The Russian economy

Growth is dead, everywhere

Economic storm clouds gather for Russia's Putin

When Vladimir Putin returned one year ago to the Kremlin for a historic third term, Russia could boast robust if unspectacular growth, a budget flush with cash from high oil prices and the world's most profitable company

News Daily,

5 May, 2013

But in the space of just 12 months, growth has slipped to the extent that Russia risks entering recession, oil prices are suddenly trending downwards and the outlook has darkened for the state champion gas firm Gazprom.

While Putin is not yet pushing the panic button, the Kremlin is all too aware of the importance of keeping the economic stability many Russians see as the greatest gain of his 13 year-rule at a time of protests and dynamic change in society.

The long-term problems remain as acute as ever, with the government's lengthy to-do list of economic reforms to wean the country off its dependence on oil and gas exports still largely untouched.

Even further ahead, the country's shrinking population -- forecast by the UN to plunge to 126 million in 2050 from the current 142 million -- remains a time bomb for the economy despite efforts led by Putin to encourage larger families and improve public health.

In a surprise move, Putin earlier this month allowed the liberal former finance minister Alexei Kudrin to put a lengthy question to him during his carefully stage-managed Q+A with Russians that turned into a lacerating critique of economic policy.

The government was adopting "half measures and half reforms" and simply did "not have a programme" to turn the country away from oil dependency, said Kudrin who resigned in 2011 in a row over spending.

The challenges are clear - growth of just 1.1 percent in the first quarter of this year makes a mockery of Russia's membership of the BRICS top emerging economies group dominated by fast growing India and China.

In a pessimistic assessment, London consultancy Capital Economics predicted Russia is now entering a phase where "much weaker growth becomes the norm" with the economy unlikely to grow by 2-3 percent over the next decade.

"We suspect that Russia will go from being one of the world's fastest growing economies to one of the world's most underperforming," it said in a report.

Putin built his popularity on the boom years from 2000-2008 that saw growth of over 7 percent and Russia overcome the nightmare of its 1998 debt default and near financial meltdown.

Meagre labour productivity in Russia remains one of the economy's biggest defects and while unemployment is relatively low at just under six percent much of the workforce is employed in unofficial work.

Deputy Prime Minister Olga Golodets in April offered the startling statistic that 38 million out of 86 million labour-capable Russians were working informally, without proper contracts or paying regular taxes.

Meanwhile the investment climate remains poor with Russia coming in 112th place on the World Bank's latest ease of doing business index, a quantum leap away from Putin's target of putting the country in the top 20 by 2018.

Prime Minister Dmitry Medvedev - who served as president from 2008-2012 -- created the Skolkovo high-tech hub outside Moscow to become a Russian Silicon Valley and the trailblazer of a modernised economy.

But in a symbol of the disintegration of that dream, Skolkovo's vice president is now being probed on suspicion of embezzling $750,000 of its money to pay an opposition MP for lectures.

In the past Putin could count on the mammoth Gazprom - which controls 18 percent of the world's gas reserves - to serve as the bulwark of the economy during tough times.

But Gazprom is facing declining demand for its core product and increasing competition from shale gas, a resource it has so far regarded with an attitude almost resembling disdain.

This week it reported $38 billion profits for 2012, a colossal figure that was still down 10 percent on 2011 and meant Gazprom lost its status as the world's most profitable company, slipping to number three behind Apple and Exxon.

Nikolai Petrov, analyst at the Carnegie Centre in Moscow, described Putin's first 12 months back in the Kremlin as a "lost year" where no serious changes were made in politics or the economy.

"We are going to get a long and serious crisis. And when the population feels it, there are going to be mass protests not just in Moscow and Saint Petersburg but the whole country," he said