Putin press conference: A man with a plan for 2019

Putin press conference: A man with a plan for 2019
Putin was confident and relaxed at this year's annual press conference / bne IntelliNews
By Ben Aris in Berlin December 20, 2018

Russian President Vladimir Putin kicked off his marathon annual end of year press conference with the usual rundown of macroeconomic results for the year. The agenda was very full at this year’s conference, and it was a mixed bag. 

Looking across the last few years of this event Putin seemed more relaxed and upbeat than he has done for several years. Recent years have been very difficult for Russia, and Putin looked tired and depressed at the press conferences between 2014 and 2016. Those were the years when the showdown with the west started and the threat of war was very real. At the same time the economy was on the verge of collapse. Although it was not widely reported Russia’s budget almost went bust in 2016 when the Ministry of Finance was missing some RUB2 trillion ($29.6bn) to plug the hole in the budget. In the end there was a faux privatisation of a 19.5% in state-owned oil major Rosneft that turned out to be a loan that bailed the country out and staved off a collapse.

Four years later and most of these challenges have been overcome. Domestically, while the Russian economy is not thriving, it has overcome a very nasty economic crisis following the collapse of oil prices and then devaluation of the ruble, and sustained remarkably little damage in the process. In the last year Russia has built up its currency reserves again to circa $470bn and economic growth and incomes have recovered. Internationally, the sanctions threat has been contained and Russia’s economy has responded. Programmes to delink Russia from the rest of the world economy — for example, food import substitution, setting up its own payment system — have been fairly successful and the threat of new sanctions in the new year is a lot less scary.

And viewing it from Moscow, Putin’s adversaries are in total disarray. US President Donald Trump has ordered a pullout from Syria, handing Russia control of that country and making Russia a major player in Middle Eastern politics. The US administration is in total disarray as the Mueller investigation moves into its end game. In Europe, Paris is in flames and French President Emmanuel Macron’s political future is in doubt. The UK is in meltdown ahead of a possible no-deal Brexit. And German Chancellor Angela Merkel, probably Putin’s most formidable counterpart in the EU, has quit the leadership of the ruling Christian Democrat Union and will leave office in 2021. On top of this, relations with China, Russia’s newest best friend, are deepening and also taking on a military dimension, while Beijing is taking an increasingly aggressive stance in its relations with Washington in both trade and in the South China Sea.

Russia still faces many challenges, but Putin has a plan in the form of the May Decrees. He has money. And he has powerful friends.

Macro

All Putin’s big speeches start with a rundown of Russia’s macroeconomic results. On the home front Putin admitted that growth was low at 1.7% and that inflation was just under the Central Bank of Russia (CBR) target rate of 4% as the year comes to an end.

But he had some boasts too. The current account in particular has almost doubled from its $115bn surplus in 2017 and is projected to end the year at a record $190bn thanks to the higher than expected price of oil this year coupled with the fall in imports, as Russia increasingly substitutes imports — especially European food imports. (Russia now has its own cheese industry.)

BOFIT tweeted that Russia’s consensus GDP growth forecast for 2018 is +1.7%, whereas October growth was +1.8% and the range is from +1.5% to +2.2%. The outlook for 2019 is also poor at +1.5%, which was downgraded from +1.6%, and the range is from +1.4% to +1.8%. “This is not very cheery,” tweeted BOFIT

Putin tried to brush these poor results off with a flippant “Well we used to have less than 1% a decade ago,” before going on to say this was not all Russia’s fault and you can’t “mechanically” calculate growth rates.

“There have been ups and down and there was a global downturn in 2008. There was a 7.8% contraction then and we are not the cause of that downturn,” Putin said in a backhanded swipe at the US. “We recovered and started to grow again, but in 2014 and 2015 there was another crisis: a drop in oil prices — our main export product. We can’t calculate mechanically.”

Putin went on to say that while GDP growth will continue at these low rates for the next two years, from 2021 the government is expecting growth to pick up to 3%.

“Low growth will continue unless we change the structure of our economy. This is the aim of the national projects,” Putin said.

He went on to sketch out 12 national programmes that he launched with his May Decrees earlier this year that are designed to invest into the social sphere and productive parts of the economy, before reiterating the transformation to a digital economy. The Russian government will allocate RUB1.376 trillion ($20.4bn) in the coming years to support the domestic industries. "We have outlined a number of programs related to the support of specific industries. In general, by 2024 it will total RUB1.376 trillion," Putin said.

The Russian government will allocate $20.4bn in the coming years to support the domestic industries: "We have outlined a number of programs related to the support of specific industries. In general, by 2024 it will total 1.376 trillion rubles," Putin said. “[We] want to invest into innovation in the economy to see greater rates of growth,” Putin said.

The goals of these programmes were detailed in the May Degrees, but the details are still being worked out and it is likely to be a long slow process.

“We need to leap,” Putin said, putting his finger on the issue at hand. “It is not only about [the net value of the economy]. We used to rank fifth biggest of the global economies. We need to have brand new quality of our economy.”

Summing up, Putin said: “By and large I am happy with 2018.” And he should be. Russia faced four rounds of sanctions in 2018 that have become increasingly stringent, and the country ends the year with growth, albeit weak, a 2.1% of GDP budget surplus — the first surplus for years, low inflation and unemployment, and a record current account surplus that has filled the state coffers.

Russia has made some real progress as the sanctions have forced austerity on a government that had been used to swimming in money during the boom years of the noughties with $100-plus oil.

The tax service has been transformed and tax receives are up: of the circa RUB3 trillion federal budget surplus in November two-thirds of the cash is from higher oil prices but one-third is due to improved tax collection.

To highlight this change Putin mentioned the non-oil budget deficit — the size the deficit would be if all Russia’s oil revenues were magically removed. During the boom year the Russian government ran a headline budget surplus, but the non-oil deficit was 3-4%. In other words Russia was using its petro-dollar income to subsidise the growth of the economy.

When the 2008 global crisis hit, the non-oil deficit soared to 13% as the state turned to its reserves to bail the economy out and cushion the pain of that external shock. The non-oil deficit also blew out to the same proportions during the 2014-2015 crisis when oil prices collapsed. However, Putin boasted that this year the non-oil deficit will come in at 6.6% and next year it is expected to fall to 6%. Going forward the state has previously said it would like to get the non-oil deficit back down to 3-4%, where the revenues earned from raw materials exports continue to subsidise the transformation of the economy.

Nuclear war

The “Planet Business” part of the Russian story is an easy sell for Putin as despite all the brouhaha, Russia’s economy continues to make progress and the state has delivered on a European level standard of living. As bne IntelliNews has argued elsewhere, the issue with the economics is that the government has adopted a “war mentality”. Russia could grow faster it if spent more, borrowed more and opened its markets to free trade. However, Putin equates Russia’s national security with keeping its exposure to international markets minimal. Russia has one of the lowest external sovereign debt exposures in the world of some 15%. At the same time the Central Bank of Russia (CBR) in December hiked rates by 25bp at a time when it didn't really need to as inflation remains slightly below its target rate of 4%. Russia’s monetary policy is too tight and its international borrowing is too low, but Putin is prepared to sacrifice faster growth and higher living standards for security and insulation against sanctions.

The press conference inevitably moved on to “Planet Politics” and Putin responded to a question asking him if he is worried about the possibility of a nuclear war to both score points against the US and to give the domestic audience a fright that will only shore up his political position at home as a tough man who will protect the country’s image. While the international press always picks over all Putin’s remarks at this annual event, it’s important to remember that the majority of what he says is aimed at the Russian gallery.

“I think you are actually right,” Putin said in answer to a question on whether he thought that nuclear war was possible. “The danger of escalation is being downplayed. It used to be unthinkable, but that is no longer true. We are talking about something that could lead to the collapse of our entire civilisation and destroy the planet.”

Putin scored points saying that there is a danger that the international arms control infrastructure is collapsing, and pointed to the US unilateral withdrawal from the Anti-Ballistic Missile Treaty (ABM) missile treaty in 2002 as the start of the problems, before moving on to the more recent US unilateral withdrawal from the Intermediate-Range Nuclear Forces Treaty (INF), another treaty that limits shorter range missile use.

Putin himself mixed missiles and macroeconomics during his state of the nation speech in April, when he used half of his presentation to showcase a new generation of “hypersonic missiles” that could penetrate all the US defences and hit any target in the world. More tellingly Putin warned that the START II missile treaty, a core security deal that limits offensive nuclear weapons signed in 1993, will expire in 2021 and that no negotiations to replace it are going on.

"Generally, this is simply an element of containing and balancing parities in the strategic balance. This is what it is. This means keeping the parity and nothing more than that," the Russian leader said, speaking about the newest breakthrough missile defence systems developed by Russia.

“Let them say that we are trying to get an advantage. We are not trying to get an advantage. We are trying to get parity,” Putin said.

Sanctions

Putin also brushed off the sanctions regime imposed on Russia since 2014. “Russia has always been under sanctions, since the 19th and early 20th century,” Putin said, going on to add that, “Our economy has adapted… The goals of the sanctions are designed to restrain Russia and we are seen as a rival,” Putin said in reference to the Skripal poisoning sanctions.

“In 2008 the economy contracted by 7.8% but following the sanctions in 2014 the economy contracted by only 2.5%. The US Treasury Department says that only a third of this year’s contraction was due to the sanctions and the rest was due to the collapse in hydrocarbon prices. I think it is less than that. And there has been some benefits from sanctions.”

Russia has invested heavily into import substitution schemes — especially in agriculture which has leap forward. The self-imposed ban on EU agricultural imports came just as Russia had joined the WTO and promised to open its markets to EU imports. While Russia had become self-sufficient in grain and chicken meat, its pork and beef markets were still heavily dependent on imports and the domestic producers would not have been able to compete with the higher quality but lower priced EU imports.

The WTO accession deal phased in dropping tariffs on these products over eight years and a mad scramble had begun to grab market share before the fences came down. That all changed with the sanctions, which were in effect ultra strong protectionist measures, and the domestic market has flourished. Some of the sanctions hurt as cheese in particular famously disappeared from the shelves, but four years on Russia now has its own cheese industry. Progress has also been made in other sectors too; Putin pointed out that localisation of automotive parts in foreign-run factories in Russia is up to 75% in some cases and in other products — like chicken meat — Russia is now a net exporter. Russia is also now the third largest grain exporter in the world.

Ukraine

The press conference could not pass without commenting on Ukraine. Putin repeated his claims that the naval clash in the Sea of Azov on November 25 was a provocation by President Petro Poroshenko designed to boost his flagging ratings in the presidential election race due to happen on March 31 next year.

While the west has lambasted Russia for the attack on three Ukrainian naval ships, the evidence that Russia was entirely to blame is inconclusive. bne IntelliNews suggested in a controversial op-ed that the idea of a provocation cannot be excluded. Moreover, bne IntelliNews has shown that talk of an imminent invasion of Ukraine by Russia is probably overblown.

Russia arrested the 24 sailors on the Ukrainian ships and while Putin suggested they will be returned to Ukraine, he added that not before they were put on trial in Russia, presumably on charges of violating Russia’s borders. While the details of the clash remain confused, even an investigation by Bellingcat found the Ukrainian vessels did enter Russia’s undisputed territorial waters and so can be charged with illegally crossing the border, although the attack on the vessels almost certainly happened in international waters while they were already in retreat.

Putin added a new element saying that the sailors were not supposed to survive the clash. “The sailors were not supposed to survive the incident. There are people in the Ukrainian elite that are angry that they are not dead.”

Stepping back from the emotive rhetoric, Putin played on the deep cultural and historical ties between Ukraine and Russia. The laws are being changed at the moment to make it easier for Ukrainians to obtain Russian citizenship. 

“How will we settle our relations? Who will be in power? That is not the main thing. It's a question of people. Ukraine is our main trade partner — despite everything — and the turnover is still growing. We have natural relations and ties. But in Kyiv as long as we have those that hate Russia and don't understand their own interests we will keep this abnormal situation.”

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