The Russian economy is suffering, but could short-term pain lead to long-term gain?

President Vladimir Putin has announced that a new decree will come into force limiting the number of Interior Ministry staff to slightly more than 1 million. As a result, 110,000 government officials are set to lose their jobs in swingeing cuts to 10% of the total workforce, writes Ivana Kottasova for CNN Money.

Austerity Hits Russia: Putin Fires 110,000 Officials
Source: Pixabay

Russia’s economic performance leads to job cuts

Russia’s Interior Ministry controls the police, paramilitary security forces and road traffic safety agency. It is thought that administrative staff will account for most of the job losses.

The job losses are a result of the worst economic crisis in years, caused by Western sanctions and low oil prices. In Q1 the Russian economy contracted by 2.2%, and the IMF predicts that it will shrink by 3.8% over the course of 2015 before a further contraction of just over 1% in 2016.

Putin himself is not safe from the cuts, and announced that he would take a 10% pay cut in March. He had previously ordered every government department, with the exception of defense, to reduce their spending.

Figures published by the government reveal that unemployment rose to 5.4% in June, compared to 4.8% last year.

Military spending also to be cut

In late June the TASS news agency reported that military spending will also be cut in the 2016 budget. Finance Minister Anton Siluanov told the press that the cuts would be less than the 10% planned for other departments.

The budget cuts would be effective from 2016-18, and focus on efficiency savings.

“That means a reduction of ineffective spending on state programs. As for military spending the percentage of optimization of this program was lower this year but the sum that we managed to cut we also want to extract from the spending in the coming years,” Siluanov said.

The cuts come at a difficult time for millions of ordinary Russians, who are sliding back into poverty as economic performance suffers.

Poverty rate on the rise in Russia

After years of getting richer, millions of Russians have seen their standard of living drop. Official data shows that 23 million Russians were living on less than $169 a month, the official poverty line, in March. Last year, the figure was 20 million.

The situation is becoming “critical,” according to Deputy Prime Minister Olga Golodets. The ruble collapse saw prices increases by an annual rate of 16% in Q1, so pay checks are worth far less than at this time last year.

Many Russians saw their living standards improve in recent years due to the country’s booming oil industry. Since Putin came to power 15 years ago, the poverty rate dropped steadily to just 11% in 2014. Unfortunately the trend has reversed, and 16% of Russians are now officially living in poverty.

With Putin continuing to provoke the ire of the U.S. and its allies, it does not seem that sanctions imposed due to Moscow’s role in the crisis in Ukraine will be lifted any time soon.

Given that Russians now have less disposable income, retail sales in Russia dropped 9.4% in June. External factors are also in play, including the ban on European funding for Russian banks and companies, and the prohibition of Russian arms sales to the west.

Prominent allies of Putin have also been subjected to travel bans and asset freezes, and trade with the EU fell by over 30% in January and February. All told, Prime Minister Dmitry Medvedev believes that Russia will lose $106 billion due to sanctions in 2015.

An attempt to retaliate against EU sanctions by banning food imports from the West led to a 21% increase in food prices in June, further complicating life for ordinary Russians.

Is Putin playing a long game?

So far the economic woes have had little impact on Putin’s approval ratings. According to The Guardian, his approval rating is currently 87%, slightly down from its record high of 89% in June.

Poverty and unemployment levels may be increasing, but it seems that the Russian population are still enamored with strongman Putin, who has successfully portrayed himself as the savior of Russia in the face of the morally bankrupt U.S. and its allies.

The economy may continue to deteriorate as a result of the recent deal with Iran. If Tehran sticks to the terms of the agreement, it is predicted that Iranian oil will flood the world market and depress prices. Despite the threat to its oil revenue, Russia was instrumental in pushing for a deal with Iran, and Moscow may be playing the long game.

Iran has repeatedly applied for membership of the increasingly important Shanghai Cooperation Organization, led by China and Russia. India and Pakistan recently joined the organization, which also counts the energy exporting former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan.

Iran’s application was suspended pending a deal on its nuclear program. If its accession can be agreed, a powerful new bloc of energy exporting countries could become a rival to OPEC.