel, Russia will lose all her chips. Had Putin shut down the Oligarchs for monopolistic practices, diversified the economy, reformed and strengthened the judicial system and encouraged small business growth, Russia would be in much better shape to weather this economic hurricane. To do those things, Putin would have to given up some of his power, which he was not willing to do.

    Putin sees the storms on the horizon, so he sent his dough boy, Medvedev to announce new 6 year presidential terms. Elections are to be held next Spring. Putin will run before the brunt of the economic crisis hits and ensconce himself in office for the next 12 years. This is a nightmare scenario for Russia and Russians. Unless of course you are a member of the Siloviki.

  3. I have actually read your blog since spring 2007 and all the explanations in the old blog about the project. Still i haven’t have a slightest clue about your background (history in Russia etc.) I would like to know more, so i could understand more.

    LA RUSSOPOHBE RESPONDS:

    Interestingly enough, the blog was founded in April 2006, has been written about in many other forums, and we don’t have the slightest idea about your background either.

  4. Moving the Russian economy to a market based economy with the rule of law and contract rights and property rights would be a huge undertaking for whoever tried to do it. How much of the Russian population is sold on socialism? Probably a lot more than want to change to something they don’t understand. There is always resistance to change, and it seems they just revert back to what they are familiar with, it’s the easy way out, less risk of personal failure. I think it’s largely human nature to resist change, especially when the change would require more effort. I empathize with the Russian people and wished them better, but with the current regime, it seems they are headed into a black hole. It’s not really communist or fascist, just another version of despotism by thugs who know how to use force and intimidation. Unfortunately, most revolutions actually end up with the people worse off, with the one exception of course, the U.S.

  5. Czar Nicholas II at least had the excuse of really never had democracy tried in Russia…what will Putin’s be?

  6. Kolchak,

    the very reason for Putin’s existence is to protect and foster monopolistic practices of the “oligarchs”. Had Putin shut down the oligarchs for monopolistic practices, he would long since be dead and you would not know his name. Try calling for liberal reforms within Cosa Nostra or something.

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