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Russia’s Slowing, Sinking Economy

Ian Bremmer, Ph.D

(LinkedIn Pulse) – You wouldn’t know it from Vladimir Putin’s swagger, but the Russian economy is in dire straits. The country has $360 billion in cash reserves, but unless things change, that cash won’t last. These five stats explain why Russia’s economy is headed for trouble. This piece has been repurposed from my column in TIME.

1. Lack of Diversification

Small and medium-sized enterprises (SMEs) play critical roles in a well-balanced economy. That’s because SMEs spur innovation and new job growth, and they’re nimble enough to adapt to evolving consumer trends. The EU is stagnant, but its SMEs still contribute 40 percent of their respective countries’ GDP. In Russia, that number is closer to 15 percent.

Moscow doesn’t seem particularly eager to reverse this trend. Between 2008 and 2012, Russia’s private sector lost 300,000 jobs while the state added 1.1 million workers to its payroll. Political elites in Moscow still believe economic decisions are better determined by the Kremlin than by a free market.

2. Productivity and Corruption Problems

Russia’s structural problems go even deeper. Russian workers aren’t particularly productive. The average Russian worker contributes $25.90 per hour worked to Russia’s GDP. To put that in perspective, the average Greek worker adds $36.20 per hour of work to the Greek economy. You know you’re in trouble when you’re trailing Greece in productivity.

Another concern is rampant corruption, a defining feature of the Russian economy for decades. It’s estimated that corruption costs the country between $300 and $500 billion each year. In its most recent report, Freedom House gave Russia a 6.75 on its corruption scale; 7 is “most corrupt.” It’s no surprise then that well-educated Russians are fleeing the country in droves. Between 2012 and 2013, more than 300,000 people left Russia for better opportunities abroad. When you lose your most talented citizens, it’s hard to draw them back.

3. At the Mercy of Oil

But Russia’s most pressing concern is the falling price of oil. When 50% of government revenues come from oil and gas sales, that’s to be expected. About a year ago, a barrel of Brent oil cost more than $100. Today, it’s selling for less than $50. And oil prices are set to decline further as Iran escapes sanctions and ramps up production; Tehran will probably bring a million new barrels a day to world markets by the end of 2016. Just how dependent is Russia’s economy on oil? According to the BBC, Russia loses about $2 billion in potential sales for each dollar the price of oil drops.

4. At the Mercy of Sanctions

This dependence on oil—40 percent of Russia’s state budget comes from crude alone—also means that Russia will become more vulnerable to US and EU sanctions over time. That’s because Russia has already tapped most of its easily-accessible oil reserves, and now needs to start extracting from trickier shale and deep-water deposits. Problem is, only Western firms currently possess the technology to do that, and they aren’t selling it to Moscow. Russia had been eyeing these reserves for years—these sources could account for more than 15% of the world’s undiscovered oil reserves and 30% of its undiscovered gas. But for now they remain trapped underground. The IMF believes sanctions could cost Russia 9 percent of its GDP over the next few years.   

5. No Incentive to Change

And here’s the kicker—despite all the problems plaguing its economy, Russians don’t want Moscow to change course. Some 73 percent of Russians are unhappy with their economy, but 7 in 10 approve of the way Putin is handling it. How is that possible? About 90 percent of Russians get their news from television channels controlled by the Kremlin. The stories they see and hear on these channels are designed to persuade them that their country is under assault from the West and that their troubles should be a point of national pride.

But it’s not just the propaganda. Putin has shown time and time again that he is nothing if not a deft politician. The man gives the people what they want, and Russians want to take pride in their country. Today, 63 percent of Russians have a very favorable view of their country, up from 29 percent in 2013 and 51 percent in 2014. By framing sanctions and the invasion of Ukraine as a clash between Russia and the West, Putin has successfully managed to blame others for the failings of the Russian economy while allowing Russians to see themselves in a new way.

And that’s why Russia’s problems are likely to get much worse.

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