Bronwyn Maddox 8 Feb 2018 09:02am

Oil dependance to stain Russian election

Ahead of the presidential elections, there has been speculation that President Putin has been presiding over a recovery in GDP and wages. Ministers suggested Russia was finally breaking free from the old dependence on oil and gas. The latest figures suggest otherwise

For months, as people began to focus on Russia’s presidential election on 18 March, you could hear a novel suggestion. President Vladimir Putin had managed to steer Russia onto a shiny economic path and was presiding over something of a triumph, some analysts said. Rising growth – not just from oil – and rising wages during much of 2017 were offered up as evidence to confound those who argued that his assertion of Russia’s influence in Ukraine and elsewhere had been a deliberate attempt to distract the public from the economic gloom at home.

Or so the argument went, in an excited way, for much of last year. But although the recent picture offers intriguing glimpses of how a new Russia could emerge, a sudden contraction of the economy in November shocked markets, in figures released in mid-January. Most signs are that the Russian economy continues to be dogged by its old weaknesses: an overwhelming dependence on oil and gas, difficulty in diversifying into new technology and higher added value activities, and a shrinking population beset by ill health.

Signs of an unexpectedly cheerful story built up during 2017. In the previous two years, Russia had suffered recession, driven by the global slump in commodity prices and the effects of international sanctions for Russia’s actions in Ukraine. In October, the economy grew by 1% and ministers predicted growth for the whole of the year would be at least 2.2%.

Ministers had begun to talk about their hopes of an economy reborn, liberated by the crash in energy prices to develop other sectors, just as Russia has tried for years to do. Indeed, throughout the year, retail, construction and agriculture did well. Household spending took time to recover after the financial crisis, but was up by 4.3% in the second quarter on a year-on-year basis. Inflation is low, real wages are increasing and consumer confidence along with it.

But GDP figures for November, despite analysts’ predictions of a 1.5% expansion, finally revealed a contraction of 0.3% compared to the same month the previous year. One of the prime culprits was the industrial sector, where output shrank by 3.6%. Ministers attributed it to the effect of international agreements – to which Russia was party – which curbed oil production in order to boost the price. Overall, Russia’s growth in 2017 came in at a more subdued 1.4-1.8%, they said.

This is a mixed picture. But it is still one dominated by oil and gas. Russia produces about 12% of the world’s oil and is the largest exporter of natural gas – as European neighbours that depend on it are well aware. Yet for all the extent that it makes itself felt in geopolitics, its economy is only a seventh the size of China’s. It has failed to innovate even in its main industries. The US, meanwhile, in its shale gas revolution, rapidly became expert in technologies such as seismic imaging and horizontal drilling.

The threat facing Russia is that pressure on oil and gas prices will continue as the world finds alternatives, and that the countries that do best out of the energy industry will be those that invest in technology and the people who invent it. But the steady decline of the Russian population, the preoccupation with the giant heavy industry of the past, and the mobility of its best and brightest technicians, many of whom emigrate, will make that hard.

Putin has used many tactics to keep his hold on public support, from intervention in foreign conflicts that appears to restore Russia’s old influence, to bare-chested self-portraits, not to mention oppression of those who oppose him. Briefly, after years of sharp recession, it appeared that economic recovery might have given him another tool.

But it doesn’t look so shiny now; the old problems have reasserted themselves. Inconvenient that they have done so just ahead of the presidential elections.

Bronwen Maddox is director of the Institute for Government and a commentator and broadcaster