BY GEORGE FRIEDMAN
Russia has had a hard time since the collapse of global oil prices which began in August 2014. This will continue in 2017. The Russian people are starting to feel the effects of prolonged low oil prices. This was bound to happen. And this will shape Moscow’s foreign policy in the year to come.
Russia’s money problems start with the economy’s structure. The country’s budget depends on income from oil exports. Low oil prices have had huge effects. And the country hasn’t even recovered from the 2008 decline.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Little to no investment was made in industrial alternatives. And almost no money was used to increase efficiency or to add new technology.
Low oil prices hurt
Signs of bad times started being seen in late 2012. Russia’s 2016 budget had planned for oil prices at $50 per barrel, and the deficit target was set at 3 percent. The drop in oil prices means less income. And that means the budget will not be met.
Russia can’t control the price of oil. So, it needs to find other ways to manage its budget. So far, this includes cuts in government spending (except in defense and social services). And there are plans to privatize some state-owned companies.
Prolonged low oil prices have had an impact on Russia’s economy. GDP per capita in Russia is down from an all-time high of $11,615 in 2013 to $11,038 in 2015. Wages fell by 9 percent in 2015. And more than 2 million people fell into poverty.
In the first three months of 2016, inflation fell from 12.9 percent to 7.4 percent. That is the factor that worries Russia the most. Still, the central bank refused to cut the interest rate. At the same time, wages rose more than 5 percent. This is the first time since 2014 they have surpassed the rate of inflation.
And the people are suffering
The big danger for Russia, though, is how the oil price problem is affecting people. Wages over the last two years have had no real growth. The poverty level has increased. Now there are reports of food costing 50 percent or more of a person’s income. People are starting to grow some of their own food so they can still eat some of what they can’t afford to buy in stores.
As a result, Russians’ despair has grown. A rising number of small, local protests have occurred. These often relate to specific economic issues, particularly pensions. The number of protests in big cities has declined, but protests in small cities have increased by 40 percent in the last year—according to the FNPR, the country’s largest workers’ association.
Making things worse are reports of wage arrears in different regions. These reports are becoming more common. Wage arrears in Russia totaled 3.8 billion rubles ($62 million) as of July 1, 2016. About a quarter of these delayed payments were the past month’s pay for workers. About 30 percent, though, dated back to 2014 or 2013.
Reports of bankruptcies are also on the rise. One of the most troubling cases thus far deals with UralVagonZavod (UVZ). This is a corporation that consists of 40 entities and is among the world’s top 100 largest military-industrial companies. Three entities—Alfa-Bank, Barnaul Forge and Press Plant, and Central Boiler and Turbine Institution—have filed bankruptcy petitions in court against UVZ in the last few months due to unpaid debts.
So Putin will strut like a peacock
In response to these growing domestic pressures, President Putin has spent 2016 trying to further consolidate his power. He created the Council for Strategic Development and Priority Projects. This council aims to change things in the economy and the social sphere and to increase economic growth rates.
In an effort to show strength, Putin also revamped some of the branches of security bodies. Russia will continue to legitimize the regime in Moscow to those who suffer economically. They will do this by showing Russian power worldwide without really doing anything.
The worse the Russian economy gets, the bigger these shows of power will have to be. Moscow will engage in strategic regions of the world in 2017 with warlike talk and potential military posturing.
All of these moves will appear to be Russian aggression. But they will really be signs of Russian weakness. This is explained in detail in Geopolitical Futures’s 2017 forecast.