LONDON: It was all looking good and going to plan. A deferential Duma had passed the legislation and a compliant Constitutional Court had approved the changes. All that was needed now was a referendum, not strictly necessary, but a huge vote in favour of the changes would underpin their legitimacy. Vladimir Putin was on his way to become President for life, or at least until he was 82, should he so wish. The referendum on the changes to the Constitution, wrapped around a goody-bag of popular measures, was planned for 22 April, Lenin’s 150th birthday. This would be followed by a mega-parade in Red Square a few weeks later to celebrate the 75th anniversary of Victory in Europe Day, when the Soviet Red Army had defeated Nazi Germany. Perfect. What could possibly go wrong?
The first case of coronavirus in Russia was confirmed on 31 January. Even by mid-March, President Putin was conveying an image of calm. Echoing his good friend in the White House, he declared the outbreak “under control” thanks to his timely measures. Russian state media was slamming Europe for “mismanaging” the pandemic, highlighting a “failure of EU solidarity”. Putin even authorised the dispatch of planeloads of aid to Italy and Serbia, emblazoned with the message “From Russia with Love”. The historic picture of a Russian aircraft landing at Kennedy Airport in New York supplying America with “humanitarian aid” of masks and ventilators flashed around the world, boosting Putin’s magnanimous image.
Then within a few days, a “perfect storm” hit the Kremlin. The oil price plummeted and the Covid-19 infection rate rocketed. Putin’s prospects took a sudden and dramatic turn for the worse.
The economic consequences of Covid-19 for Russia are severe. The IMF’s initial forecast for Russia as a result of the pandemic is a 5.5% fall in GDP this year. However, this was before the unprecedented collapse in oil price, which if factored in, could lead to a total drop in GDP of about 10%. It will have a huge impact on business, particularly small businesses, and present the Kremlin with a major challenge.
But not the challenge that might have been had America and the West not imposed sanctions on Russia following Putin’s illegal annexation of Crimea. Sanctions have meant that Russia has been self-isolating for six years, becoming more self-reliant. Cut off from international capital markets, Russian firms had no choice but to deleverage, resulting in corporate debt as a share of GDP falling to below 50%. Even state debt to GDP is well under 20%, tiny by comparison with western countries.
Russia is, of course, poorer as a result, with small annual growth rates. But Putin’s government has been parsimonious with its spending. Following sanctions, the government took the decision to keep a balanced budget with oil prices set at $42 per barrel. As a big oil producer, any income over that went into its National Wealth Fund (NWF), savings for a rainy day, which in March this year was reported to be 12.2 trillion roubles ($157 billion). In addition to this, Russia reported its gold reserves to be $120 billion in March. By any measure, President Putin has built a fortress economy, one which should protect it from severe shocks.
As recently as March it looked as if Russia was in a good position to survive the pandemic. Since then, the oil price has collapsed to about $20 per barrel and Russia faces a huge budget deficit, which could go on for months, even years.
Putin’s government is now battling with the conundrum faced by all governments: how do you safeguard your citizens’ health without causing huge damage to the economy.
In the meantime, 144 million Russians have to survive.
From a slow and indecisive start, the government raised the offer of help to business from a paltry 300 billion roubles to 2 trillion ($27 billion). It claims that this will provide a number of small businesses with sufficient cash to pay employees 12,000 roubles per month ($162), Russia’s minimum wage. The strict condition is that they don’t fire more than 10% of employees. Much of this money is in the form of a grant, which is expected to be paid back in due course. Too little, say the critics. With 15 million Russians employed in small businesses and 20 million self-employed, all with zero income, many businesses will go, bust creating huge unemployment. The future is also bleak for 70% of the population who have no savings and live from day to day. Their real wages have been falling for the past six years.
Russian economists argue that President Putin should use the NWF to give everyone a hand-out of 20,000 roubles per month ($270) in order to survive. He is unlikely to agree as he is desperate to keep the NWF untouched and such “generosity” would deplete the fund before the end of the year. He wants the money for future big national infrastructure projects, designed to support his image and heritage.
But people have to eat.
The medical situation in Russia is no less critical. As of May 1, the number of confirmed cases of Covid-19 was 115,000, including Prime Minister Mikhail Mishustin. There have also been 1,169 declared deaths from the virus, although many believe a massive cover-up is taking place to falsify this figure. Russia inherited a robust healthcare network from Soviet times, with about 5,300 hospitals and more than 1 million beds. But under Putin there has been severe underfunding in health of less than 3% of GDP, compared to an average of 9% in developed countries. Stories of infected medical workers are emerging daily as Russia fights the virus, with dozens of doctors and nurses dying. There are reports of hospitals closing and staff walking out over poor working conditions and low wages. Badly paid doctors are quitting in droves, fearing for their lives after being told to treat coronavirus patients without adequate protective equipment. There is an acute shortage of ventilators, with medical staff being told to expect delays of 3 months before even basic supplies can be delivered. Long lines of ambulances queuing for hours to admit desperate patients do not inspire confidence in the health system.
Anger is also growing over movement restrictions now extended to May 11, the loss of jobs and income and fear of starvation. A poll last week revealed that 60% of Russians want businesses to open even though the virus has not been contained. On April 20, a crowd of 2,000 descended on the main square of the city of Vladikavkas, capital of Russia’s North Ossetia region, demanding work in order to buy bread. It was brutally dispersed. This was the first major political rally and show of defiance since the pandemic began, but will almost certainly not be the last.
This pandemic could not have come at a worse time for President Putin, who on Thursday ordered his government to come up with a package of new measures to soften the economic impact. For 20 years he has carefully promoted the appearance that he alone can revive national greatness while delivering stability to his sprawling nation. This was the image he wanted to maintain in the lead-up to the referendum, now delayed until some unspecified date in the future. Other than a Kremlin flyover of warplanes and military helicopters, the victory parade in May has been cancelled. Putin’s plans have been thrown into chaos and his popularity is in decline.
All is not lost, however. As an ex-KGB officer and master of the dark arts, President Putin maintains the support of the security services in Russia and controls all media output. It’s therefore unlikely that he will suffer any long-term consequences from the pandemic, unless of course there is mass unemployment and total breakdown in healthcare. Public protest is extremely limited by law and infringements are treated harshly. With four years of his presidential term remaining, a frustrated Putin can easily delay the referendum until 2021, by which time a vaccine should be available. Also by then, Russia’s expanding trade in petrochemicals and piped gas with a recovering China will have resumed and should compensate for a slow pick-up in other exports, therefore boosting budget receipts. This will not be sufficient to transform the economy, as Putin would wish, but will go some way to underpin financial and therefore political stability. Tsar Vladimir can then receive his post-corona coronation.
John Dobson is a former British diplomat to Moscow and worked in UK Prime Minister John Major’s Office between 1995 and 1998.