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Managing Russias Economic Decline

Published: February 19, 2014 (Issue # 1802)


One reason why Russians support their countrys invasion of Crimea is because Russia looks strong again. The Russian military appears well-equipped, disciplined and efficient. Gone are the undersized Soviet-era recruits, the cartoon Rambos of the Chechen campaigns and the officers in banana republic-style oversize hats of the 1990s. These guys look like real soldiers like U.S. GIs.

This picture of strength obscures the fact that the Ukrainian misadventure stems not from strength but from weakness. The need to use force comes from Russias failure to interest Ukraine in a voluntary alliance. Russias economic and political system is so utterly unattractive that Ukraine, like former Soviet satellites in Eastern Europe and other former Soviet republics, wants to have nothing to do with it. This is the reason so much of Ukraine has opted to join the West.

For 20 years, Ukraine had a system that was very similar to Russias until its latest kleptocrat, the utterly shameless and supremely greedy former President Viktor Yanukovych, finally ran it into the ground. The choice to adopt a more open, competitive, rules-based Western-style system is natural for a democratic Ukraine. Putinism can only work in a country that, like Russia, earns $350 billion annually by exporting its oil and gas.

But even Russias phenomenal natural wealth cant support indefinitely an economic system that produces little and instead efficiently breeds parasites. Even with high oil prices and output, the Russian economy is sputtering. Capital and brains are fleeing the country, investment is shrinking, and inflation is on the rise. The Central Bank has already been forced to devalue the currency to make petrodollars go farther in ruble terms.

It is the beginning of the end for the Russian economic boom. The natural gas market is shrinking, and prices are under pressure thanks to new fracking and gas liquification technologies. While Russia goes on pumping oil, the rest of the world is developing renewable sources of energy and energy-saving technologies. Oil from shale has boosted U.S. oil output to its highest level in 25 years, whereas Brazil is planning to triple its deep-sea oil production in the next 15 years, to cite just two examples.

Instead of peak oil, when supply of black gold would start to diminish, analysts now talk of peak oil demand as proven reserves are revised upward. In the U.S., gasoline use per car peaked in 2004 and has now fallen to its lowest level since 1984. The administration of U.S. President Barack Obama wants automakers to double their average gas mileage by 2025 to nearly 55 miles per gallon.

Oil prices are likely to fall in the next five years. Besides oil, gas, metals, weapons and chemicals, Russia sells very little to the rest of the world. This means an inevitable decline in export earnings and a diminishing role for Russia in the world economy.

This was going to happen anyway, but by invading Crimea and refusing to acknowledge that those are Russian soldiers the Kremlin has declared that it is no longer bound by international rules and that Russia refuses to act as a member of a community of nations. This means economic isolation, falling foreign investment and lower credit ratings.

And then there are imminent international sanctions. True, sanctions will disrupt oil markets in the near to medium terms, boost natural gas prices in Europe and penalize many U.S. and European companies. But in the end they will merely speed up the process of Russias economic decline that was going to take place in any case.

Alexei Bayer, a native Muscovite, lives in New York. His detective novel Murder at the Dacha was published by Russian Life Books in 2013.





 


ALL ABOUT TOWN

Friday, Oct. 24


SPIBAs ongoing Breakfast with the Director series continues today, featuring Tomas Hajek, Managing Director of the Northwest Division at Danone Russia. Hajek will be discussing collaborations between businesses from different cultures. The meeting is at 9 a.m. at the Domina Prestige St. Petersburg hotel and all who wish to attend must confirm their participation by Oct. 23.


Get your gong on at Sounds of the Universe, a concert at the city planetarium this evening incorporating six different gongs to create relaxing songs that will transport you upwards into the stratosphere. Tickets are 700 rubles ($17).



Saturday, Oct. 25


AVA Expo, the eighth edition of the event revolving around all things pop culture, returns to Lenexpo this weekend. Geeks, nerds, dweebs and dorks will have their chance to talk science fiction and explore a variety of international pop culture. Tickets for the event can be purchased on their website at avaexpo.ru.



Sunday, Oct. 26


Zenit St. Petersburg returns home for the first time in nearly a month as they host Mordovia Saransk in a Russian Premier League game. Currently at the top of the league thanks to their undefeated start to the season, the northern club hopes to extend the gap between them and second-place CSKA Moscow and win the title for the first time in three years. Tickets are available at the stadium box office or on the clubs website.



Monday, Oct. 27


Today marks the end of the art exhibit Neophobia at the Erarta Museum. Artists Alexey Semichov and Andrei Kuzmin took a neo-modernist approach to represent the array of fears that are ever-present throughout our lives. Tickets are 200 rubles ($4.90).



Tuesday, Oct. 28


The Domina Prestige St. Petersburg hotel plays host to SPIBAs Marketing and Communications Committees round table discussion on Government Relations Practices in Russia this morning. The discussion starts at 9:30 a.m. and participation must be confirmed by Oct. 24.



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