Russia: Privatization or Desperation?

At the beginning of the month, President Putin announced that Russia would be selling off some of its public assets to individual buyers as a means of closing the widening budget gap, a sale which marks one of Russia’s most ambitious privatizations in years (Arkhipov, Biryukov). The sale was originally only open to domestic buyers, which Putin announced on the 1st of the month. However, by February 2nd, his statement was amended: shares will be available to foreign buyers too. It seems the Russian government had suddenly remembered something: their citizens have no money.   

As many of you have probably heard in the news, Russia has been in the middle of an economic crisis since 2014. There are several reasons for this: Climate change, which is causing droughts in the southern regions and stalling crop output (Flintoff); President Putin’s ongoing mission to expand the Russian military, an extremely expensive endeavor which some have pointed to as the catalyst for the country’s economic woes (Ormiston); Attitudes springing from a post-communist society, which discourage the individualism, radical thinking or competition that could create new industry or stimulate a free market economy. Perhaps the biggest blow of all has come in the form of the plummeting price of oil, exports of which has been a main pillar of the Russian economy since the Soviet era.

Since the start of this economic decline, the value of imports has fallen by over 38 percent. More than 2.3 million people have slipped below the poverty line in the past year. Inflation remained above 15% throughout 2015, with the US dollar being worth more than 70 Russian rubles by December of last year. “Right now,” Alexei Ulyukayev, Russian Economic Development Minister said in an interview in October, “you have to be a brave, even crazily brave person to open a business” (Hobson).

Despite all this, support for the Russian regime remains high throughout the country. This could be partly due to the fact that unemployment has remained low–about 5.5%. However I doubt this is the cause, considering employers were only able to preserve jobs by cutting workers’ hours and wages. Instead I believe the Russian government has kept discontent at a distance by blaming the economic crisis on external factors, or anti-Russian conspiracies–a sentiment often touted by their (state-owned and operated) TV news stations (Hobson). There’s also been some speculation over Russia’s true motives behind their recent campaign against ISIS. It’s true that the government and citizens have been rightfully up-in-arms against the organization, which shot down a Russian passenger plane in October, killing all 224 people on board. But I wonder whether Putin would have taken up against ISIS so aggressively if the economy had not been in such a sorry state.

While it seems counter-intuitive to launch a major military campaign in the midst of an economic crisis, this is actually a common political move among leaders trying to fend off public discontent. It’s a way of distracting the public and garnering support for a government which is now using its power to “protect and defend” the homeland and/or some other noble cause. This phenomenon is often referred to as a “rally-round-the-flag” strategy by political scientists, who have observed a consistent uptick in public opinion for one’s government whenever dramatic international events occur (Americans might recall the immediate and drastic increase in support for President George W. Bush immediately following the attacks on September 11, 2001). This rallying effect creates an incentive for leaders to start “Diversionary Wars,” i.e. wars with the purpose of improving conditions at home by literally diverting attention from domestic problems and providing a scapegoat for whenever those problems do become apparent. We’ve seen this strategy used before in the West, with President Bill Clinton’s 1998 Missile Strikes in Iraq following the Monica Lewinsky scandal; or more pertinently, with Prime Minister Margaret Thatcher’s struggle in the Falklands–the victory in which bolstered her support to a degree that allowed her to be re-elected in the midst of an economic crisis. So it’s not really such a surprise that now, despite Russia’s economic weaknesses, President Putin seems to have made it his personal mission to dismantle ISIS.

What is surprising is that he would now publicly announce that Russia is selling its assets, providing evidence of the country’s economic woes. And whether this privatization as a bid for cash will work remains to be seen. You see, in order to attract investors, your company needs to look like it will grow and increase output. At the moment, Russia’s government seems to be doing to opposite. And while this may seem like an excellent opportunity to buy (normally domestically exclusive) Russian stock, a savvy economist will remind you that you only own something of Russia’s as long as their government wants you to own it. In past privatizations, we’ve seen Russian investors receive pennies back on the dollars they invested once the Russian government decided the economy was stable enough to go public once more.

Still, this may not be the case during this unusually sharp economic decline. It is rare to see a state openly declare that they are broke enough to put pieces of their public sector up for sale. In a country as prideful as Russia, it is a sure sign of desperation.

Arkhipov, Ilya and Biryukov, Andrey. “Putin Opens Asset Sales to Foreigners as the Budget Gap Widens.” Bloomberg Business. n.p., 2 Feb. 2016. Web. 22 Feb.

Flintoff, Corey. “For Russian Farmers, Climate Change is Nyet so Great.” NPR. NPR 22 Feb. 2016. Web. 22 Feb. 2016.

Hobson, Peter. “8 Shades of Crisis: Russia’s Year of Economic Nightmares.” The Moscow Times. The Moscow Times, 25 Dec. 2015. Web. 22 Feb. 2016.

Ormiston, Susan. Ruble’s Dramatic Drop Inflicts Economic Pain in Russia. CBC News, Jan. 2015.

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