Russia’s Gloomy Prospects

MOSCOW – Russia’s economic prospects are looking increasingly grim. Last year, plunging energy prices and international sanctions contributed to a 3.7% fall in GDP. Real wages in the country plummeted by around 10%. This year, the negative trend is expected to continue. In 2016, public spending on education and health care is slated to decline by 8%.

The Kremlin’s desultory attempts at diversifying the Russian economy have largely failed. Labor productivity remains chronically low, and investment – foreign and domestic – has dried up. Sadly, a turnaround is unlikely. Under current conditions, neither higher energy prices nor the lifting of sanctions would likely be enough to reinvigorate the country’s moribund economy.

Over the past decade, Russian President Vladimir Putin’s regime has degraded the institutions that are essential to the functioning of a modern economy. The judicial system, for example, is largely in tatters. And above all, the ownership and governance of key assets and resources are almost all in state hands. Indeed, in 2012, the IMF calculated that the consolidated public sector accounted for nearly 70% of Russia’s GDP. Though comparably detailed estimates are not available for earlier years, in the early 2000s, this share was around 30-40%.

The expansion of the state’s control of the Russian economy has been driven by a proliferation of state-owned corporations, whose gross liabilities now amount to 150% of GDP. Firms in the energy, infrastructure, banking, and armaments sectors have been nationalized. In 2014, publicly owned or controlled entities accounted for nearly 70% of the turnover and 85% of employment among Russia’s top 15 companies. For the largest 100 companies, these shares were 54% and 68%, respectively. The consolidated public sector now accounts for one third of total employment.