Around a year ago, Russia announced its anti-crisis program in response to a recession that looked to rival the 2008-2009 Great Recession. Drops in oil price, years of economic sanctions and continuing corruption culminated with the collapse of the ruble in 2014. As the one-year program draws to a close, Russian officials are claiming it looks as if the plan has been successful and Russia will escape its recession. Yet the program initially raised doubts as economic analysts criticized it for sticking with the old measure of just pouring money on the economy. So how did this initiative actually hold up?
It may be easy to denounce Russian claims as propaganda, but there may be some truth in these statements. When the plan was announced, President Vladimir Putin and Prime Minister Dmitry Medvedev pledged to cut budget expenditures by 10 percent, but with no changes in defense and agricultural spending. Instead, Putin promised the 2.3 trillion rubles aimed toward macroeconomic stability would support fostering small businesses and import substitutions. Businesses were promised more freedom, and the government pushed toward replacing imports with Russian-made goods. The damaged banking system would be improved through the use of a “bad bank” and recapitalization. The “bad banks” would remove troublesome assets from Russian banks, allowing them to regain their footing.
Surprisingly, the devaluation of the ruble has actually helped some industries in Russia. Many of the industries export their goods in currency other than the ruble. So as the ruble devalued and manufacturers’ production costs decreased compared to the rest of the world, they were then able to sell their goods in a currency valued higher than the ruble. That’s not to say the sanctions aren’t damaging, as they have allegedly stripped Russia of a quarter of its cash holdings. However, while the damage caused is great, it is likely not enough to force Russia to make any changes.
Medvedev recently stated he expects inflation to be brought down to 6.4 percent in 2016. Some U.S. agencies rated Russian government bonds as stable due to the stabilization of external finances within Russia. Yet others claim the economy is still deteriorating. It can be hard to discover the truth in these statements, as each side has something to gain with their forecasts. By making optimistic predictions about a fall in inflation, Russia not only attempts to appear strong and sturdy in the eyes of the rest of the world but would also gain from a favorable inflation shock.
Whether Russian officials or western analysts are more accurate in their predictions, the inconsistent statements made about the economy are cause for concern. These statements demonstrate a complete lack of international cooperation in a time where such collaboration is becoming a must. Russia still remains stubbornly independent with claims it can fully sustain itself. While this may be true, the past has shown how valuable cooperation can be in stabilizing currency. In 1985, when U.S. currency was over-appreciating and negative GDP growth seemed to be the norm, nations worked together to cooperatively devalue the dollar and stimulate international growth in an agreement that became known as the Plaza Accord. Amidst all this was an increasing pressure toward protectionism and other self-isolating solutions. Yet the G-5 nations at that time were able to prevent this through cooperatively adjusting exchange rates and creating economic growth .
It is hard to imagine Russia and the West ever cooperatively working together to improve each other’s economy. Yet the potential for global prosperity and peace, should this occur, makes it thoughtless to dismiss the possibility. Economic stability can be the forefront in a movement toward more peaceful relations. While Russia may be able to escape the current recession, it is difficult to see its problems with inflation and currency stability going away permanently. An agreement as big as the Plaza Accord would be a difficult hurdle to jump, but if Russia wants economic stability, pursuing agreements resembling the Accord would be a step in the right direction.
Tim Marshall is a Rice University sophomore majoring in mathematical economic analysis.