Russia’s Downfall: The Worst Economic Crisis Since the Collapse of the USSR

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Executive summary

December 2015

Vladimir Milov

This working paper looks at the recent trends in the Russian economy and argues against the official view of the Russian authorities that the worst phase of the Russian economic crisis is over. The paper highlights the main driving factor behind the current crisis, the sharp decline of domestic consumption, unprecedented in the past twenty years, and argues that Western sanctions have had a great role to play in these developments

Keywords

Russia – Economy – Crisis – Domestic demand – Inflation – Real wages – Sanctions

Introduction

Russian authorities have been constantly claiming during the past several months that the economic crisis in Russia has ‘bottomed out’ (or ‘passed its peak’,1 as recently claimed by President Vladimir Putin—whichever term one prefers). However, a brief analysis of the raw data from the Russian economy and the most realistic patterns of development of the situation suggests that the crisis is not only far from over—it is actually only in the beginning phase, meaning that the economy has every chance of being further dragged into a strong downward spiral. This paper will consider several important reasons why this is so, including the impact of Western sanctions and the consequent depreciation of the rouble; the decline in investment in and the inefficiencies of Russia’s state-led economic system; and especially the significant, lasting and progressive collapse of consumer purchasing power, which is the main characteristic of the current crisis and is occurring at levels unprecedented since the early 1990s.

This final factor differs significantly from previous post-Soviet economic crises in Russia. During the period of the 1998 default, the collapse in real incomes was serious but short-lived and very much V-shaped.2 In addition, few individuals kept their savings in roubles (most held them in hard currency due to the permanent instability of the rouble), which is why consumer power was only damaged to a limited extent. Later, during the crisis of 2008–9, despite a sharp plunge in GDP and output, real income  growth was still positive, although it had decreased significantly compared to the average 12% growth per year in the period 2000–7.

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