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Symptoms of a serious economic crisis caused by the disconnect of the Russian bureaucracy from the reality or its unwillingness to coupe with it broke the surface in the end of the first half of 2019.
Previously, SouthFront released several critical pieces on this topic:
- “Russia Slides Towards Internal Political Crisis” 26.02.2019
- “Monthly Q&A – March 2019” 03.04.2019
Unfortunately, our pessimistic predictions are turning into reality.
According to the recent report by the Russian Federal State Statistics Service (Rosstat), in the first quarter of 2019, Russia’s GDP grew by 0.5%. In the same period, the US’ GDP grew by 3.2%. To get a more comprehensive look it should be noted that the US GDP in 2017 was $19390.60 billion while the Russian GPD in 2017 was $1577.52 billion.
Rosstat also reported a new record of the capital outflow from Russia – for the first four months of 2019, this number was $34.7 billion, exceeding 1.9 times the figure for the first quarter of 2018. Foreign investment in the Russian economy also declined to a minimum. Real incomes of the population continue to fall. Foreign trade, which steadily recovered in 2017–2018, began to fall again.
The developing crisis in the Russian economy is a result of the government’s desire to withdraw income from the population and business by increasing taxes and fees. This cannot lead to any other results.
SouthFront economic analysts had made several critical comments regarding this practice since the start of 2018. They are mystified at what reasons may be behind this economic policy. Russia has a successful experience of overcoming crisis developments in 1998-1999. Then, a serious economic and financial crisis was overcome within a very short time thanks to actions of the government led by Yevgeny Primakov (then Prime Minister of Russia) and Yuri Maslyukov (the first deputy chairman). This Primakov-Maslyukov government took several measures to solve the crisis: economic policy changes, reduction of tariffs, value-added tax on food is reduced, and the default is overcome.
For example: By the time Primakov assumed government, the debt of enterprises and organizations to the budget was 50 billion rubles, and the budget debt to enterprises amounted to 150 billion rubles. Debts also accumulated between the enterprises themselves. Federal authorities demanded cash-only payments. Direct clearing settlements were banned in accordance with the recommendations of the IMF i.e. For one side to repay its debt to another, it had to use cash, as did the other side. However, recall that by this time the Russian economy was deliberately demonetized. The volume of monetary supply was reduced by 4-5 times below the average level of other governments of the world. This meant that there was no money and repayment of debt was practically impossible. This promoted a furtherance of debt with respect to wages, pensions, and taxes, lack of capital and other negative phenomena. All of this was done under direct control and through recommendations of the IMF and international advisers. Primakov’s government, contrary to recommendations of the IMF and prior practice, initiated mutual settlements between government and enterprises. At the outset, it allowed to liberate 50 billion rubles. MORE HERE
After that, the real sector of the Russian economy get a momentum for rapid development. The measures applied by the Primakov-Maslyukov government are in many ways directly opposed to what the economic bloc of the current Medvedev government has been doing over the past 1.5-2 years. Previously, the problems of transition of the economy to a steady growth were associated with certain “structural reforms”. After these 1.5-2 years it seems that all the real problems are connected with the bureaucratic sabotage of the country’s economic development. It is hard to explain this by logic.
The first explanation is that the entire structure and system of the Russian bureaucracy is flawed. Another version is that the country is experiencing a deliberate sabotage by senior officials of the economic block of the government. Many of these persons are de-facto agents of foreign interests (power groups) that are not linking their activity with Russia’s national interests and people. The Russian government’s economic bloc largerly consists of alumnus of the National Research University Higher School of Economics (NRUHSE). The NRUHSE is well-known for its pro-Western visions.
The decline in annual GDP growth rate from 2.7% year-on-year to 0.5% year-on-year in the 1st quarter of 2019 means that the economy in the 1st quarter shrink by about by 1.6% in comparison with the previous one. This is the most serious quarterly failure since the economic crisis in 2008–2009.
Neither the collapse of oil prices in 2014 (in the middle of 2019 the oil price is at a level higher than the comfort level of the Russian economy), nor the sanctions could cause the same economic failure as an increase in taxes and administrative pressure (fines, fees, etc.). This has withdrawn resources from the economy, significantly reduced the real household disposable income, significantly increased expenses for small and medium businesses, and negatively affected the desire of both citizens and small and medium businesses to invest in new projects.
There are examples. Let’s take a look at two real companies, which were provided by our Russian readers as an example of this situation.
- One small LTD with a monthly turnover of about 2,000-3,000 USD and the number of employees 3-5 worked for 1.5 years. Then, due to the planned change in the scope of activity, it temporarily ceased to carry out operations (for one quarter). After the resumption of work, it turned out that the deadlines for delivery of a part of quarter reports were violated [the campaign did not work and there were no account turnover records]. As a result of this minor administrative violation, the campaign was penalized by the tax authorities – initially around 350 USD. This case was instantly transferred to the Federal Bailiffs Service. LTD got no notice regarding this decision. The Federal Bailiffs Service instantly increased the penalty to 700 USD. This decision was motivated by the supposed debt collection costs.
- A second example is much more flagrant. An IT company operating in Moscow with a monthly turnover of 15,000-20,000 USD and a staff of 25-30 people signed a 50,000 USD contract to create an analytical software package for one of Russia’s state structures. The contract was executed in time. The work was accepted without complaints and objections. One month after the execution of the contract, the revenue authority initiated an inspection. The campaign provided the entire package of documents. Authorities citing a new regulatory document stated that the company had not provided an appendix to the work completion certificate. This appendix had to be issued by the client. To this requirement, the company stated that it needed a short period of time to inform the client about this new requirement. The revenue authority rejected this request and imposed on the company a penalty of 200,000 USD. The IT company went bankrupt and ceased its work.
Another factor that affected the state of the Russian economy in the first half of 2019 was a sharp deterioration in the economic situation in Western Europe and Turkey. This led to a drop in Russian gas exports to these consumers. If we take into account that in the structure of Russia’s GDP, gas supplies are a part of the wholesale trade and transport, this fall presumably was around 10%.
The most significant fall of the wholesale trade was recorded in January-March. Its turnover, according to Rosstat, decreased by 9.3% year-on-year. In addition, a decrease in economic dynamics is facilitated by a reduction in oil production within the OPEC + deal. In the second half of 2018, the recovery in oil production and rising energy prices were among the factors accelerating the economy.
The seerious problem is a huge outflow of capital. The Central Bank in its bulletin “What are the trends talking about”: 8.8 billion USD of direct foreign investment came to Russia in the end of 2018. This figure is more than 3 times less than a year earlier (28.6 billion USD). It is the minimum figure for last 10 years. Another point is that a large part of foreign investments to Russia is in fact the re-investment capital previously withdrawn from the economy. These funds are returned back through offshore jurisdictions such as the Netherlands. As a general rule, these funds belong to oligarchs.
All these problems make it impossible to fulfill the instructions and tasks received by the government from President Vladimir Putin in December 2016:
“I instruct the government, with the participation of leading business associations, to develop a substantive action plan by May 2025, the implementation of which will make it possible to reach world economic growth rates in 2019–2020, which means strengthening Russia’s position in the global economy “.
Later, the same goal was declared in Putin’s “May decrees”.
“The Government of the Russian Federation shall ensure the achievement of the following national development goals of the Russian Federation for the period up to 2024: […] Russian Federation should join the group of the world’s five largest economies, ensure economic growth rates above the world’s level while keeping macroeconomic stability, including inflation at no more than 4%.”
Orders and high-sounding words do not change the situation. Now it is obvious that these tasks cannot be completed. However, there are no staff decisions or changes in the Russian economic agenda observed. Preconditions for such changes are not observed also. Officials of the economic bloc believe that they are doing everything correctly, and the ongoing processes are in no way connected with their actions.
For comparison, it is useful to get a look at actions of US President Donald Trump and officials from the economic bloc of his administration. Some accuse Trump of providing the inconsistent and wrong economic policy. Nonetheless, a strict protectionism, especially in relation to the real sector of the US national economy, is a key feature of this policy.
The Trump administration consistently promotes interests of US business around the world and creates comfortable conditions for key industry enterprises. The Trump administration economic policy includes both strict protectionism and mercantilism. The results are obvious.
Earlier we noted that the Primakov-Maslyukov government in Russia’s 1990s undertook the same measures.
Returning to the current situation, actions of the modern Russian bureaucratic system fuel the crisis. One gets the feeling that measures to stimulate the economy proposed by the government are not aimed at the goal. Or government officials do not want to execute even them. A closer look at reporting sessions of the Russian government shows that officials are not able or do not want to solve even minor tactical issues. They try to shift the responsibility onto somebody else and justify delays with the need of numerous interdepartmental approvals. The number of unexecuted tasks and instructions increases daily. The Russian political system is heading towards a collapse that could be aggravated by the economic crisis.
