Russia Enters New Era of Stagnation

Russia Enters New Era of Stagnation

Russian Prime Minister Dmitry Medvedev says he recognizes the problems holding back the country’s economy. Sadly, nobody has much confidence in his plans to address them.

With the country’s rate of economic growth declining toward zero, Medvedev is making a renewed effort to show the business community that he knows what to do. In an unusually long article published in the business daily Vedomosti, he acknowledged that what growth the country has is largely artificial, that the government is too dependent on revenue from the oil industry, and that Russia offers a terrible environment for investment.“Output growth is supported almost exclusively by large investment projects financed by the government and state-owned companies, salary raises in the public sector, an expansion of subsidies to agriculture and other sectors fueled by the high oil price,” Medvedev wrote. In other words, Russia’s economy might not be growing at all if the government wasn’t pouring oil money into subsidies and infrastructure projects, such as the preparations for the Sochi Winter Olympics in 2014 and the soccer World Cup in 2018.

The private investment needed to replace the government spending, he wrote, isn’t coming, in part because investors have an “understandable lack of trust in public institutions.” Besides, private business has a hard time competing with state-owned behemoths: State-controlled banks, for example, hold 53 percent of the Russian economy’s entire loan portfolio.

“We are at a crossroads,” Medvedev wrote. “Russia can continue going forward in slow motion, with economic growth close to zero, or it can take a serious step forward.” The second path “is fraught with risk,” while the first “leads to a precipice.”

Few economists would argue with the diagnosis. “The head of the cabinet has largely learned to name the correct reasons for the country’s predicament,” Maxim Blant wrote on the opposition website ej.ru. Sergey Aleksashenko, director of macroeconomic studies at Moscow’s Higher School of Economics, agreed: “It’s a good thing that this has at least been said.”

The biggest flaw in Medvedev’s lengthy program, critics said, was the paucity of solutions. All he offered was a slowdown in tariff increases at Russia’s state-owned utilities and some small-business support in the form of tax breaks, loans and government contracts. He also expounded on the need to turn Moscow into an international financial center.

“And that’s it,” Aleksashenko wrote. “What about safeguarding property rights and the quality of the judicial system, shrinking the state and using government resources effectively, what about privatization and infrastructure?”

Medvedev’s article does not contain the word “corruption” or mention capital flight, expected to reach $70 billion this year. It offers no specific measures to foster competition, the focus of the latest World Bank report on Russia.

“Every month the Russian Statistics Committee surveys 25,000 entrepreneurs, trying to find out what obstacles they face, and every time they give the same answers: taxes, bureaucratic pressure, corruption,” Igor Nikolaev, head of strategic analysis at the audit firm FBK, told the web site Expert Online. “How long will the government close its eyes to that, merely pretending that it’s doing something?”

Some worry that Russia could be entering a new era of stagnation — a term most associated with the tenure of former Soviet leader Leonid Brezhnev. “A crisis is a situation you can enter and exit, but stagnation is a situation with unpredictable consequences,” said Economics Minister Alexei Ulyukayev, according to Vedomosti.

Both the economy and the bureaucracy seem to be running in place, with the latter unable to take the radical action needed to break the impasse. All power belongs to one man, President Vladimir Putin, who recently indicated that he intends to stay in power through 2024.

Even if Medvedev, who kept the presidential seat warm for Putin from 2008 to 2012, had a bold plan to restart growth, he would lack the authority to implement it. As the journalist Alexander Polivanov put it in a column on the web site Lenta.ru: “Medvedev is prepared to change separate parts of the government machine, but not the machine itself.”

(Leonid Bershidsky, an editor and novelist, is Moscow correspondent for World View.)