Cutting Off Your Nose…
Such a hit to the economy can potentially raise the risk of
civic unrest. Yes, Putin’s popularity is still high at the moment, but the
question is whether that popularity will continue over a long period of
economic malaise. Despite the fact that U.S. and European sanctions were
narrowly focused on elites close to Putin, in an action that resembled the
proverbial “cutting off your nose to spite your face,” in 2014 Russia
retaliated with its own sanctions
on imports of European and American goods, particularly food stuffs. Prior to these
retaliatory sanctions, Russia had imported 43 billion dollars-worth of food
products from Europe and the U.S.
The sanctions decreased such imports in 2014, but bans had
not completely blocked the path for the European and American goods. Many continued
to pass through Belarus and other Former Soviet states into the market. Recently,
as a show of commitment to upholding the sanctions, the Russian government burned
contraband goods in accordance with presidential decree, sparking anger inside
and outside the country.
The biggest threat to Putin’s power, however, may not be
from civil unrest, but rather from among the elite itself. Putin’s own rise to
power may provide some insight here. The 1998 Russian financial
crisis had hit the country’s economy hard, causing it to contract 5.3%, the
collapse of the ruble and the country’s default on treasury bills. Boris
Yeltsin’s inability to manage the crisis, and his general weakness led some in
the elite to recognize the need to replace him. Putin, who had been promoted
from Yeltsin’s head of Security Council to prime minister in August 1999, was appointed
president until official elections could be held.
Russia could see a similar situation occur with Putin if
economic hardships continue for an extended period of time.
We All Fall Down
Russia is not the only former Soviet state being hit by the
current crisis, and Putin’s certainly isn’t the only authoritarian government
put at risk by it. Regardless of the independence gained after the fall of the
Soviet Union, the Eurasian states are still highly connected and dependent on
Russia for exporting raw materials and as an outlet for excess labor. The labor
stop-gap is very important for many of the countries whose own economies—due to
inefficiencies in the systems—are not able manage their unemployment rate.
In Kyrgyzstan and Tajikistan remittances make up 32 and 42
percent of GDP respectively. And the decline in the Russian
economy—particularly the labor market—puts extreme pressure on these countries
as their citizens are returning home without jobs. One article notes that the drop in
remittances to Central Asia could be estimated at somewhere around 15 percent.
We may be seeing the
effects of the downturn manifest in the sphere of politics. Armenia,
being one of the countries that are more vulnerable to risk, due to its state
of war with Azerbaijan, strained relationship with Turkey and its relative lack
of natural resources, has already seen civic unrest in the country over the
government’s decision to raise energy prices.
It’s the Exchange Rate, Stupid
Resource rich countries like Azerbaijan and Kazakhstan have fared
slightly better, but are beginning to see the limits of what their oil wealth can
do. Unable to continue to support its currency’s managed float, Kazakhstan freely floated the tenge on August 20, which resulted in a 26.2 percent depreciation
against the dollar to 255.26.
Azerbaijan,
though not resorting to freely floating its currency, determined that it was
unable to maintain the manat’s previous exchange rate and devalued the currency
in February. Pressure in the society has grown since then with concerns over
rising prices. And this concern was significantly increased with the fall of
the Kazakhstan tenge, which prompted some Azerbaijanis to exchange their manats
for dollars in expectation of a similar fate to the country’s currency. The
situation also prompted Azerbaijan’s Trend news
agency to question whether the depreciation of the tenge would affect
Azerbaijan’s economy, and others
to speculate about how long the Azerbaijan government would be able to maintain
even the current exchange rate.
Each of these suggests a rising uncertainty in the region
about the future of the countries’ economies and potentially the political
status quo.
Better Late Than Never?
Perhaps it’s a little too late to repeat the international
community’s mantra of “diversify, diversify, diversify.” Even though Russia
claimed that sanctions enabled the country to focus on developing its internal production,
it will take time for the governments of the region to make any significant
changes, particularly since endemic corruption and an appearance of political,
economic and legislative instability serve to deter foreign investors and
discourage local small and medium business.
Recent crackdowns on political opposition further suggest an
unstable environment
As these countries, lose foreign investment and their
ability to export natural resources for high prices, they find themselves at
greater risk. The long-term forecast for low
oil prices could produce a number of negative effects over the coming
years—economic and political instability being some of the most significant.
There might be a chance to start anew with the expansion of
other sectors of the countries’ economies. After all, the lower exchange rates
make goods more affordable on the international market and suggest less risk of
suffering Dutch disease. However, this won’t be a quick fix.
Economies that were highly centered on oil and gas revenues
(Kazakhstan, Azerbaijan, Turkmenistan and Russia) cannot quickly redevelop
Soviet industries that have languished for years. And reinvigorating these old
industries or developing new ones will take significant investment—investment
that is currently not coming from external sources and might not find
sufficient cash infusion from governmental “rainy day funds.”
The countries in the region without significant petroleum
resources are not in much better situations, since many of them relied upon
remittances from resource rich countries.
Most likely, what we will see is a rough few years with
increased conflicts between the populace and the government—even if only on the
small scale—and infighting among elites, who seek to gain access to a shrinking
pool of government resources.
There is still hope, however, that the Former Soviet States
will use this chance to take a hard look at the systems currently in place, and
despite the fact that changes may have negative repercussions on the regimes in
power, will make the hard choices that will ensure sustainability in the
long-term.
