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What hit the Russian economy hardest was rapidly falling oil prices, which considerably reduced the country’s revenue from oil exports.
What hit the Russian economy hardest was rapidly falling oil prices, which considerably reduced the country’s revenue from oil exports.

Constant Sanctions Hampering Russia’s Growth Prospects

Russia has seen its purchasing power decrease continuously for the past four years after the world’s number 11 economy was hit with western sanctions

Constant Sanctions Hampering Russia’s Growth Prospects

Russia’s economy is the world’s eleventh-largest. Following a period of recession, it managed to return to growth last year despite Western sanctions widening. But can the country continue on the road of recovery?

Russian President Vladimir Putin, widely expected to secure a fourth term in the March 18 polls, oversaw a period of economic growth during his first two terms in office (2000-2008), boosting incomes across the country, DW reported.

Those years were perceived as a welcome change from the financial instability of the 1990s, when many Russians lost their savings. But Putin’s third term in the Kremlin, which began in 2012, saw a decline in ordinary people’s quality of life.

Russia has seen its purchasing power decrease continuously for the past four years after the world’s number 11 economy was hit with Western sanctions meant to punish Moscow for its annexation of Crimea and the Kremlin’s role in the ongoing Ukraine conflict.

But the far-reaching sanctions were not the only, and indeed not the most important, factor behind the decline. What hit the Russian economy hardest was rapidly falling oil prices, which considerably reduced the country’s revenue from oil exports.

As a result, Russia’s poverty rate, which had fallen from 29% in 2000 to 10.7% in 2012, inched back up to 13.5% in 2016, according to the most recent annual figures.

  A Land of Contrasts

Rising poverty rates have contributed to the stark contrast between the poor and the rich in the country.

According to a study by Credit Suisse, the most affluent 10% of Russians control 77% of the wealth, placing the country on the same level of inequality as the United States in a ranking of developed nations.

Although the Russian economy returned to growth in 2017 seeing GDP expand by 1.5%, medium-term forecasts don’t exceed 1 to 2% growth per year, far from the leaps of the early 2000s. Analysts agree that the slower expansion expected in the years ahead will not be enough to tangibly improve people’s lives or increase funding in domestic areas like education and healthcare.

In the run-up to the polls, President Vladimir Putin has promised increased investments in infrastructure and housing. Yet he has remained vague about the source for such funding, and he has yet to mention future reforms that would address the country’s structural problems.

Putin did make clear, though, that Moscow would bend over backward to reduce its economic dependence on the West, especially as sanctions look unlikely to be removed any time soon.

  Divergent Views

Renaissance Capital analyst Oleg Kouzmin told AFP the lender’s policy has helped avoid worse outcomes. “While standards of living are still lower than they were, the economy as a whole has de-risked substantially,” Kouzmin insisted, pointing to lower capital flight and a cleanup of Russia’s banking sector.

Economists are divided over Russia’s current ability to strengthen the economic reform process. They argue the Kremlin could take a number of steps to improve the outlook, including privatizing state companies and dramatically raising the retirement age.

Efforts to this end have so far been stymied by policy disagreements between loosely-aligned groups of economic liberals in Moscow.

Ongoing challenges could derail the modest recovery, which according to the World Bank is largely supported by increased oil prices and positive global economic growth.

According to Mark Goyhman, an analyst with TeleTrade company, the economy improved in 2017 because of higher oil prices and because it was starting from a lower base after the recession.

Meanwhile, voters want Putin to make changes to the economy. With little real opposition, he is expected to easily secure a fourth presidential term so there is not much incentive to present a concrete plan. And with so much disagreement among officials it would be a challenge to put one together.

Chris Weafer, a senior partner at economic and political consultancy Macro Advisory, said the Kremlin had created a “golden monster” of expectations that living standards would keep rising.

“We are at the point where people are aware that their lifestyle has deteriorated, or the prospects for improvement aren’t great,” he said.

“They want the government to do something about it, or have moved to demanding the government do something about it. The government is listening but nobody knows what to do.”

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