Russia Retreats to Autarky As Poverty Looms

Russia Retreats to Autarky As Poverty Looms

October 20, 2015

Russia is running out of money even as the country has escalated the war in Syria. With oil wealth evaporating, Vladimir Putin is falling back on Soviet-era self-reliance. The three big rating agencies have all issued alerts, warning that the country’s public finances are deteriorating fast and furiously.

Prospects of an oil revival look bleak, making matters worse.

Standard & Poor’s says the budget deficit will balloon to 4.4% of GDP this year, including short-falls in local government spending and social security. Rich economies with deep capital markets can manage such deficits. However it’s another story for Russia in the midst of a commodity slump and a geopolitical showdown with the West. Oil and gas revenues cover half the budget.

“They can’t afford to run deficits at all. By the end of next year, there won’t be any money left in the oil reserve fund”, says Lubomir Mitov from Unicredit. Even the country’s finance ministry has admitted that the funds will be exhausted within 16 months on current policies. Alexei Kudrin, the former finance minister, says Kremlin cannot raise loans to ride out the oil bust. The pool of internal savings is pitifully small.

Kudrin had tended his resignation in 2011 protesting Russia’s military build-up, fearing that it would test public finances. Events are unfolding just like he had suggested.

Diplomats are saying that wars in Syria and Ukraine are eating into the country’s budget. Cruise missiles are not cheap.

The Kremlin has gone back to the drawing board, working from the assumption that oil will remain stuck at $50 a barrel for the next 3 years. Russia’s central bank had also issued a warning about this earlier.

Putin claims to have an ace up his sleeve.

Russia will fall back on industrial self-reliance and import substitution. “Our policies are not frozen. They adapt to circumstances”, he said.

The Kremlin is launching a radical plan to slash imports across 20 key sectors within 5 years, ranging from heavy machinery to electrical engineering, photonics, cars, tractors, chemicals, pharmaceuticals, and food.