A round of punitive sanctions designed to cripple the economy. A collapse in the price of its key commodity. A currency in freefall and a central bank hiking rates to emergency levels while a corrupt, authoritarian government embarks on foreign adventures at potentially huge expense. For the whole of 2014, the Russian economy was the most toxic in the world, with one calamity coming hard after another.
But here is something nobody expected. In the first quarter of this year, Russia was doing a bit better than anyone could have forecast. We learned last week that the economy managed to grow by 0.4% in the latest quarter, compared to the zero growth or the outright recession that most economists had pencilled in. The rubleUSDRUB, +0.02% is the best-performing currency of the last three months. Even the Moscow stock index has started to recover.
In reality, sanctions and a fall in the oil price might have been the best thing to have happened to Russia since the invention of double-glazing. Why? Because the problem for a country rich in resources and well-educated, creative people has been an over-reliance on energy, and a tight-knit kleptocracy that distributes the wealth it generates. It has failed to create its own industrial economy.
But with sanctions keeping out imports, and the oil wealth drying up, it might be forced to do so — and paradoxically that might lead to a stronger recovery.
Last year was the worst year for the Russian economy since the ruble crisis of the 1990s.
Vladimir Putin’s reckless annexation of the Crimea and adventures in the Ukraine led to a tough round of sanctions from Western Europe and the United States. The web of businesses around the president were especially targeted, and the sanctions made it very hard for Russian companies to roll over their debts.
A 50% drop in the oil price CLK5, -1.93% , on which Russian depends for most of its exports and tax revenues, led to a run on the currency. In December last year, the central bank pushed interest rates all the way up to 17%. Over the first two weeks of December, the RTS index lost 30% of its value.
And yet economic sanctions are probably the least-effective foreign-policy weapon ever created.
They were imposed for years on countries such as South Africa, Iraq, Iran or North Korea, without making much difference to the people in charge — when change did come to those countries, it was a long, long time after sanctions began, and for different reasons. They are mainly designed to make political leaders sound tough, without actually doing anything. That has been true in plenty of other countries, and it is turning out to be true in Russia as well.
The predictions of collapse have turned out to be wide of the mark.
Putin is still in power, and still in possession of Crimea. Nor is there much sign of anything more than short-term damage. A 0.4% quarterly growth rate is not fantastic, but it is better than France, and roughly the same as Germany or Japan. Neither country is facing imminent collapse. True, the forecasts are for gross domestic product to fall for this year — the IMF suggest it will contract by more than 3% — but those may well turn out to wrong as well. What is certainly true is that the economy has not been devastated.
The interesting question, however, is whether it might actually be strengthened. That might sound odd. But the main problem for the Russian economy over the past decade was an over-reliance on oil revenues, and a state-led kleptocracy, which stifled the emergence of a productive domestic economy.
The contrast with Poland, another big, former Communist country, which inherited lots of useless, uncompetitive heavy industries from that era, is striking. While Poland, which only has a bit of coal by way of natural resources, has gradually transformed itself into an increasingly vibrant, modern economy, Russia had remained stuck in time warp.
There are, of course, lots of reasons for that. It suffered under Communism for far longer, and it is not a member of the European Union (although the trade benefits of that are exaggerated — most countries have access to global markets these days).
Even so, the big reason might well be what plenty of analysts over the years have described as “the curse of oil.” The black stuff generates lots of easy money, and by filling the state coffers with cash, it makes it relatively easy for a corrupt, authoritarian regime to entrench itself in power. That has been seen in countries ranging from Saudi Arabia, to Saddam Hussein’s Iraq, and Hugo Chavez’s Venezuela. Putin’s Russia was no different.
Without oil, Russia will have to develop its own industries. And with sanctions slowing down imports, there will be space for entrepreneurs to move into. The state will become less powerful, because it will have lower oil revenues, and so will the oligarchs. Russia will have the opportunity to gradually replace crony capitalism with competitive capitalism. In the medium term, that can only be for the better.
Of course, just because it might happen does not mean that it will. You have to go back more than a century before Russia looked like anything more than a functioning emerging economy. Arguably, it never has. At the same time, however, it would be wrong to rule it out. Keep in mind that this is one of the best educated of the emerging markets, with plenty of reliable infrastructure, low taxes and low debts, and a cheap, skilled workforce.
If Warsaw and Prague can rise to Western European standards of living in less than two decades, there is no necessary reason why Moscow and St. Petersburg can’t do the same.
Keep in mind as well that this is one of the cheapest markets in the world. The Moscow index trades on a price-to-earnings ratio of 6.7, less even than Greece. For an economy that is solvent, and growing at 0.4%, that is a bargain. Sanctions and a collapsing oil price were meant to torpedo Russia — but they may end up doing it a favor.
Zhejiang Yaang Pipe Industry Co., Limited (www.yaang.com)