With or without sanctions, Russia’s economy is declining

01 September 2014

In a monthly Operational Environment Watch commentary, EFD Fellow Anna Borshchevskaya discusses the declining state of Russia's economy -- a situation which is not set to change in the near future.

As the standoff between Russia and the West over Ukraine continues, the West imposed additional sanctions on Russia. In this context, a discussion about the state of the Russian economy is warranted.

Russia’s economy has been declining in recent years, with little to indicate that this trend will change unless the Kremlin revises its policies. The following excerpts from the Russian-language press express a pessimistic view, which only supports the argument that Russia’s economy is, indeed, in decline and that there is little hope for change in the near future.

The first excerpt, by Tigran Mordoryan, from (Newspaper) says the level of monetization of the Russian economy is shamefully low. Monetization refers to the ratio of the so-called “broad” money (money supply in its most inclusive terms) to nominal GDP. The degree of an economy’s monetization holds important implications for economic growth: the higher the monetization, the better off the economy.

Monetary policy, which is typically carried out by the central bank, is what affects monetization. As Mordoryan suggests, in simplest terms the Russian economy has very little money because the Russian Central Bank restricts the money supply. It does so out of fear that increasing the money supply will be inflationary. Yet in Russia inflation has little to do with the money supply, according to Mordoryan.

Russia’s economic woes, however, go deeper. A recent study by Russia’s own Academy of Sciences’ Sociology Institute (ISRAS) found that the government employs the majority of Russia’s middle class, which is Russian President Putin’s support base. To keep these individuals happy, the government pays them inflated salaries and provides other benefits. The Russian government keeps accumulating higher debts to accomplish this. In the context of an already corrupt and stagnant economy resistant to reform, this policy is unsustainable. Once this support base begins to feel the effects of Russia’s economic decline, it is less likely to support Putin.

While economists and policy analysts debate the effects of Western sanctions on Russia, one thing is clear: even without sanctions, Russia’s economy is going downhill. “Is it possible to relax?” asks the author of the second excerpt from, “Only in one case: if you live in the today, and the absence of the threat of default in six months is your main demand from the future. In actuality, the Russian economy has been showing growth that verges on statistical error.” In this context, it is certainly possible to conclude that, even if Western sanctions have not made a serious impact as of yet, they do matter. Beyond sanctions, Russia’s economy is important to watch because its growth and decline are intrinsically connected to the public’s ultimate support for Putin.

This article originally appeared here.