Russia’s Slow Start into a Post-Prosperity Year

The extra-long Christmas-New  Year-Rozhdestvo (Orthodox Christmas) celebrations in Russia have been muted this season, and unmistakable anxiety stands in stark contrast to the exuberance that greeted the arrival of the year 2008. Just two weeks before that “best-year-ever start,” President Vladimir Putin had announced the name of his successor and the Russians were preparing to vote for Dmitri Medvedev with total confidence that nothing would change in Russia’s astonishing success story. Now the “tandem” system of leadership is firmly established but the persistent pledges to “stay the course” betray only the colossal bureaucratic machine’s helplessness in the face of the sudden downturn, which is expected to accelerate (Vedomosti, December 30; Kommersant-Vlast, December 22). Opinion polls show that 40 percent of respondents now think that the country is on the wrong track (up from 24 percent in September), despite non-stop reassurance from official propaganda (Levada Center, December 17).

The first half of the past year was, in fact, extraordinarily successful; and the only so slightly reshuffled government proclaimed Russia to be an “island of stability.” It was not even considered necessary to find an accurate translation for the odd term “subprime.” It was the meltdown of the stock market, which lost 75 percent of its capitalization from the start of June to the end of October, that manifested the arrival of the crisis; but the ruling duo mistook it for a malignant external influence caused by the banking panic in the United States. The “natural” solution was to turn Russia into an independent financial center and curtail the role of the U.S. dollar as the main international currency; Medvedev trumpeted that idea in several European capitals until the G20 summit in Washington in mid-November, where it was dismissed by the Chinese, of all partners (Ezhednevny zhurnal, December 31).

The market catastrophe duly resulted in a credit crunch, which revealed that Russia’s mushroomed corporate debt was, for the most part, “subprime” and could be covered only with the Central Bank’s reserves. Putin ordered the rescue of Rosneft, Gazprom, and other “champions” from the state coffers, which quickly turned into looting but did not prevent the crisis from spreading into the “real sector.” The depth of industrial contraction in the last quarter of 2008 astonished the economists, who had never expected to see figures surpassing the recession of 1992-1994 and the default of 1998 (Moscow Echo, December 30). The long holiday break enabled many enterprises that are cutting down production and have to put their employees on unpaid leave to postpone the inevitable layouts until the new year, when unemployment is expected to reach 2.2 million from the current 1.45 million (www.newsru.com, December 29).

The direct connection between Russia’s economic fortune and the trajectory of the oil price on world markets has been demonstrated beyond reasonable doubt, and it is already clear that the great hopes about the barrel on the New Year’s Eve were in vain as the price continues to slide (Vedomosti, December 30; Expert, December 15). One direct consequence of this downfall is the new Russian-Ukrainian “gas war,” which Moscow has launched this year out of desperation rather than arrogance as was the case in 2006. In autumn Gazprom was reaping record profits from exporting gas to Europe, because the price of gas follows that of oil with a lag of six to nine months. These increased prices are set to disappear in 2009, so Gazprom wants to fix the price for Ukraine at the current European level, which Kiev has every reason to consider too high. Putin and Medvedev staged a “discussion” in front of TV cameras before cutting the flow to Ukraine, seeking to convince the EU that it was the “clan politics” in Kiev that blocked the agreement. There is some truth in that; but the Czechs, who assumed the EU chairmanship on January 1, have refused to take sides and are demanding an urgent resolution of the “commercial dispute” (www.lenta.ru, January 3).

The conflict will probably be over in a few days with Ukraine gaining a small discount and ruining its reputation as a transit country and Russia gaining new arguments for constructing the Nord Stream pipeline across the Baltic Sea (www.rbc.ru, December 3; Moscow Echo, January 2). This petty but emotional bargaining cannot disguise the sudden deflation of Russia’s self-perception of “restoring the greatness” and “innovative breakthrough,” since the inglorious dependency on oil prices is too obvious to deny (Moscow Echo, January 3). Putin is trying to manage this crisis in his ideology of “raising the country from its knees” by promising to deliver on all the scheduled pension and salary increases and maintain the socially oriented national projects in health care and education. The result is an unnaturally high inflation rate that reached 13.3 percent in 2008 (up from the anticipated level of 8.5 percent) and is expected to stay at this level in 2009 (RIA-Novosti, December 31).

Putin and Medvedev make a show of standing shoulder to shoulder against the hardships, even going skiing together on New Year’s Day (www.newsru.com, January 3). The dual leadership was not, however, designed to withstand a crisis of such proportions; for that matter, the president cannot even criticize the prime minister or the government, so blame for the crisis remains unassigned (Nezavisimaya gazeta, December 30). Experts keep arguing that Putin intends to escape from the unenviable position of prime minister, with its excessive responsibility for impossible tasks, and return to the Kremlin for six years, as permitted by the newly amended constitution (The New Times, December 22). Far more important, however, is the question about discontent within the ruling elite, which has lost a colossal amount of money in Russia’s suddenly shrinking economy and senses the confusion of the ruling pair. It was exactly such a loss of control that prompted top officials to stage a putsch in August 1991; and Putin, who resembles Gorbachev only in his inability to comprehend the reality of crisis, could face a mutiny of disgruntled siloviki. That old farce may be replayed, perhaps as a tragedy, since Russia traditionally goes against the logic of history.