Despite encouraging signs, Russian economists and politicians continue to express only cautious optimism about the future of the economy.

In 2017, Russia might be forced to recognize itself as strong politically, but comparably weak and poor economically, with a destitute population and undiversified economy. Photo: RIA Novosti

Despite many difficulties, the Russian authorities were relatively successful in responding to the 2014-2015 crisis, alleviating its burden on the population and eventually emerging from the economic recession in 2016. At least, this is how Russian and foreign experts, economists and politicians assessed the situation during the Jan. 12-14 Gaidar Economic Forum, one of the nation’s key platforms to address major economic, financial and political challenges.

However, the crisis is far from over. One positive sign is that some representatives of the government are aware of this fact. At the forum, Russian Prime Minister Dmitry Medvedev warned against the risks of a long-standing recession, which are still high. The only way to hedge these risks is to conduct sweeping structural reforms, which would shift investment from large-scale natural resources projects into infrastructure and human capital.

“The fact that Russia overcame the recession doesn’t necessarily mean the problems are resolved,” Medvedev said during the Gaidar Forum. He pointed out that the key challenges are Russia’s technological backwardness, the commodity-based economy and the enormous role of the government in it.  

Likewise, Oleg Buklemishev, a professor at Lomonosov Moscow State University and a former assistant to the finance minister and the prime minister, expresses pessimism despite the fact that “the current statistics increasingly confirm the view that the recession is formally over.”

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“That doesn't mean that it was irreversibly overcome,” he told Russia Direct. “There could be economic growth in 2017, but this growth will be more of a statistical phenomenon rather than something real. According to the government's forecast, investment growth will not resume in 2017, and it means that future economic advance is not guaranteed even in the longer term.”

Christopher Hartwell, the president of the Warsaw-based Center for Social and Economic Research (CASE), is even more pessimistic about the future of Russia’s economy than his Russian counterpart. Although he agrees with Medvedev’s repeated mantra about the urgent need for drastic structural economic reforms, “private investment, the driver of the economy, isn’t going to rebound any time soon unfortunately,” he told Russia Direct.

Sounding the trumpet about defeating the recession would be like Napoleon claiming he conquered Russia once he reached Smolensk,” he said. “No, the battle is nowhere near done and any ‘victory’ now is Pyrrhic.”

“The Russian economy is so intimately tied to public spending that any cut-off of said spending leads to huge ripple effects throughout the economy,” he added. “This is why the price of oil is so important. Now, the tentacles of the Russian state in every economic activity is exactly why we’ll never again see growth like we did in the early 2000s – there are just too many hands on business for it to grow. So what you’re going to see is slow growth, because you can’t quite strangle entrepreneurship no matter how hard you try. But any growth that occurs in 2017 is going to be a result of public spending.”

Will the Kremlin be able to fulfill its social commitments?

At the same time, some participants of the forum questioned the Kremlin’s capability to meet the expectations of its citizens and fulfill its social commitment over the long term unless sweeping structural reforms are undertaken. Today Russia is trying to maintain its wobbly oil-dependent economy and reclaim its great power status. It spends money from its budget coffers on its military endeavors in the Middle East. So, many experts agree that it is becoming even more difficult to meet the demands of the ageing population.

In 2017, Russia might be forced to recognize itself as strong politically, but comparably weak and poor economically, with a destitute population and undiversified economy, according to Andrei Movchan, an economist and an expert at Carnegie Moscow Center. He sees Russia as “the government that can afford itself nothing” — it can afford neither large spending on defense, nor expenses on social welfare, pensions, high-quality healthcare, science, education and infrastructure.    

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Most importantly, in December 2016, Russia’s Finance Ministry spent half of the country’s Reserve Fund, accumulated over the years due to high oil prices, to pay debts and fulfill budget commitments. In other words, these funds were used to plug holes in the country's oil-dependent budget. If one looks at it from a broader perspective, the statistics for 2016 will be even more pessimistic. In 2016, the Fund fell from $50 billion at the beginning of last year to $16.03 billion in early 2017. No wonder, then, the World Bank warned in its recent report that Russia might face serious difficulties in fulfilling its tacit social compact with the population — providing economic prosperity, welfare and cheap government services in exchange for political dominance.

The problem is that 42 percent of the Russian population (60 million people), including 40 million retired people and 20 million employees of state-run companies, depend on the government a great deal, with their key source of income coming from the state budget.

And this cannot help concerning those at the helm. In short, the government is finding it more and more difficult to balance between fulfilling its public commitments and maintaining its budget at an acceptable level, the World Bank reported during the Gaidar Forum. It also pointed out other economic problems, such as inefficient governance, outdated infrastructure, an unattractive investment climate, and declining human capital.

Will Russia’s “rainy day” funds help?

Nevertheless, the authorities continue to pin their hopes on the scenario of rising oil prices, which, according to many economists, might be feasible in 2017. The recovery in oil prices this year could be helpful for Russia's Finance Ministry to avoid spending all of its Reserve Fund in 2017, Finance Minister Anton Siluanov said on Jan. 13, during the Gaidar Forum.

"Will we be able to preserve the Reserve Fund if oil prices stay at $50 per barrel? We will," he told reporters on the sidelines of the economic forum.

However, Hartwell is very skeptical about the prospects of the recovery of oil prices, especially given Donald Trump’s presidency in the United States and his promise to make the U.S. an independent energy power. “If President Trump goes full throttle on oil development in the U.S., we can expect to see Russia’s stagnation last for quite some time,” he said.

Naturally, this could have serious implications for Russia’s economy and result in a deficit. And the country’s reserve and welfare funds might not be enough to address the challenge, according to Movchan.

“We are talking about two funds,” he told Radio Free Europe /Radio Liberty. “One of them, the Reserve Fund, is more or less liquid, while the second one, the National Welfare Fund, comprises many assets that are impossible to sell. This means that there is much less real money than is officially declared. That’s why if one uses these funds, they will be depleted much faster than it seems to be.”

Hartwell is also skeptical about the potential of the two reserve funds to deal with the economic challenges.

“Where is the money for fiscal ‘stimulus’ coming from when revenue is down?” he asks. “Well, you can print money, go into debt, or cover it from savings. That last one is exactly what the Russia authorities have done, taking from the Reserve Fund for current spending. It’s obviously unsustainable — savings run out at some point during a crisis — but it has kept the Russian economy from a much deeper recession.”

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Although spending in a recession might lessen “the depth of the trough,” it also lowers the height of the rebound, Harwell continues. After all, austerity and fiscal consolidation in a crisis leads to much healthier economies in the long run. But the problem is that the buffer of the wealth fund took away the urgency of austerity, because the cushion will run out sooner or later, and the Kremlin will be forced to confront inconvenient spending choices.

Likewise, Buklemishev sees the Kremlin’s excessive reliance on the Reserve Fund in dealing with the crisis as “too rosy” and believes that “the authorities played a negative role during the 2008-2009 crisis in Russia, creating the wrong impression that solution of any problem could be financed with the help of its funds.” That’s why, he argues, the government is still working under the assumption that “the pain of reform is not needed.”