On Friday, January 9, CGI hosted a private event with Vladimir Milov, a Russian opposition politician, president of the Institute of Energy Policy, a Moscow-based think tank, and former Deputy Energy Minister of the Russian Federation. Milov is a former member of the political committee “United Democratic Forces – Solidarnost” and is a current member of the political party Democratic Choice. He is a frequent contributor to Russian and international media, including regular columns in Russia’s leading business broadsheet Vedomosti. In addition, Milov’s writing has appeared in the Wall Street Journal and the Financial Times. During the event and in an interview with CGI, Milov discussed Russia’s current economic situation and the future of Russia’s opposition. Below are the key points from his talk:
- While sanctions have taken their direct toll, the most substantial impacts will be felt long after they are (hypothetically) lifted, as the willingness of foreign lenders to take on Russia’s political risks prohibitively dwindles.
- Without this liquidity and access, the inefficient debts racked up by large state-affiliated firms will force Moscow’s hand. The silver bullet solution to this looming debt crisis, namely accessing Chinese finance, has proven untenable. For example, Russia’s Gazprom has had difficulties acquiring financing for its Power of Siberia pipeline project. Even under the best conditions, the Chinese financial system, unlike the West’s, is not capable of providing large loans to meet Russia’s demand.
- Many in the Kremlin have stressed the economic benefits of a weaker ruble, such as increased production and consumption of domestic goods. In reality, import substitution will require systemic changes in the Russian agricultural and industrial systems. There is currently no serious effort under way to tackle these tasks. Furthermore, the medium and long-term effects of the currency’s rapid depreciation will seriously hamper foreign direct investment, while Russia’s stack of greenbacks is gorged by the balance sheets of state enterprises.
Following the talk, CGI asked Mr. Milov several follow-up questions regarding Russia’s economic situation and the prospects for the opposition movement.
Would the lifting of sanctions, however unlikely, allow the Russian economy to rebound from its current depths?
The political removal of the sanctions would not mean that much. The events of the last twelve months have led the international community to reconsider the political risks associated with Russia. The major political problems, such as lack of democracy, have been exacerbated by Russia’s geopolitical maneuvering. Thus, even if sanctions are lifted, the financial community already reevaluated the political risk associated with Russia and will not rush to provide credit for Russian firms. Furthermore, we will not witness a return to the level of borrowing Russian banks and companies enjoyed leading up to the current crisis in the foreseeable future.
What are the short-term implications of Russia’s current credit crunch?
Toxic assets, as a result of the rapid collapse of the ruble, are increasingly appearing on the balance sheets of Russian banks. This has resulted in the downgrading of Russian bonds to junk status, adding to the already precarious political risk and economic outlook. Major borrowers are state-affiliated banks and corporations dear to Putin’s system of economic planning, despite their inefficiencies since the collapse of 2008. Given his personal stake, Putin will use the state to support these entities by tapping the sovereign wealth fund. In short, while pensioners benefited from the boom years of high commodity prices, they will now be coopted to pay for lagging state firms. This dynamic will add to the crisis through further depreciation of the ruble.
Will the current economic crisis provide an opportunity for Russia’s opposition to gain more support? If so, what steps are needed to reap substantive results at the polls?
The economic crisis provides the opposition a way forward. For example, United Russia incumbents recently lost mayoral elections in Russia’s third and fourth largest cities, Novosibirsk and Yekaterinburg respectfully, to opposition candidates. In the 2014 Duma elections, United Russia candidates were only able to win due to extremely low turnout, partially caused by the decision by several prominent opposition leaders to boycott. In sum, these results indicate that the population is willing to vote against the establishment. This characteristic will only grow as the economic situation worsens.
However, on the pessimistic side, it remains to be seen if the opposition can create a nation-wide system to capture this momentum. During the 2011-2012 mass protests, this political infrastructure was vitally missing. The recent move to re-introduce single candidate voting in city deputy elections should help opposition candidates gain ground by avoiding large party endorsement. The main problem for the opposition is not uniting, but being competitive. So far, a majority of the prominent opposition leaders have focused on a narrow audience of Moscow intelligentsia, which speaks a different language than the average Russian. These leaders do not know what the country wants beyond the Garden Ring [Moscow’s equivalent to the Beltway]. The opposition must create a pragmatic agenda that bridges the immense gap between the Moscow liberals and the rest of the population if it hopes to mobilize masses of people and win large-scale elections.