Amid geopolitical uncertainty over the Ukrainian crisis, the Russian economy has entered an economic recession and suffered a massive flight of foreign capital. The hope of an emerging Russian middle class gets fainter still.
Bleak growth
Bleak growth
The BBC quoted an IMF representative saying that Russia had its second trimester of negative economic growth, which is generally considered the criterion for defining a recession.
The IMF's concluding statement for the 2014 article IV consultation mission for the Russian Federation points out that the current Russian economic model is obsolete and will not provide further basis for sustained growth: "After almost 15 years of growth based on rising oil prices, successful macroeconomic stabilization policies, and increasing use of spare resources, this growth framework has reached its limits". Indeed, the source of Russian economic problems go far beyond the Ukrainian crisis.
Apart from needing a new economic model, Russia also needs further economic integration to the rest of the world: "More integration with the world economy should help close the productivity gap with other countries, foster investment and diversification, and enhance growth. On the other hand, less integration with the world economy would slow this process, missing out on available opportunities for technological transfers and the exploitation of comparative advantages." The Ukrainian crisis is not prone to help Russian relations with international partners.
Russia's real GDP growth prospect has taken a slump and the IMF corrected their prediction for 2014 and 2015 to 0,2% and 1%:
Source: WEO (April 2014) and the IMF's concluding statement for the 2014 article IV consultation mission for the Russian Federation.
Capital outflow
The outflow of capital from the Russian market has amounted to approximately 70 billion US dollars for the first quarter of 2014 as opposed to 63 billion US dollars for the combined 4 quarters of 2013.
President Putin has formerly threatened sanctions against Western companies, citing the energy sector as a potential victim. However, the real impact of the Russian reaction might not come in the form of formal sanctions but rather with foreign companies finding government interactions especially hard.
Depression or recession?
For Europeans, the news of a Russian recession are both good and bad. On the one hand, economic difficulties can make Putin think twice before engaging into a costly military campaign in Eastern Ukraine. On the other hand, a democratic transition cannot happen without a healthy middle class. Short-term security relief from the economy comes at the price of a long-term security.
Russia's real GDP growth prospect has taken a slump and the IMF corrected their prediction for 2014 and 2015 to 0,2% and 1%:
Capital outflow
The outflow of capital from the Russian market has amounted to approximately 70 billion US dollars for the first quarter of 2014 as opposed to 63 billion US dollars for the combined 4 quarters of 2013.
President Putin has formerly threatened sanctions against Western companies, citing the energy sector as a potential victim. However, the real impact of the Russian reaction might not come in the form of formal sanctions but rather with foreign companies finding government interactions especially hard.
Depression or recession?
Although the Russian economy is in recession, a recession alone is not enough for a depression to be called. Depressions are periods of deep dysfunction of the economy. In that regard, the fragile economic system relying on energy exports could collapse with a unified European energy policy seeking alternatives to Russian gas and fracking for natural gas.
The Russian middle class
With the Russian recession, a flight of foreign capital, and a negative geopolitical situation, the government-independent middle class will have a hard time finding jobs and business opportunities that allow it to grow.For Europeans, the news of a Russian recession are both good and bad. On the one hand, economic difficulties can make Putin think twice before engaging into a costly military campaign in Eastern Ukraine. On the other hand, a democratic transition cannot happen without a healthy middle class. Short-term security relief from the economy comes at the price of a long-term security.
