OpinionJuly 31, 2020

Putin forever

Stefan Hedlund

Reading time: 12 min

It is likely that Russian President Vladimir Putin will win for another six-year term in the 2024 election. In the meantime, he will face significant challenges. Unless oil prices begin to rise, military adventurism may be Putin’s last resort.

On July 1, Russians voted on the Kremlin’s proposed constitutional amendments. The official outcome was 78 percent in favor, with a voter turnout of 65 percent. At a glance, this was a major triumph for President Vladimir Putin. One of the approved amendments was a clause allowing him to run for an additional two terms as chief executive.

Russian Election: Problem 2024

What the Putin era has so clearly demonstrated is that Russia remains a country where power is unaccountable, where rules are made to be bent and where the road to wealth is through political influence. This is as true in the Kremlin today as it was in the Politburo in the Soviet Union, at the imperial court in St. Petersburg and in the Boyar Duma of Muscovy. And this has some serious implications for the future.

The main outcome of the referendum was to put a conclusive end to speculation about “Problem 2024” – what will happen when President Putin’s current term, his fourth, runs out. Pundits have spilled much ink describing fanciful options: he might become president of a Russian-Belarusian Union State, or be appointed chairman of the mighty Security Council, or even simply step down. This guesswork has now stopped.

The safe bet is that Mr. Putin will be duly elected for another six-year term in the Russian election 2024. If this is repeated in 2030, by 2036 he will have been in power since 2000. He will have then reached the respectable age of 84 years. Those who have long argued that being leader for life has always been his ambition may feel vindicated.

The safe bet is Mr. Putin will be duly elected for another six-year term in the Russian election 2024.

Those who beg to differ will say that the game is far from over, that the main goal of the amendment was to drive home the point that President Putin will not tolerate any heir apparent. The Russian leader could still change his mind, springing yet another surprise on his entourage. While the entertainment value in observing these games is unquestionably high, the downside is that the show is being produced at a rather steep cost, measured in terms of a negative impact on the quality of governance.

Over time, Russia has demonstrated a distinct pendulum movement between reform and restoration. Rulers come to power with good intentions and then gradually retreat into well-established patterns of corruption and predation. The Putin era has been no different.

Short-lived hopes

The first two terms of the Putin presidency did represent a time of improved governance, with reforms and a well-functioning legislature. Following the chaos of the Yeltsin presidency in the 1990s, this was a much-needed change. It allowed Russia to bypass Germany and become the fourth-largest economy in the world (in terms of purchasing power parity). But during his second term, President Putin turned away from meritocracy and systemic performance deteriorated.

A potentially decisive period was the interregnum in 2008-2012, when Dmitry Medvedev was tapped to serve as a caretaker president. He emphasized modernization and improved relations with the West. Most importantly, members of the middle class began to believe that innovation and entrepreneurship would be rewarded. But again, this was not to last. As the end of his term drew near, Prime Minister Putin decided he would return to the Kremlin.

The mode of his return added insult to injury. In what came to be known as the rokirovka (“castling,” moving the rook and king at once in chess), Messrs. Putin and Medvedev suddenly announced they would simply swap jobs and that this had been agreed long ago. Although it was legal under the constitution, it was also the epitome of contempt for government accountability. Massive street protests followed. In March 2012, when Mr. Putin was elected for a third (non-consecutive) term as president, Moscow resembled a city under martial law.

The middle class and entrepreneurial intelligentsia lost faith in their government. Disillusionment led to a dual form of brain drain – external, as many skilled young Russians sought to leave the country – and internal, as those who stayed distanced themselves from politics.

When the coronavirus pandemic struck, Russia was already seriously weakened.

As a result, the hardliners, who had been clashing with the modernizers under President Medvedev, came out on top. As the Kremlin increased its control over private enterprise, they were promoted to important positions, also in the business world. The stock market responded by devaluing companies that were taken over. Vital contracts for military modernization were awarded through cronyism rather than on merit. This was particularly true with naval missile technology, where the number of launch failures began to rise significantly.

President Putin still managed to improve Russia’s image abroad, especially with the Olympic Games in Sochi in 2014. Touted to the world as a great organizational success, to Russians it was a symbol of corruption run amok. A meeting of the G8 in Sochi was meant to follow, allowing Russian grandstanding. Instead came Crimea, war in Ukraine and international sanctions.

When President Putin was elected for a fourth term, in 2018, Russia was locked in a standoff with the West. Cuddling up to China, the country was becoming increasingly isolated from the Western world and thus deprived of the competitive pressure that is ultimately the only true driver of innovation. With patriotism rampant, Russian hardliners began touting import substitution as an excellent route toward increased productivity. Mounting problems in the military industry, hamstrung without Ukrainian contractors, gave a lie to such projections.

When the coronavirus pandemic struck, Russia was already seriously weakened, with a flagging economy, a ruling class bent on short-term predation and a middle class that was alienated and frustrated. The country’s role in the global economy was increasingly linked to the primary sector; its participation in global value chains was dwindling.

Perfect storm

During the memorable spring of 2020, Russia was hit by the pandemic and the associated slump in global energy demand. The impact was exacerbated by the Kremlin’s ill-considered decision to trigger an oil price war with Saudi Arabia, which caused the price of a barrel of Brent crude oil to plummet to below $20 on April 21, from $69 on January 6. Given the importance of energy revenues to the Russian economy, the result can only be described as a perfect storm.

Like populations in many other countries, Russians found themselves gripped by fears of succumbing to the illness on one hand, and of losing their livelihood due to the lockdown on the other. But many presidents and governments saw their approval rates rise, while President Putin’s popularity dropped to a historical low of 59 percent in April.

This number is lower than during the anti-government rallies of the winter of 2011-2012. It is the lowest of his entire presidency. The glory that followed the annexation of Crimea, when his approval rate hit 85 percent, seems a very distant memory.

Members of the opposition have now found additional reasons to castigate the Kremlin and its cronies. Yet, it is unlikely that any serious threat will emerge. What is very likely to follow is a further deterioration in the – already poor – quality of governance.

As President Putin and his shrinking circle of loyalists circle their wagons, the returns on short-term predatory activities will increase – at the expense of longer-term investments in innovation and high-quality governance.

Short-term management

Looking forward, the positive short-term outlook is that the coronavirus is receding without having crushed the healthcare system, and fiscal reserves remain robust enough to ensure that there will be no collapse on financial markets. While both observations have elements of truth, it is essential to differentiate between short-term crisis management and the longer-term damage to human and physical capital.

The initial impact of the pandemic on Russia was mild, causing some to believe that it would be a fleeting inconvenience. But during April and May, the rate of new infections rose dramatically, especially in Moscow. By the end of June, Russia had the fourth-highest number of infections in the world, more than eight times the rate recorded in China. While the dubious veracity of official information has made the severity of the pandemic difficult to assess, there can be little doubt about the long-term consequences.

As the Russian presidential election 2024 approaches, the political implications of its poor crisis management will come back to haunt the Kremlin. The massive cutbacks in healthcare that were made to compensate for the boost in military spending will be felt. Allegations that the true numbers on infections and deaths have been covered up also add to public discontent.

It is noteworthy that the pandemic got in the way of two major events of crucial importance to President Putin’s standing. One was the vote on the amendments to the constitution, and the other was the parade planned to celebrate the 75th anniversary of the victory over Nazi Germany. The former would have taken place on April 22 and the latter on May 9. While both had to be postponed, the delay was only marginal.

President Putin demonstrated a callous disregard for the well-being of his people.

The vote took place on July 1, and a huge Victory Day parade was held on June 24. The plebiscite was declared a great success. While the real numbers will probably never be known, the stunt had elements of a classic Pyrrhic victory.

By deciding to hold a constitutional vote in the midst of a raging pandemic and by staging a massive parade to boot, President Putin demonstrated a callous disregard for the well-being of his people. Unless he comes up with some new Crimea-like stunt to boost his popularity, his legitimacy as president will be seriously damaged. And he will not find it easy to shift the blame on Americans this time.

The likelihood is slim that the economy will improve in the years ahead. During the first two terms of his presidency, Mr. Putin surfed a wave of rapidly rising energy prices that substantially raised real incomes. Unless there is a renewed spike in energy prices, this will not reoccur. Systemic flaws in the management of the economy are more likely to depress economic activity, thus further fragilizing the Kremlin’s footing.

The combined impact of the lockdown and the collapse in oil prices could have led to mayhem. The saving grace has been that the Central Bank and the Ministry of Finance have again proven that they are an exception to the general rule of abysmal governance.

Despite the sharp fall in the price of oil, the ruble has only fallen by 11 percent since the outset of the year. The Central Bank has been able to provide stimulus by maintaining and even cutting interest rates. On June 19, it dropped the base rate by 100 points, to an all-time post-Soviet low of 4.5 percent.

Russia’s sovereign reserves have even increased slightly, from $554 billion at the end of 2019 to $569 billion at the end of June. Although this has been due largely to appreciation in the value of Russian gold reserves, it occurred despite dipping into the reserves to plug the widening hole in government finance.

Prudent fiscal and monetary policies have softened the blow. During the financial crisis in 2008-2009, Russian gross domestic product (GDP) took the biggest hit of all OECD member states. This time, the World Bank predicts its GDP may contract by 6 percent, with growth to resume in 2021. A more pessimistic scenario sees a contraction by 9.6 percent this year and a slim recovery by 0.1 percent in 2021. The main point, however, is that these predictions are roughly on par with the outlook for a global contraction of 5.2 percent this year, and with predictions for the European Union and the United States.

Long-term consequences

While it is good news that the Russian economy has done comparatively well, despite its vulnerability to the slump in energy revenues, the impact on the population will still be severe. Over the second quarter, households may have lost a fifth of their incomes and the unofficial unemployment rate may now be around 20 million – this in a country where the poorest segment of the population does not even have access to running water and electricity. The situation will intensify the brewing discontent with the Kremlin.

It is not only the poor who are suffering. When the pandemic struck, the more affluent middle class had already shrunk by a fifth since the start of the economic crisis in 2014. Given that the middle class is generally viewed not only as the driver of economic growth and innovation but also as the bedrock of democratic governance, this reduction will have grave repercussions.

Households may have lost a fifth of their incomes and the unofficial unemployment rate may now be around 20 million.

Based on a study of how different sectors of the Russian economy performed in April, the peak of the crisis, the OECD notes that, “The sectors suffering the greatest contractions also have the largest shares of new and small firms. The potential impact on private sector development in an economy already dominated by large, often state-owned or controlled firms is devastating.”