Confronted with sanctions, low oil prices and reputational risks as a result of its foreign-policy actions, the Russian government responded to the economic crisis of 2014 without pursuing major economic reforms. The Kremlin eschewed potentially disruptive economic policies beneficial for growth but detrimental to the regime’s primary bases of support in favour of cutting budget deficits, reducing public spending and maintaining – and even expanding – political control over the economy. More widely, Russian President Vladimir Putin’s approach since coming to power has been similar, heavily prioritising macroeconomic stability in managing the economy.
Russia’s debt levels are relatively low – this year’s public debt is estimated at 14.9% of GDP, excluding that held by state-owned firms – and inflation has been held in check. Both markers are critical to the regime – which has also steadily improved the World Bank’s Doing Business rankings for Russia – to encourage international investment. These three factors aid the country’s biggest businesses, and help enrich the businessmen most closely tied to the regime and those running important state-owned enterprises. Yet real wages have fallen considerably since 2014. An estimated four out of ten families cannot always afford food. The regime, however, has made sure to maintain high employment levels to forestall social protest. Doing so reduces efficiency, but brings political benefits.
Overall, the Kremlin is comfortable letting the private sector improve efficiency, as long as it does not threaten the political interests of either the state or the country’s most powerful individuals. This approach enables the Kremlin to maintain its power, but creates limitations and dependencies that affect Russia’s foreign policy. The structure of Russia’s budget and the political role of the energy sector, in particular, are key to Russia’s economic strategy.
