Russian Prime Minister Dmitry Medvedev (2ndL) meets with World War II veterans at the Museum of the Great Patriotic War at Poklonnaya Gora in Moscow on April 28, 2015. AFP PHOTO / RIA NOVOSTI / DMITRY ASTAKHOV (Photo credit should read DMITRY ASTAKHOV/AFP/Getty Images)
In his annual address to parliament on April 21, Russian president Dmitry Medvedev reported that gross domestic product (GDP) had declined 2 percent in the first quarter. Medvedev assured the Russian people that his economic team had everything under control, that the recession would be mild, and that growth would resume in 2016.
By May 21, things looked less rosy. The finance ministry reported that the first quarter decline was between 3.5 and 3.7 percent. A week later, Russia’s state development bank, VEB, reported Russia’s first-quarter GDP down 4.3 percent. VEB’s chief economist framed the glum news as follows: “The accelerating fall in GDP in April indicates that the crisis still hasn’t passed its lowest point,” meaning that things will get worse before they get better.
Russia’s statistics agency, Goskomstat, has yet to post its official first quarter figures. We can imagine that the statistics agency is under pressure to downplay negative results. As it now stands, Russia’s recession is more than twice as deep as Medvedev had promised a month earlier.
The downgrading of Russian economic performance during the past month has been bad news for the “worst is over” and “the sanctions have had no impact” crowd. The Russian people, whose living standards are plummeting, must be asking whether the administration can keep its solemn promise to “meet all its social obligations.”
In my A Russian Crisis with No End in Sight, I projected that Russian first-quarter GDP would fall by 10 percent in the absence of extraordinary measures, given prevailing energy prices and lack of foreign borrowing. It took a significant drawdown of reserve funds, sleight-of-hand tricks by the central bank, and forced currency repatriation to limit the loss to 4.3 percent, if that is the final number. That GDP shrunk less than 7 to 10 percent may represent a remarkable achievement of the Putin economic team; it could have been much worse.
The Russian economy cannot continue to be propped up by dwindling reserves. Capital flight in 2015 is projected again to exceed $100 billion as sanctions bite deeper. Oil prices will not recover in the short run. Russia’s only hope is a sanctions reprieve. Who knows? Will the West fall for the “sanctions are hurting us more than them” story of Putin’s propaganda machine?
