THE CURRENT ECONOMIC STATE OF PLAY IN RUSSIA BY ANDERS ÅSLUND In December 2014, the Russian economy entered a crisis state that may be described as a perfect storm.1 This conundrum has at least three major causes: state and crony capitalism, the sharp fall in the price of oil and Western financial sanctions. Even if the real panic ended in January 2015, all economic data look poor. The natural outcome is a sharp contraction in the Russian economy this year. The Russian government is reacting to the crisis, but not very well. Officials will not abandon the current policy framework, even though it offers few effective options. The government has adopted an anti-crisis program, but its measures are of limited consequence and crisis management is not very apt. Therefore, government policies are not likely to resolve the crisis. There is a chance to steer Russia away from the path toward economic disaster, but the kremlin is likely to balk at the necessary measures. After exploring these problems, this paper considers what the US and European governments can and should do in this situation. How can they act, and what impact are their alternative actions likely to have? The overall conclusion is that the current financial sanctions have great effect, and that it is difficult to see any major avenues of new cooperation between Russia and the West until its military aggression has ceased. The Current State of the Russian Economy In the 1990s, Russia went through a difficult transition. Officially, GDP fell by half, which is probably an exaggeration, but the output fall was certainly substantial. Still, a transformation to a market economy took place. Prices and markets were liberalized, and two-thirds of the economy was privatized. The financial crash of 1998 cleansed the economy of subsidies and forced the government to balance the budget.2 The decade of 1999–2008 offered average annual economic growth of no less than 7 percent.3 In US dollar terms, the GDP surged from merely $200 billion in 1999 to $1.9 trillion in 2008. Three major forces brought about this success. The first was the economic transformation of the 1990s. The 1998 crash brought about major cuts in public
expenditures, both leveling the playing field and bringing the budget into surplus from 2000 onward. Second, after the long depression, Russia had plenty of free capacity: human capital, raw materials and factories. Third, from 2003 until 2008 world oil prices rose sharply, but then they leveled off. The Russian public, however, tends to relate these economic successes to President Vladimir Putin’s coming to power in 2000, although that happened almost a year after the strong growth had started. Therefore, domestic popular understanding of what caused the high growth is distorted. This period was the best time ever for Russia’s economy, and the conditions that caused it are unlikely to return. Since 2008, Russian GDP has lingered around $2 trillion. In response to the global liquidity freeze that ensued in the wake of the Lehman Brothers bankruptcy in September 2008, Russia in 2009