Wednesday, August 24, 2016

The Power Vertical

Russia's Next Crisis

Former Finance Minister Aleksei Kudrin
Former Finance Minister Aleksei Kudrin
What would happen if Russia's current political turmoil were compounded by an economic crisis?
Last week, a think tank associated with former Finance Minister Aleksei Kudrin raised that question, and the answers were -- to say the least -- not pretty for the Kremlin. And today, the ruble fell to a three-year low on falling oil prices, which dropped by 4.5 percent over the past week.
The government insists there is no cause for alarm. Deputy Prime Minister Arkady Dvorkovich told RIA-Novosti that the authorities are "prepared for any scenario" and "have the reserves necessary for dealing with a crisis, if there is one."
Nevertheless, whether Russia's $513 billion in foreign reserves will be enough to weather an economic downturn sparked by contagion from the eurozone and falling oil prices must be causing a lot of sleepless nights in the Kremlin.
A report released on May 24 by the highly respected Center for Strategic Research commissioned by Kudrin's newly formed Committee of Civic Initiatives warned that Russia could descend into violence and chaos if the authorities continued to crack down on opposition protesters or if the economy slides:
Our research shows that the crisis has become irreversible. regardless of the scenarios of its further development. Maintaining political stability, let alone a return to the pre-crisis status quo, is no longer possible ... At this stage we view the probability of such a scenario as high because the escalation of violence has already started. As it spreads, the return of the protests to a peaceful course is becoming less and less likely.           
The report noted that "the middle class in the largest cities is de facto lost for the authorities." An economic downturn would undoubtedly cause them to lose the working class as well, leading to rural and industrial unrest.
At a press conference presenting the report, Kudrin -- who won accolades for steering Russia through the 2008 financial crisis -- said a recession in Russia is "possible and even likely," adding that there was a 50 percent chance that this would be "a destabilizing factor for political problems."
An economic downturn would, indeed, land the second half of a one-two punch against President Vladimir Putin and his ruling circle.
As I have blogged in the past, rising living standards in Russia over the past decade led to the creation of an embryonic middle class that once made up the bedrock of the regime's support. But once that class became secure in its wealth -- as was the case in South Korea, Indonesia, and elsewhere -- it began to seek political freedoms, causing it to lose patience with Putin's authoritarian rule.
Having lost the middle class, which has taken to the streets against him, Putin turned to the working class, which is now the backbone of the Kremlin's social base. A deep recession risks turning them against him as well.
"In connection with the problems in the countries of the eurozone, notably in Greece, the world economy can expect a new strong shock. In the meantime, in Moscow, they are busy with everything under the sun except preparations for a new wave of crisis," a May 25 editorial in opined.
"Of course, fears do not always come true, but if they do come true, it certainly does not have to be in full. But the atmosphere is heating up before our eyes. The flight of capital from Russia is speeding up. Oil has become cheaper," the editorial continued.

"The Russian budget, half of whose income is provided by selling energy, will encounter real difficulties yet this year if the oil price simply stays fixed at today's level. And if it so happens that it stays below $100 for quite a long time, it will simply become impossible to describe what is happening other than with the words 'economic crisis.'"
If the worst-case scenario does come to pass, the results could be nasty. The opposition to Putin is comprised as much of nationalists and radical leftists as it is of pro-Western liberals.

(Note to readers: Tune into "The Power Vertical Podcast" on June 1, where I will discuss this issue at length with my regular co-host Kirill Kobrin, managing editor of RFE/RL's Russian Service.)

-- Brian Whitmore

Tags: Russian economy,Russian opposition

This forum has been closed.
Comment Sorting
by: Eugenio from: Vienna
June 01, 2012 07:18
"Russia's Next Crisis", "Russia's current political turmoil" :-))))). Ah, the RFE/RL clowns are really desperate in trying to divert people's attention from the fact that their "wonderful" country is going towards a financial bankrupcy at home and (one more) military defeat abroad :-)). And yes, please do continue asking me for "proofs" that you, US-made Beavuses and Buttheads, are just a nation of useless inept bankrupt losers :-)).
In Response

by: M from: M
June 01, 2012 14:38
Is it all what you are able to say.
As your Marx said: you are on the history garbage tip, unfortunately comrade you didn't notice it, yet.
In Response

by: Eugenio from: Vienna
June 02, 2012 08:52
No, M, unfortunately for you, this is not all I am able to say. Just a little bit more data on the REAL CRISIS which is happening right here in the EU right now (and not the imaginary one in Russia):
(a) yesterday (Friday) the Central Bank of Spain (this country blessed by god to be a member of the EU) annonced that the capital flight from SPAIN during the month of APRIL only constituted more than € 66,000,000,000!
(b) and following this news - and demonstrating once again what a great system is that of free capitalist market economy - ALL the major stock exchange indicators in the "advanced" "industrial" "democracies" collapsed: the German DAX by 3,20 % in one day (and Germany, as we know, is the industrial motor of Europe), the US Dow by 2,22 % in one day, the French CAC 40 by 2,21 % in one day etc.
And while the roof is already falling on your heads, you continue talking about the "Russia's Next Crisis" :-)).
All this RFE/RL promoted discourse really reminds me of the stories that Joseph Goebbels was telling the Germans in January of 1945 about the "Wunderwaffe" with which the Deutsche Reich was going to destroy all of its adversaries in one night. And then - 6 months later - there was no Wunderwaffe, no Joseph Goebbels and no Deutsche Reich. There was only a bunch of ruins. That's what happened to those who did not want to face the reality back in Jan. 1945 and that's what will happen to you, guys, for this very same reason a couple of months from now.

by: Aibek
June 01, 2012 12:58
Rising living standards in the middle class also preceded the fall of the Soviet Union. However, Putin is unlikely to repeat Gorbachev's "mistake" of allowing greater freedoms. And despite what we read in the news, the numbers of people protesting still represent only a tiny percentage of the population.

Still, the continuing massive outflows of cash from Russia show that the moneyed elites agree with this article.
In Response

by: Jack from: US
June 01, 2012 14:57
money outflow from Russia is similar to money outflow from EU and from Middle East. With EU is heading toward collapse, with US-instigated wars in Middle East, money flee EU, Middle East for safe heaven in US. As EU is the largest trading partner of Russia, Russia is also affected, i.e. money flee Russia for US. Have you watched euro and ruble going down against dollar in recent months? US government makes troubles abroad so as to attract foreign buyers into US treasury bonds, which otherwise would have gone down the drain long time ago, with US economy collapsing as a result. So US government is instigating wars for a reason - to force foreign investors to pile money into US. That's how US is parasiting on world's financial system.
In Response

by: William from: Aragon
June 02, 2012 23:41
Certainly the price of oil is being manipulated in this manner, Jack. Have you noticed how the price of oil goes up due to "instability in the Middle East" when nothing has really changed, apart from the issue of a strongly-worded press release from the White House about Iran, Yemen or some other Middle Eastern country?

by: Dragomir from: Australia
June 01, 2012 14:49
Russia as undemocratic country should be prohibited to sale of oil,gas , minerals and any commodities because all of them by mistake were placed in to soil of undemocratic country.Full unrestricted exploration shall be given to western more democratic country for a 1oo years at least.Al Jazeera should be appointed to educate Russia in all aspects of democracy.I am hoping you do agree with me.By the way you will be free to set out price list . Hopefully once exploration is over Russia will be full
democracy to take care of environmental recovery.

by: Mark from: Victoria
June 01, 2012 16:46
What would happen if Russia's current political turmoil - largely in the minds of the handful of protesters, the perennially dissatisfied elite and their western supporters - were to be compounded by its being struck by a piece of deorbiting space junk roughly the same size and shape, which removed Russia from the map as efficiently as a giant surgeon might? Seriously; if we're going to play "what if?" based on nothing more than a temporary drop in oil prices, which are constantly fluctuating, why not go apocalyptic? Last August the spot oil price was $85.06. Did Russia collapse? Did Medvedev weakly beckon the liberal elite to take the leadership of the country from his failing hands? Was Kudrin - never so popular with the west when he was the actual Finance Minister as he apparently is now that he's a political dissident - carried through the streets on the shoulders of his cheering countrymen? Are we going to be treated to a flutter of seditionist excitement every time the world oil price hiccups?

What would happen to Russia if there were an economic crisis right now? Perhaps Kudrin's think tank found that the answers were not pretty, but you should have asked him how pretty the situation looked for countries that did not have a $500 Billion reserve fund to fall back on. And if the prospect causes a lot of sleepless nights in the Kremlin, what must it be causing in Washington, mortgaged to the hilt to China?

If there is an economic crisis, and there is an excellent chance there will be considering Western Europe is teetering on the brink of the abyss, development will slow or stop, and energy prices will fall steeply. Will they stay low for years? Well, what do you think? Does the west loathe Russia so deeply that it is prepared to undergo years of deprivation and economic contraction in order to bring it to heel or destroy it?

Better ask the voters.

by: Mike from: Prague
June 02, 2012 15:35
This is an interesting post. But I don't see the direct connection between the economic crisis (lower ruble and oil/gas demand) directly translates into a loss of support by the working classes. Unemployment is now at 5.8%, real wages are increasing 10% y/y. Increasing domestic demand can maintain the political support of the working class and can offset part of the headwinds of the European crisis. The only way Putin can lose the support of the working class is by a sharp increase in unemployment and inflation.

What the political opposition really needs at the moment is not the working class, but a set of credible charismatic leaders. But for that to even happen, we need to see greater signs of division among the Kremlin elite (resignation of politicians who then join the opposition). I don't see a way for the Kremlin to start censuring the Internet - they are way behind the curve in that - and so I agree that it is a matter of time until the 'power horizontal' begins to take hold.

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The Power Vertical is a blog written especially for Russia wonks and obsessive Kremlin watchers by Brian Whitmore. It offers Brian's personal take on emerging and developing trends in Russian politics, shining a spotlight on the high-stakes power struggles, machinations, and clashing interests that shape Kremlin policy today. Check out The Power Vertical Facebook page or