It is now a little over a year since Russia seized control of Crimea from Ukraine and local inhabitants enthusiastically backed the annexation in a referendum. The mood of euphoria, however, which marked these events at the time, is now largely gone. While the Kremlin has been using a military buildup on the peninsula to underscore its commitment to this home of Russia’s Black Sea fleet (and to more than two million people of whom around 60% are ethnic Russians), little has so far come of promises to pour in money to boost the local economy and help residents.
Foreign investors have fled, the banking sector is paralyzed, and many residents are struggling to make ends meet. Many of the supplies from Ukraine that used to be taken for granted have been disrupted, including water to irrigate crops, power to run factories, and tourists to populate the beaches and bring in money. The government says that tourist numbers more than halved last year. Rail connections from Ukraine to Crimea have been severed and only Russian airlines now fly there. Moscow has vowed to establish alternate routes and has awarded a USD 3-billion contract to Arkady Rotenberg, a close Putin ally, to build a bridge across Kerch Strait to connect Crimea to the mainland. But even if this connection were to get built, it will probably not diminish the Russian regime’s desire to establish a land bridge by permanently severing the Luhansk and Donetsk regions from Ukraine and grabbing hold of the city of Mariupol.
In Russia itself, economic conditions have been worsening as well under the weight of the Western sanctions and the global oil price collapse. While the Central Bank, after yanking up interest rates dramatically six times in 2014 to support the ruble, shifted back to easing in January to prop up the economy, the benchmark is still at a painful 12.5%. Real GDP expanded surprisingly, by 0.4% in October-December, year-on-year, after an 0.9% gain in the preceding three months, but this still left the advance for all of 2014 at a mere 0.6% and forecasts for the current year look for declines of anywhere between 3% and 5%.
Manufacturers have been reporting deteriorating conditions for the past four months, with output, employment and new orders falling as the economy enters its first recession in six years. Inflation slowed in February to just over 2% for the month from nearly 4% in January, yet consumer prices in March were still 16.9% higher than in March 2014. While the Central Bank says it expects monetary erosion to slow as the effects of the ruble’s sharp devaluation fade, it predicts a range of 12%-14% for end-2015, which suggests that the drop in real household income that was evident late last year will continue for the foreseeable future. Private sector wages have been rising more robustly than those in the public sector, but they have still been lagging the inflation rate by a couple of percentage points.
Car sales in Russia have been in trouble for a while, and they dropped by one-third in January-February, as production fell by 20% and imports plunged 45%. Sales in March were off by more than 40%, year-on-year. General Motors announced that it is shuttering its St. Petersburg plant indefinitely and is pulling the European Opel brand and most Chevrolet models from Russia. The Ministry of Economic Development opines that net capital flight this year will come to USD 115 billion. The CB is a bit more pessimistic, predicting USD 118 billion. Both could be far off with their estimates if Pres. Putin resumes his expansionistic ambitions in Ukraine or, worse, extends them to other countries in the region, even though there is at this point very little desire on the part of Western Europe to expand the sanctions. As it is, the country’s banks are ailing and it will take a major effort by the Kremlin to prevent many of them from going belly-up. The government has also set up a corporate bailout program, but the scheme is unlikely to have nearly enough funds. Companies have already requested at least USD 37 billion, a total that is sure to rise far higher.
Withal, public opinion surveys still indicate that Pres. Putin and his policies have the overwhelming support of Russians, but the people have only recently begun to feel the pain. The one thing they are most worried about is inflation, especially as food price inflation has been skyrocketing, at least in part because of the reverse sanctions the Kremlin has imposed on food imports from the West. Over the past six months, for example, the cost of cabbage in Russia has shot up by 66%, that of onions by 40% and that of potatoes by 36%. This is hard on household budgets when pay hikes lag far behind. In some regions (Murmansk and Zabaikalsk, for instance) teachers have not been paid in months and numerous private companies across the nation have also had difficulties paying their employees on time or in full. The Labor Ministry estimates that 154,800 jobs were cut in 2014 and another 127,000 disappeared in the first two months of this year. Most of the layoffs occurred at large Russian firms which are run by the state or by oligarchs.
A majority of the oblasts do not have the finances to ride out the problems. As many as 63 of the 83 are said to be at risk of defaulting on their debt or going bankrupt in the next few years. In time, if conditions keep getting worse, this could turn the populace against Putin. Which is, presumably, one reason why the Kremlin keeps rattling the saber – of late even the nuclear one – to distract the people from their domestic problems. Recent Russian military exercises have included nuclear elements and the Kremlin has vowed a full overhaul of the country’s land-based nuclear arsenal in the next five years. Yet, the EU countries are now deeply divided over how the bloc is to confront Moscow, with the UK and the Nordic and Baltic nations being on the side of the hawks while France, Italy and Spain lead the parade of the doves.