Russia has weathered the economic storm that broke in 2014 and will, despite external attempts to cow it, gradually return to growth, President Vladimir Putin said on December 1 in a state of the nation speech laden with patriotic sentiment and a pledge to boost social spending.
In contrast to the often confrontational tone heard since the 2014 nosedive of relations with the West over Ukraine, Putin rather pushed a message of economic and social development on a homegrown platform of strength after two years of effective isolation.
“Every cloud has a silver lining,” Putin said, commenting on Western sanctions imposed against Russia, which he said had been an attempt to make it “dance to someone else’s tune”.
However, after falling 3.7% in 2015, the country’s GDP shrank only 0.3% in the first ten months of this year, Putin noted with a nod to similarly decreasing inflation, on course to come in under 6% in 2016, less than half of the 2015 level.
“We do not want any confrontation and we as well as our partners and the world community do not need it,” Putin told members of both chambers of parliament, the government and assorted dignitaries gathered in the Kremlin. “In contrast to some Western counterparts who see a rival in Russia, we do not look for enemies and have never done so. We need friends. However, we will not tolerate that our interests are either neglected or infringed.”
On the homefront, Putin emphasised the planned boost in social spending, especially for the regions. However, his detailing of success in bringing better healthcare to the population in recent years only served to highlight the stiff cuts in health spending under the 2017 budget that was recently approved by parliament.
As the government struggles to rein in the budget deficit toward the 3% red line set earlier by the Kremlin, spending on healthcare next year will decrease 22% to RUB466bn ($7.4bn). These cuts and reductions in some areas of military spending will finance a hike in social spending that Putin also focused on in his speech.
Social spending will rise by a third from RUB4.4 trillion in 2016 to RUB6.2 trillion in 2017, the largest line item in the budget after the federal government’s general expenditure bill. Spending on everything else will decrease to keep the spending inside the RUB15.7 trillion cap.
At the same time, Putin pressed the government to find new sources for growth that did not materialise earlier in 2016, with the broad policy brainstorming and liberal economic course advocated by the team of former finance minister Alexei Kudrin.
By May 2017, Putin instructed the government to come up with a plan for achieving the pace of global economic growth by 2019. According to International Monetary Fund estimates, that would amount to 3% annually, while all recent outlooks on Russia warn that its growth potential is capped at 1-2% as long as deep structural problems remain unaddressed.
Meanwhile, the latest long-term development outlook by the Russian Ministry of Economic Development sees the country entering a period of stagnation until 2034, with average annual GDP growth amounting to 1.8%. The finance ministry’s long-term budget framework also sees stagnation, with the revenue base shrinking from 33.3% of GDP in 2016 to 29.9% of GDP in 2034.