Russians are pessimistic about the future, compounding Russian economic problems.
The economic downturn is being amplified by four things.
- The ruble has been de facto devalued
- Interest rates have risen
- Money is being pulled from Russian banks due to fear of future sanctions
- Russian money is in “capital flight”, it is being sent outside Russia
This week’s annual Russian presidential press conference was smoke and mirrors. The Russian economy is not alright, it is hurting and is sure to become worse if Russia doesn’t change.
Expectation of New Sanctions Harming Russia More than Existing Sanctions Have, Shelin Says
Saturday, December 22, 2018
Staunton, December 21 – Just as the threat of a strike is often a more powerful labor weapon than any strike itself, so too the threat of new sanctions by the West is already having a more serious and negative impact on Russia than the sanctions Western countries have already applied, according to Rosbalt commentator Sergey Shelin.
He says that Russia has been living for some months in the expectation of new sanctions as a result of the Skripal case and the Azov crisis and that the last year has shown that “future actions against the Russian economy have already cost our country more dearly than those which are already in place” (rosbalt.ru/blogs/2018/12/21/1754647.html).
Despite Vladimir Putin’s upbeat messaging, Shelin says, Russians are entering 2019 far more pessimistic about the future than they were a year ago, less because of any specific Moscow action, including pension reform, than because of their expectations that more sanctions are about to be applied and that these will hurt them more directly than earlier ones.
These expectations have several real world consequences, and those consequences are likely only to become more serious, he suggests. First of all, there has been an effective devaluation of the ruble. At the start of 2018, it stood at 56 to the US dollar; now, it is at 68 rubles to the dollar.
Until very recently, oil prices have been high and so this change is not the result of that, Shelin continues; and “only the special measures taken by the Central Bank and the finance ministry have prevented a more serious devaluation,” a fall that he says is the result of “fear and panic” among Russians about the future. And that fall is now “the main driver of inflation.”
Second, there has been a rise in interest rates, with every indication that they will go higher still. “This is a natural response to growing uncertainty in the ruble. One of the consequences of this new course, the rise in the cost of all kinds of credit, is bad news for ordinary people because a life in debt has become the norm for many.”
Third, given the decline of the ruble and the expectations it will continue, Russians are increasingly pulling their money out of banks. Some of that, of course, reflects an effort to maintain their standard of living given that incomes are flat and inflation is rising; but much of it is about fears the US will impose sanctions that will make purchasing dollars more difficult.
And fourth, there has been a sharp increase in the amount of capital flight. The amount leaving this year will be more than 60 billion US dollars, more than twice the 25 billion which left last year. The current year’s flight is less than in four other years since 2007 but it is still impressive – and the trend will only get worse.
Most important, “except for the expectation of sanctions, there are no other reasons” for this to be happening. Both Russians and foreigners view Russian firms as toxic and dangerous places to put money given that additional sanctions may make it difficult or impossible to retrieve it and thus impose real costs on those who keep their money in Russia.
Ordinary Russians understand even if Putin is trying to convince them otherwise that “life in 2018 really got worse, and not because of sanctions but only because of the anticipation that there will be more of them.” They may accept the Kremlin’s version of the Skripal and Azov cases; but they aren’t ready to accept its projections about the future.
Consequently, more sanctions and counter-sanctions are coming, but they will be doing so, Shelin says, “not in the same public atmosphere as they did earlier;” and that means the Russian powers that be won’t have the same flexibility or support that they did in the past. The expectation of sanctions will thus do much to redefine the nature of Russian politics in 2019.