Precarious Putinomics
The Putin consensus had been replaced by class and culture wars. It implicitly acknowledged having lost the most advanced part of the nation; they would have to rally the most backward. The other Russia that Putin was now appealing to were the ‘vengeful losers’ who had suffered the most in the 1990s: pensioners, state employees, factory workers, war veterans and bureaucrats. There are a lot of them. Though Russia buzzed with talk of a new middle class in 2011, as many as 53 per cent of people were living off the state budget either as state employees, pensioners or on benefits.24 Even the most inflated measurements show over 100 million Russians cannot be considered middle class.
Putin’s aggressive politics meant new economics. The announcement of his return triggered the departure of the fiscal conservative Alexey Kudrin from the finance ministry, grumbling about not having been chosen as prime minister and worried about reckless loosening of the public purse strings totally dependent on the oil price. This meant there was now nobody trying to restrain Putin’s big spend. Ever since the hiss of dissatisfaction had grown audible in mid-2011, the regime had responded by making more and more astounding spending increases in pensions, military and police salaries.
Putin was spending like a Gulf sheik. These states had paid their way out of the ‘Arab spring’ exactly as the Kremlin was now doing. Payouts had risen drastically since the financial crisis first sent ripples of unrest. Between 2007 and 2010 funding to the regions leapt by $58 billion from 5.7 per cent to 9.2 per cent of GDP.25 The same year pensions were hiked 50 per cent.26 In 2011 pensions were raised by 10 per cent again, with a 6.5 per cent across the board increase in public-sector wages.27 Simultaneously, a gigantic $613 billion ten-year plan for the military was announced.28 This was not to fight a war but to keep the single-industry armament towns quiet, employed, and the military–industrial complex onside. Surrounding the campaign Putin doubled military and police salaries and promised $160 billion worth of giveaways.29
In Russia, as was happening in the Gulf States, this big spend meant the necessary price of oil to balance the budget grew dramatically. The government’s break-even price had been less than $40 a barrel in 2007 but stood at over $110 by 2012.30 Even the head of the central bank had warned this is ‘too high’.31 Instead of making itself secure Putin had bought social calm at the cost of vast exposure should the price of oil tumble from its historically unprecedented highs. This seemed reckless when long-term trends such as an unreformed pension system, slowing growth and a shrinking trade surplus were undermining accounting certainties. The unreformed pensions system alone would see government expenditure here rise from 9 per cent of GDP to 14 per cent of GDP by 2030, which if financed by borrowing would send Russia’s debt to GDP ratio up from 14 per cent of GDP to 70 per cent the same year.32
To support Putin, state finances were becoming ever more precarious. Even his finance ministry warned spending levels might be unsustainable. The same could be said for the propaganda. With his new image of a working-class hero utterly dependent on fulfilling the new expanded social contract, ostracizing the new middle class would leave the Kremlin without a constituency, should the oil price fall and rip a hole in the budget. Putin’s Russia is not cohesive or stable enough for austerity. Any fiscal tachycardia disrupting social payouts could send his new ‘support base’ into the streets, with bourgeois elites no longer there to buttress him.
However, there are grounds for Putin to feel secure about making such a spending increase: the country had amassed the third largest reserves in the world and has the lowest debt to GDP ratio of a G-20 member state at a mere 14 per cent debt, far behind most Western countries.33 Reforms were started on pensions. Nevertheless, the collapse of oil prices, no pension reform and a large return to international borrowing amid political risk could send Russian bond yields shooting up before it reached deep levels of debt. Russian stability was now as precariously balanced on market favour. Putin had rebuilt his ‘stability’ on the one thing in Russia he had no control over whatsoever – the price of oil.
In western Siberia, however, all is not well. Here, in the resource rich wastelands that produce two-thirds of Russian oil, the crushing majority of old Soviet fields are in production decline. The technological revolution pioneered by Khodorkovsky that jacked-up oil production has run out of steam. The 1990s problems of fields with falling production are re-emerging. Even if prices stay high Russia is slowly running out of cheap oil. Its current reserves are of declining quality and its huge potential fields lie in extremely difficult terrain in eastern Siberia or under the Arctic Ocean. At the very moment Putin needs more oil profits, oil production risks entering a long-term stagnation, even decline, unless a radical overhaul in techniques, taxation and import of new technologies gets under way. His own energy minister has warned that without a delicate, but feasible policy turn, oil production could fall from 505 million tons per year in 2010 to 388 million tons per year in 2020.34
This can be avoided through extensive investment, tough and expensive prospecting and intrusive tie-ups with foreign companies – but the whole industry could be forced to invest not $25 billion upstream but $50 billion annually to keep production steady.35 It is hard to imagine that the Kremlin will have as much money to play with as in the past if it wants to rejuvenate the sector it depends on. The easiest way to avoid production falling is to lower oil taxes in order to give the companies the money they need to revitalize and drill for new wells.
Yet this will be difficult for the state to do at the very moment it has become more dependent than ever on high oil taxes. Similar problems are looming in the gas sector as LNG and shale pose long-term problems for Gazprom’s business model. Russia is set to stay an energy superpower – but the best years of the boom are behind it, even if the oil price continues its ever-volatile rise. The era of both a production and price boom that defined the best years of Putin’s regime are likely over. Putin had bet the Kremlin on a challenged industry, where prices are as unpredictable as the hand of a drunken card sharp. This uncertainty means that Russia is not only exporting huge amounts of raw materials – but money and people. As many as 38 per cent of the wealthiest Russians want their children to emigrate, and capital flight hit $80.5 billion in 2011.36 The two most sensitive assets in any country were fleeing Russia.
Vertical of Discontent
Sustained opposition in Moscow has not gone beyond 100,000, but discontent is national. The government claims that only those protesting resent the regime. If this were true, United Russia in the 2011 parliamentary elections would not have fallen below 50 per cent, despite industrial rigging. In most regions dominated neither by oil, gas or ethnic cliques, the party got far less than in Moscow – around 35 per cent.37