The Economic Challenges Facing Russia

The largest country in the world i.e. Russia has just concluded its election process. The results have been completely predictable. Vladimir Putin has once again emerged as the winner in this election. There have been several concerns about the possibility that these elections were rigged. Some critics have alleged that Putin got to pick his opponents and anyone who posed even a slight threat was immediately disqualified from the race. Also, there are accusations of widespread voter fraud as a result of which Vladimir Putin has won with a whopping 77% majority!

In this article, we will not discuss the validity of Vladimir Putin’s victory or its political implications. Instead, we are more concerned about the economic effects of this victory. In this article, we will have a closer look at the economic challenges which are being faced by Russia.

The Falling Rates of Oil

The economy of Russia is largely dependent on oil. At the present moment, Russia is the largest producer of oil in the world. However, as a result of fracking i.e. hydraulic fracturing, American companies are able to refine oil at rock bottom prices. This has led to a drastic fall in the prices of oil in the international market. Hence, Russia’s number one export has been hit hard and as a result, the government revenues are dwindling. As a result of this, the growth forecasts for the Russian economy are capped at a maximum of 2%. In real terms, the economy might be facing a decline.

Demographic Crisis

Russia has been suffering from low birth rates ever since the World War era. As a result, the population of Russia has declined steadily over the years. The birth rate is also very low amongst the new generation. As a result, Russia is likely to face a shortage of skilled manpower over the years. Russia is also facing a shortage of skilled professionals in technical fields like computer programming. This is in stark contrast with other emerging nations like China and India who have rising populations and as a result, can keep the wages low. It will be a challenge for Russia to ensure the rapid upskilling of its workforce. However, it needs to be done since it is the only way to stay relevant in the global marketplace.

The Pension Issue

As already mentioned above, the revenues of Russia are already falling because of the low price of oil. Hence, it is imperative for the Russian government to cut expenses in order to make ends meet. One of the biggest expenses in the Russian budget is state pensions. Russia has one of the lowest retirement ages in the world. Also, Russia has one of the highest life expectancies in the world. As a result, the government has to pay pension to former state employees for a long period of time. This is the only remnant of the socialist era economy that was present in Russia. These pensions are considered meager by many retirees who claim to have difficulties in making ends meet. As a result, if Vladimir Putin tries to reduce the amount of pension being paid out, he would end up making a wildly unpopular choice. On the other hand, if he does not reduce the amount being paid out, it will lead to a tremendous strain on the national treasury.

Sustainable Growth

Russia does not have a plan to achieve long-term sustainable growth. In the past few years, the high growth was made possible by skyrocketing prices of fuel. In the more recent years, the growth has been relatively subdued. In fact, the dismal growth that has been clocked by Russia has been the result of infrastructure projects. The Russian government has been borrowing a lot of money and spending it on projects such as the Football World Cup and the bridge to Crimea. Once these projects are over, the nation will find itself in a lot of debt with interest payments to be made. On the other hand, the revenue generation from these projects will be dismal. This is the reason why Vladimir Putin has been courting foreign investors to invest in Russia. Russia is in urgent need of investments in order to have sustainable growth. This is the reason why Vladimir Putin has not responded to the tariffs imposed by Donald Trump. Economically, Russia is in no position to pick fights.

Inflation

Russia has been consistently devaluing the ruble. There were multiple devaluations in the years 2013 and 2014. These devaluations were done with the intention of shoring up exports. However, the Russian government has been unable to do so. Instead, Russia faced several sanctions from European Union countries as well as the United States because of its annexation of Crimea. This has made it difficult for Russians to import goods at lower prices. Since Russia imports a lot of the food grains it consumes, the sanctions have led to inflation in food prices. The ruble has also seen a decline because of the fall in the prices of oil. To sum it up, the average Russian is facing very high inflation rates. If this issue is not dealt with immediately it could cause bigger problems for the Russian economy and for Vladimir Putin.

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