President Vladimir Putin went back to the classic format for his annual marathon press conference by opening with a run down of the latest macroeconomic results. In the last two events he spent more time on international relations and the showdown with the West in Ukraine and Syria, which got little attention this year.
Putin’s press conference has become a pre-Christmas tradition and the chance for Putin to play the understanding Tsar to the people. The 11 press conferences held so far have run a total of 35 hours and 24 minutes, with a grand total of 643 questions.
The return to the domestic agenda suggests Putin is feeling more confident that he has achieved his main geopolitical goals; it could also mean he is getting seriously worried by the poor health of the Russian economy, which could threaten his position.
The president started by saying Russia is still in recession but pointed out that GDP growth has gone from a 4.1% contraction in the last quarter of 2015 to a much more modest 0.5% contraction expected for the full year in 2016. He also conceded that the budget deficit will come in at about 3.7% of GDP this year – way ahead of the 3% target he set for the Ministry of Finance in January.
While "of course” economic difficulties remain, a “positive trend has emerged, and in recent months we observe very modest, but still growth in real wages in the real sector of the economy”, Putin said during his annual televised press conference on December 23. “That inspires a certain confidence that the movement will be positive in the near term.”
And Russians are feeling more optimistic. The majority of Russians (53%) hope 2017 will be better than 2016, according to independent pollster the Levada Center. Only 4% said they expect things to be worse and another 18% are not expecting any change. The poll also found that 60% expect more corruption scandals and resignations of government ministers, while 21% said they expect mass unrest in 2017, down from 31% the previous year.
The return to a focus on the domestic agenda is partly because Russia is seen as having “won” the showdown this year, turning Ukraine into a frozen conflict and with EU pressure waning as it becomes increasing distracted by its own internal problems and the rise of rightwing populist politics. Likewise, with the fall of Aleppo in Syria, Russia has effectively all but sidelined the Western powers involved in that conflict and the prospect of a Russia-Turkey-Iran alliance there could exclude the West completely from the future resolution.
The press conference was remarkable in that after two hours there had been no questions on the situation in Syria and the future of the country. This stands in stark contrast to Putin’s appearance at the VTB “Russia Calling” conference at the start of the year where he virtually skipped his traditional macroeconomic précis and only became engaged and dynamic when he began to talk about the international tension. However, Putin did say that the Russian naval base in Syria at Tartus – the only Russian naval base outside the Mediterranean – will be expanded.
"Liberation of Aleppo from radical elements is an essential component of a full normalization in Syria, and I hope in the region on the whole," he said at a meeting with Defence Minister Sergey Shoigu. "And this operation, certainly there is no doubt about it, ended with a direct participation – if not to say a decisive participation and influence of our military – especially in its final part, concerning the humanitarian operation.”
Putin did say the next stage in the Syria conflict resolution will be talks in Astana, hosted by Kazakh president Nursultan Nazarbayev, who is emerging as the go-to statesman for Russia’s multinational diplomatic efforts. More importantly this looks like a move by Russia to sideline the US by bringing together the regional powers.
The same was true on Ukraine where Putin kept his comments short, towards the end of the press conference saying: “Normandy format of peace talks on Ukraine doesn't work too well but there are no other options.”
One of the really big success of Putin’s third term has been the dramatic reform of the banking sector which was loss making last year but back in profit this year. The key reform has been the Central Bank of Russia (CBR) campaign to close down the “bank-like” institutions that are mostly little more than money laundering scams; the CBR has halved the number of banks to around 600 now and will probably keep going until there are only around 300 left. The CBR has been closing about 3 banks a month for several years.
“If we have banks that are laundromat for laundering dirty money, nothing good will come out of it, so we have this new system of insurance to deal with this problem,” said Putin.
Russia almost doubled the minimum amount covered by the deposit insurance scheme on bank deposits to RUB1.5mn ($2,460) which has gone a long way to shoring up confidence in the system.
Asked about Russia’s poor showing in technology, Putin pointed out that Russia is a world leader in several sectors: specifically he said that Russian arms exports have soared under his leadership from about $5bn to $14bn of weapons sold this year, and Russia reached $7bn in IT services exports.
But things are still hard for business, especially small and medium-sized enterprises (SMEs). Putin promised significant subsides in 2017 to support business, including agricultural, but went on to say these measures are temporary.
“Anti-crisis measures can’t be permanent,” Putin says. “Entrepreneurs must learn to live off natural demand instead of government subsidies.”
Putin repeated that the budget's “very conservative" assumption of a $40 average price of oil remains. However, following the Opec production cut deal, oil is more likely to average $50 in 2017. That will make a big difference to the deficit and take pressure off the government.
Putin said that while the state was sticking to its $40 oil budget assumption, he believes the price (which Putin says he checks every morning) will stabilise at the “current levels” or about $55. Each $10 differential in oil prices brings in an extra RUB1.75 trillion ($28.6bn) to the budget, Putin said.
“If average oil price around $50/bl, deficit around 1.5% of GDP,” tweeted Iikka Korhonen, the chief economist at Bank of Finland Institute for Economies in Transition (BOFIT). That is well down on the -4% the Ministry for Economic Development (MED) predicts.
Putin says the OPEC deal to cut Russian production by 300,000 bbl/day "won't significantly affect the total production volume" but will bring in additional revenue, “so it's a win-win”. Russia is currently pumping at record levels of over 11mn barrels a day so any cut will simply push production down to the really high levels seen last year.
Putin also highlighted that spending on defence has passed its peak, the line item that has thrown the Russian budget into deficit in recent years. Putin clearly thinks that the Russian army’s modernisation has progressed sufficiently for him to achieve his geopolitical goals. Now the danger has shifted to the domestic front where the worst-than-expected economic results pose a greater threat to his administration.
Alexei Kudrin, Russia's former finance minister, said on Twitter that Putin's comment that defence spending will come down to 2.8% of GDP in 2018 is "an important estimate". A former finance minister, Kudrin was sacked in 2011 over his criticism of a massive hike in Russia's military spending, but has since been appointed co-head of the presidential economic council and is in charge of drawing up the recovery plan.
Still, Putin is being slightly disingenuous on this point as while the headline spending on defence may be going down, the share of military spending that goes into the “black budget” – the part of the budget that is secret and the details not made public – has been rising steadily.
Putin also promised that pensions will be indexed again next year, after the indexation was cut to below inflation this year to help close the budget deficit. Putin also said that he would not mess with the flat tax regime he introduced on taking office in 2017.
“I doubted that a flat income tax regime, introduced in 2001, was a good idea, but then income tax revenue increased sevenfold. Revenues will drop if the government starts messing with the flat tax. I prefer to increase luxury taxes," Putin said.
The Wall Street Journal’s Nathan Hodge, the token foreign media representative, asked if there will be a presidential election next year? Putin answered with one of his trademark jokes: “Which country”? Hodge: “Russia”. Putin: “It’s possible but not expedient,” to peals of laughter.
Hodge followed up with a question about president-elect Donald Trump's tweets the previous day about the need to strengthen nuclear forces. Putin responded with: “To be honest I’m a bit surprised by the officials of the Obama administration. They started to prove that the US army is the most powerful in the world. Nobody challenges that. I said that Russia is stronger than any potential aggressor.”
He then highlighted that in 2001 the Bush administration unilaterally withdrew from the ABM missile treaty, the “cornerstone” of European security that limited the number of missiles each side could deploy. The decision was a shock to Russia, which promised at the time “we will react” and began the long process of beefing up Russia’s military that has come to a head recently.
“The conditions for an arms race was started by the US unilateral withdrawal from the ABM treaty… We have done nothing wrong. We have not done anything that was not agreed at the time. And we have stayed within all our treaty obligations – including the START treaty,” Putin said.
Putin indirectly dismissed the speculation that Russia hacked the US election, saying that the Democrats were trying to blame their loss on “external factors”, when in fact they were facing their own “systemic problems”.
“The current [US] administration has split the nation. The call on electors not to vote for Trump is dividing the nation. Even on this the Democratic Party lost. If you lose you need to lose with dignity,” Putin lectured the audience.
“The Democrats didn't just lose the presidential election, but the House and the Senate as well. Did I do that as well?" he joked. “I would like to have business-constructive relation that would serve the interest of Russia and our two nations.”
Putin refused to comment on reports that Obama reportedly told Putin to “cut it [hacking] out.” “As for the hacking conversation with Obama, he [Obama] says he never talks about private conversations with other leaders,” Putin said, adding that the substance of the leaks are more important than who did it.