Troubled Times: Stagnation, Sanctions and the Prospects for Economic Reform in Russia

Russia’s economic performance has been weakening for several years. The simultaneous fall in the price of oil and the Ukraine crisis have merely exacerbated pre-existing tendencies.

The combination of stagnant GDP growth and lower oil prices threatens to reduce federal government revenues, but spending commitments are likely to prove hard to trim.

Direct government spending on social welfare, expansion of the state, and a large-scale rearmament programme have put increasing weight on the public finances and compromised longer-term fiscal stability. The strong state of finances at the federal level conceals a marked deterioration in the finances of local governments across the country.

Russia’s political economy is inefficient in terms of allocating resources to the most productive sectors. However, the system has proven to be politically and socially efficient. The economy requires significant reform if Russia is to enjoy growth and prosperity in the future. Areas for improvement include competition, financial sector reform to broaden access to capital, and the easing of constraints on small and medium-sized enterprises’ development.

The longer EU and US sanctions persist, the more the market-oriented policy elite is likely to be marginalized as economic policies consistent with a more statist and introverted approach take hold. The diversion of resources to domestic defence, energy or manufacturing enterprises would likely strengthen existing constituencies that would benefit from sanctions.