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Stratfor: Russia Economy Hits Perfect Storm

The Russian economy started stagnating in 2013, but the nation was never actually able to recover from the 2008-2009 recession, according to Stratfor Global Intelligence. The combination of the 2014 sanctions over the Ukraine and collapsing oil prices is a perfect economic storm that is grinding Russia to a halt.

Russia’s central government has cut its budget by 10 percent across the board, except for defense. As a result, social programs have been slashed, and even funding to host the World Cup 2018 has been severely restrained.

The Russian economy shrank by 4.6 percent in the quarter ending June. Although the media has focused on the stability in Moscow and maybe St. Petersburg, the economic decline in Russian provinces has been much more serious.

Debt in Russia’s 83 regions has risen by 100 to 150 percent since 2010. Russia’s economic minister suggested that possibly 60 of those 83 regions are in crisis mode, and 20 may have already been defaulting on their debt.

President Vladimir Putin and the Kremlin have $541 billion in reserves, but intervention to bailout the regions would drain much of Russia’s wealth, which is spread throughout its currency reserves, the National Wealth Fund and the National Reserve Fund.

Stratfor predicts that the Kremlin will allow the economies of many of the country’s Soviet-era mono-cities, which rely on a single industry, to continue to deteriorate. As a relic of the Soviet period, the mono-cities employ the bulk of their populations in a single industry such as manufacturing, metallurgy, timber or energy. These mono-cities generate about 30 percent of the country’s industrial production. With only a single skill, workers in mono-cities generally cannot migrate to find better jobs or salaries.

Already facing food shortages and other issues with the countersanctions, Stratfor believes Moscow is “stepping up its security apparatuses within the regions, stepping up its control within the governors and within the mayors.”

Stratfor believes Putin is trying to prove that he can “isolate Russia from the West, from Western foods, and keep Russia Russia.” But using the people to demonstrate his power and sustainability, is risking the social contract Putin made with the Russian:

“You will always receive your paychecks; I will keep the economy growing; I will quadruple–pretty much-standard of living; you will have Western-style foods and goods inside of Russia.”

Putin’s popularity was sky-high for the last 15 years, because he delivered on his promise to the Russian people of strong leadership. But now Putin must chose to battle the West or give in to the needs of the people.

Russia’s inflation rate hit 16.9 percent in the first half of 2015, cutting wage values by 14 percent over the last 12 months. Caught up in the worst economic decline since the 1998 ruble crisis, Russia’s national poverty rate increased by 14 percent in the first half of this year. So far, Russia has been unwilling to increase the minimum wage or social benefits to fight poverty.

Stratfor expects that protests against the Kremlin will increase as more Russians fall under the poverty line, and regional and municipal debt grows. They expect the Kremlin to retaliate by cracking down on protest movements and opposition parties to block the formation of any broad and serious any serious challenge to their hold on power.

They believe that Russia can hang on with its current strategy for the next couple of years, but Putin’s popularity will soon fade. Eventually, regions could revolt in a similar process that led to the dissolution of the Soviet Union in 1991, when 15 nations comprising a third of the population and a quarter of the Soviet Union declared independence.

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