Putin Overestimates Russia’s Economic Strength
Putin Overestimates Russia’s Economic Strength
Russia's economy still dependent on raw materials

In any kind of conflict, it’s always good to hear the other side. German TV station ARD gave Russian President Vladimir Putin 30 minutes of airtime Sunday. 

Apart from defending Russia’s geopolitical activities, he also tried to convey Russia’s economic strength. While Putin is a confident and powerful man, his faith in the Russian economy is misguided. 

Russia Growth 

Putin claims Russia’s growth will rebound from around 0.5 percent growth in 2014 to 1.2 percent in 2015 and 2.3 in 2016. These predictions will be as correct as the predictions of the International Monetary Fund for Greece during the eurocrisis. 

Even before sanctions hit in 2014, growth started faltering, hitting a high of 4.8 percent in the first quarter of 2012. This was at the same time that Brent crude oil hit a high of $125 per barrel and perfectly illustrates the complete and utter dependence of Russia on energy exports. 

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Energy Dependence 

In 2013, 68 percent of all exports were energy related and a good chunk of the rest is other commodities. In addition, according to its own Ministry of Finance, Russia needs oil prices to stay at $96 for its budget to work out. It now trades at $80. 

Putin wants us to believe that sanctions might change this structural problem: “You can live very comfortably, if you only sell [oil and gas], if we only need to think about to produce more oil and gas and import the rest. But this age is already partially over.”

Judging from the latest GDP figures and projections from Russia’s own central bank, it is not. The Central Bank of Russia expects growth of only 0.3 percent for 2014 and a nice round zero for 2015.

Crude Oil (petroleum); Dated Brent - Daily Price - Commodity Prices - Price Charts, Data, and News - IndexMundi

Innovation 

Communist countries do not have a good track record of innovation and Russia is still suffering from this legacy. Because communist systems penalize risk-taking and emphasize indoctrination over education, they chronically lack innovation.

This is still true in Russia today, which depends on Western technology to access its more remote energy fields. In addition, because of the sanctions and the falling ruble, Russia is experiencing massive capital flight and capital is another important factor in building productive capacity. 

Watch exclusive interview with President Putin on Ukraine crisis:

 

Counterbalance 

While Russia has failed to diversify its economy in good times, it is hard to see how it will do so in bad times. While the recent gas deals with China diversify its customer base, it is still gas the country is exporting. 

On the other hand, the gas supply agreement with China allows Russia to reduce exports to Europe at its whim. Europe and especially Ukraine still import most of their gas from Russia. 

Even though Putin did not mention this factor in the interview, when it comes to gas, Russia more than ever, has the upper hand. Even if the United States wanted to come to the rescue and ship its cheap gas to Europe, Russia could do to gas what Saudi Arabia is doing now to the oil price.

As soon as the first liquefied natural gas terminal in the United States starts construction, Russia will flood the market with gas and depress the price, rendering these projects economically unprofitable. 

Yes, Putin overestimates the economic strength of his economy. However, this doesn’t mean Europe and the West should underestimate what Russia can do to harm them. 

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