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Russia's hard times aren't over yet

Following the 2014 annexation of Crimea, introduction of Western sanctions, and fall in oil prices, Russia's economy entered a recession in 2015. The consensus among Russia watchers is that the economy will only start to grow in 2017, but even then the growth rate will be relatively low — between 1 and 2 percent per year. The reason for this is threefold.

Russian economist Sergei Guriev
Christian Hartmann | Reuters
Russian economist Sergei Guriev

First, the decline in oil prices has played a major role. The Russian economy is still very dependent on oil prices. Even though Russia's central bank has moved to a floating-exchange-rate framework, Russia could not avoid the recession, given the 50-percent drop in oil prices. The ruble depreciation buffered the shock but could not have shielded the economy completely.

Second, Western sanctions reinforced the impact of the decline in oil prices. If not for the sanctions, the Russian government, banks, and corporations could have borrowed their way out of the crisis (especially given that the overall external debt was not large).

Third, the Russian economy was not in good shape even before 2014. The post-Great Recession recovery ran out of steam already in 2013. After reaching pre-crisis GDP level in mid-2012, Russian economic growth started to slow down. By early 2014, the Russian economy started to stagnate with the growth rate oscillating around zero.

How did this happen? In his December 2013 address to Parliament, President Vladimir Putin was clear: Russia's economic problems were driven by internal, not external, factors.

This analysis was right on target: The Russian economy suffered from high corruption, excessive regulation, poor protection of property rights, lack of competition and openness, and the expansion of state-owned companies.

These problems have been recognized before and reforms to address them have been drafted many times — including in Putin's own 2012 electoral program. At the same time, the European Bank for Reconstruction and Development (ERBD) produced a "Diversifying Russia" report which, based on original research of Russian regions, firms, and households, identified barriers to growth and policies to remove these barriers.

The EBRD's analysis delivered policy recommendations for Putin's campaign promises: In order to grow, Russia would have to deregulate, develop its financial system, and promote competition, openness, labor mobility, human capital, and innovation.

Unfortunately, even though these policies have been announced and even enacted by Putin in his famous "May Decrees" (signed on his first day in office), almost none of these reforms have taken place. This has resulted in capital flight and stagnation, and even a decline in investment.

Initially, the Russian and international business community cheered the reform program. But as time went by, the disillusionment with non-implementation of the promised reforms demonstrated that Russia's huge growth potential is unlikely to be tapped.

Is Russia doomed to stagnate?

The current official forecast — as well as the one from the IMF's World Economic Outlook — expects that even after the current recession, Russia is likely to grow at about 1.5 percent to 2 percent per year. These forecasts are based on the assumption that Russia cannot resolve its internal problems and carry out structural reforms. What would happen if it could?

If Russia resolves its "internal problems" (as President Putin refers to political roadblocks to pro-growth reforms), there is no reason to believe that Russia cannot catch up with its neighbors in the East or in the West. Russia has watched as Kazakhstan and China have surpassed its GDP per capita, and a number of East European and East Asian neighbors have caught up with more developed countries and joined the Organization for Economic Cooperation and Development.

Russia can certainly do the same: It has impressive human capital, outstanding mineral wealth, a huge quantity of fertile soil, and access to the rich European market and growing Asian market. In other words, there are no fundamental factors that sentence Russia to stagnation — except for political barriers to reform. Once these barriers are overcome, Russia will restart growth and catch up with the West.

Commentary by Sergei Guriev, a professor of economics at Sciences Po in Paris. He previously served as rector of Moscow's New Economic School and economic advisor to former President and current Prime Minister Dmitry Medvedev. He left Russia in 2013 under pressure from the Russian government. He is currently a contributor to Foreign Affairs. Follow him on Twitter @sguriev.

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