Ian Bond / May 2020
A few weeks ago, Vladimir Putin was expecting Victory Day on May 9th to cap an excellent start to 2020. He would bask in the glory of the 75th anniversary of the Soviet Union’s defeat of Nazi Germany (glossing over the roles played by other former Soviet States, not to mention the USSR’s Western allies). He would show off the renewed might of Russia’s armed forces to his international guests, including China’s Xi Jinping and France’s Emmanuel Macron, and perhaps even Donald Trump. The Russian people would have endorsed his continued rule, having voted in a referendum on April 22nd to let him stay in power until (potentially) 2036.
Instead, a lonely Putin laid wreaths on Saturday at the war memorials in the shadow of the Kremlin walls, and the Russian Air Force flew over an empty Red Square. COVID-19 had struck, and Putin’s plans had gone south along with the Russian economy, as I explain in my latest research paper for the Centre for European Reform.
Hydrocarbons are the lifeblood of Russia’s economy: income from oil and gas accounted for 39 per cent of federal budget revenues last year, and 46 per cent in 2018. The budget breaks even at around $42 per barrel – above that the surplus boosts the National Welfare Fund, which currently stands at $157 billion, or 11 per cent of Russia’s GDP. But when China followed by other countries shut down large parts of their economies, oil prices began falling.
Instead of cutting production, Igor Sechin, the CEO of Rosneft, Russia’s state-owned oil major, and a former KGB colleague of Putin, reportedly talked the president into keeping the oil flowing, triggering a price war. Saudi Arabia responded by increasing its production, sending crude prices into free fall. Despite an eventual deal to cut output, Urals crude slumped from a high of $62 on January 9th to $12 on April 21st, before recovering to around $30 now. At current prices the government will need to withdraw money from the National Welfare Fund to plug gaps in the budget.
At the same time COVID-19 is ravaging Russia’s people as well as its economy. The daily increase in cases in Russia is second only to the US, and shows little sign of peaking. There are suspicions that Russia is under-reporting COVID-19 deaths. As of May 8th, Russia had recorded almost 188,000 cases, comparable to Spain’s 203,000 at the same stage of the pandemic, but Russia had reported just 1,723 deaths, compared with Spain’s 15,000. Russia’s medical staff are particularly hard hit: almost 9 per cent of the fatalities are healthcare workers, and Putin has admitted to shortages of personal protective equipment.
Estimates of how badly low oil and gas prices and COVID-19 will affect the Russian economy vary. But the Central Bank of Russia has estimated a 4-6 per cent fall in GDP this year, while Aleksey Kudrin, chair of the Russian Audit Chamber (the equivalent of the UK’s National Audit Office), forecast a 7-8 per cent contraction, similar to the impact of the global financial crisis in 2009. A prolonged recession seems highly likely, since global demand for hydrocarbons will probably recover slowly. Putin may struggle to make good on social spending pledges now written into the amended constitution.
Unlike many Western governments, the Russian authorities have so far taken only modest steps to mitigate the economic effects of COVID-19, providing less than 3 per cent of GDP in loans and fiscal assistance. Putin seems reluctant to borrow money abroad or draw heavily on the National Welfare Fund, while the government appears to have little appetite to issue more rouble-denominated debt. But there are doubts about whether the measures taken so far will be enough, and some Russian commentators also worry that there is too little support for SMEs.
The spread of COVID-19 forced Putin to postpone the vote on the amendments to the constitution (though legally they can enter into force without a popular vote). The risk for him is that it will now take place against the backdrop of a much worse economic situation, and after a public health disaster.
Not for the first time, Putin has responded badly to a domestic crisis: in the early stages, the Kremlin seemed mainly to want to push responsibility onto regional governors and avoid blame falling on the president. Opinion polls show that Putin still has approval ratings that Western leaders would envy – 59 per cent – but that is the lowest figure since he became prime minister in 1999. Now he will face severe economic turbulence even if he wins the right to remain in power more or less for life.
In this situation, relations with China will be even more important. If the Chinese authorities turn to infrastructure investment as an engine of economic recovery, Russia will be well-placed to supply the commodities needed. However, lower global prices will increase Beijing’s leverage, and even China cannot rescue the Russian economy on its own.
The COVID-19 pandemic could be an opportunity for Western leaders to challenge the Kremlin’s narrative that the West is Russia’s enemy. As the pandemic releases its grip on Europe, there should be scope for European countries to help Russia fight the pandemic and include Russian scientists in efforts to find vaccines and treatments. The West should be guided by pragmatic self-interest when it comes to combating an infectious disease in a country bordering on Europe.
The key question for the West, however, is how Putin deals with the economic crisis and the decline in his popularity. Will he seek to improve relations with the West or look to rally popular support with a foreign adventure? Putin has done nothing so far to merit any relief from sanctions imposed after Russia’s invasion of Ukraine in 2014. But for the moment, the Russian domestic media has toned down its criticism of the West (although external Russian outlets continue to peddle conspiracy theories). Anti-Western rhetoric could resume, however, if the economic situation fuels social tensions in Russia. Europe will need to monitor Russian domestic and external narratives for signs of encouragement, or of danger.