Russia in Decline

On October 20, The Jamestown Foundation held a workshop in Washington D.C. titled “Russia in Decline,” with the participation of a veritable Who’s Who of senior American experts on Russia. It was the concluding exercise of an extensive research project on Russia designed to provide policy guidance to the next president of the United States. Prior to the workshop, the leader of the project, S. Enders Wimbush, had solicited written contributions by a dozen of the best-known Russian political commentators and economists. 

The bottom line of both the workshop and Russian contributions was a remarkable consensus: Russia has entered a period of prolonged decline that will take many years to reverse even if it could be stopped soon, which is unlikely. The decline is man-made and predates Russian aggression in Ukraine and Western sanctions; it is the aggregation and interaction of a variety of negative systemic trends in Russian society already in existence.  Reversing these trends, the experts concluded, will be extremely difficult if not impossible. Russia’s decline is likely permanent.

Vladimir Putin’s rule accelerated and deepened Russia’s decline. Putin came to power in 1999 at a time when 70% of the Russian economy was in private hands, however corrupt the process of getting there might have been. It is now less than 50% private, with all the important sectors in the state’s hands after an intense program of renationalization. Moreover, large private companies, often in the hands of oligarchs, are also considered and treated as instruments of the state. They depend for their very survival on serving Putin and his regime of the power elite, or siloviki. Putin’s great luck in the first half of his rule (1999–2008) was the rapid increase in the price of hydrocarbons, Russia’s single significant cash crop. Oil that traded at $12-$14/barrel when Putin ascended to power rose steadily to $147/barrel in May of 2008. For a few years, GDP growth rates of 7% per annum and rising incomes ensued. This reliance on oil and gas exports, which increased from less than 50% of exports in 1999 to 68% today, convinced him that state control of the economy was essential to his ability to hold on to power.  

This classic bubble burst when hydrocarbon prices collapsed, empowering all the built-in inefficiencies and pathologies of Putin’s top-down model to come into full play. These were helped along by Western reaction -- or lack thereof -- to his ever more aggressive behavior, beginning with Russia’s attack on Georgia in 2008. Russia’s economic downfall this time was nowhere near the meltdown suffered after the collapse of the Soviet Union, but was nonetheless dramatic. It has continued to worsen. In 2013, the first year of the current stagnation, Russia had a $2 trillion economy. Today it is roughly half that, and decline is advancing rapidly.

The long-term implications of Russia’s steady decline are particularly troubling, as they raise profound questions not of how one reverses something probably irreversible already, but rather how one deals with the kinds of dynamics that attend the failure of a once powerful state, with the kind of contingencies that flow from that failure.

Decline has gripped nearly every aspect of Russia’s corporate life.  For example:

The Knowledge Industry -- This could be the most serious long-term threat to the Russian economy and status as a global player. Historian Harley Balzer documents how Russia has simply ceased to be a knowledge economy and is rapidly deteriorating further. These problems are punctuated by a tsunamilike brain drain of young educated Russians -- mostly to the West and developed economies -- who no longer see a future for themselves in a declining Russia. This year the number of such emigrants is expected to reach 330,000. Russian education is failing. According to demographer Nicholas Eberstadt, in 1990 Russians made up 6% of the world workers (ages 15 to 64) with secondary and another 6% of those with tertiary education. Current trends forecast that this will drop to 2% or less by 2040, and for Russian males the percentage will be 1%. In most areas of international high tech, Russia is no longer competitive. Thus, it received a miniscule 0.23% of the patents awarded from 2002 to 2015 by the U.S. Patent and Trade Office (USPTO) and only 0.36% of the International Patent Applications in the same period, putting it “neck and neck with Alabama.” As a 2015 Computer and Information Service Exporter, Russia ranks behind Luxembourg (population 563,000) and only slightly ahead of the Philippines. Moreover, with R&D spending of $126.9 per capita, five to ten times less than developed countries, Russia has no chance of catching up.

The Military -- Russia’s main claim to international relevance and Putin’s domestic support rest on an aggressively militaristic and nationalistic posture and constant saber rattling. It is now clear that its militarization campaign has reached the limit of what the economy can bear, which is far below the extravagantly ambitious objectives set by Putin. The defense spending plan for 2011–2020 envisaged a fanciful GDP of $5 trillion in 2020 and a defense budget of $200 billion. The reality is a GDP of $1 trillion and a defense budget of $60 billion, which, in fact, is no longer sustainable. Indeed, two-thirds of the promised military procurement of $700 billion, including 1,500 new aircraft and 2,300 new tanks, has not materialized and is not going to anytime soon. Moreover, in technological prowess the Russian military is rapidly falling behind not only the West, but also China. In one example, 65% to 79% of the electronics needed for Russian missiles are said to be imported from the West and are currently unavailable.

Demographics -- Russia is in the grips of a severe demographic crisis that is getting worse as the economy shrinks. It has had below replacement fertility since 1980 and experienced 14 million more deaths than births in the 1992-2012 period. In the strategic Far Eastern district, Russia lost 22% of its population, mostly to migration. Perhaps most disturbing is the abysmally low life expectancy for Russian males. Russian 15-year-olds can expect to live only to age 52, which is lower than that of most African countries, according to the World Health Organization.

Oil and Gas -- Developments in this sector are of particular interest because many in Russia, including the government, believe that once sanctions are lifted things will go back to where they were in the 2000-2008 period in a kind of deus-ex-machina replay. They will almost certainly be disappointed. What Russia’s current decline has shown beyond doubt is how grossly inefficient and corrupt Putin’s model of state-owned oil and gas resources really is. The western sanctions regime found Russia’s “national champions” Gazprom and Rosneft up to seven times less efficient than, for instance, Exxon and Shell, and very dependent on Western technology and investment. Russian producers, it turned out, lack the technology to do Arctic shelf drilling or horizontal fracking. They have bought 90% of their drilling platforms from South Korea. Putin’s much touted “pivot to China” to deliver gas in return for investment has come to nothing, and neither the “Power of Siberia” nor the “Altai” pipeline has much of chance of becoming reality. The “pivot to China” is just another Putin dud. Instead, Russian production costs are rapidly rising as gas markets are shrinking and Gazprom is currently selling gas to Germany at a loss. With the U.S. shale revolution marching on and LNG supplies continuing to expand, it is very unlikely that the happy days of the 2000s are coming back to Moscow.

The Jamestown project noted these and many other indicators of Russia’s decline, including its brittle political system, rapacious leadership that harvests the state’s wealth and parks it abroad, ethnic imbalances that promise to change the character of critical institutions and regions and indeed of the state itself, and even looming environmental catastrophes. For example, Eurasian expert Paul Goble noted Russian experts’ concern that rapid climate change is melting the permafrost underlying nearly 65% of Russia’s territory, probably rendering it uninhabitable in coming decades.

A Russia in decline is not what most Western policy makers envision. Most lack the conceptual mindset required. Too many are still caught up in stifling paradigms like “re-setting” relations, which imply that the West is dealing with a normal Russian nation.  But “normal” Russia disappeared long ago, and its place has been taken by something very different and infinitely more threatening.  For as Russia declines and its window of competitiveness closes, it will discover large incentives to take more and greater risks to remain in the game. We have already seen some of its first moves -- in Georgia in 2008 and Ukraine in 2013, and now in Syria, too. Its brazen cyberwarfare aimed at the United States, and, at this writing, an attempted Russian-sponsored coup in Montenegro, are part of a menu of Russian stratagems to support its shrinking competitiveness. Russia will increasingly favor its military to support its risk taking; it, too, is in decline, but will remain a good enough instrument for some time to threaten, intimidate, and coerce successfully. And when this fails, Russia’s necessary recourse will be to its nuclear weapons.

The challenges of Declining Russia should be a wakeup call to Western policy makers to understand and acknowledge the nature of this dangerous state. And it will necessitate new kinds of strategies and a willingness to employ them.

Alex Alexiev is chairman of the Center for Balkan and Black Sea Studies (cbbss.org). He tweets on national security at tweeter.com/alexieff and could be reached at alexievalex4@gmail.com. 

On October 20, The Jamestown Foundation held a workshop in Washington D.C. titled “Russia in Decline,” with the participation of a veritable Who’s Who of senior American experts on Russia. It was the concluding exercise of an extensive research project on Russia designed to provide policy guidance to the next president of the United States. Prior to the workshop, the leader of the project, S. Enders Wimbush, had solicited written contributions by a dozen of the best-known Russian political commentators and economists. 

The bottom line of both the workshop and Russian contributions was a remarkable consensus: Russia has entered a period of prolonged decline that will take many years to reverse even if it could be stopped soon, which is unlikely. The decline is man-made and predates Russian aggression in Ukraine and Western sanctions; it is the aggregation and interaction of a variety of negative systemic trends in Russian society already in existence.  Reversing these trends, the experts concluded, will be extremely difficult if not impossible. Russia’s decline is likely permanent.

Vladimir Putin’s rule accelerated and deepened Russia’s decline. Putin came to power in 1999 at a time when 70% of the Russian economy was in private hands, however corrupt the process of getting there might have been. It is now less than 50% private, with all the important sectors in the state’s hands after an intense program of renationalization. Moreover, large private companies, often in the hands of oligarchs, are also considered and treated as instruments of the state. They depend for their very survival on serving Putin and his regime of the power elite, or siloviki. Putin’s great luck in the first half of his rule (1999–2008) was the rapid increase in the price of hydrocarbons, Russia’s single significant cash crop. Oil that traded at $12-$14/barrel when Putin ascended to power rose steadily to $147/barrel in May of 2008. For a few years, GDP growth rates of 7% per annum and rising incomes ensued. This reliance on oil and gas exports, which increased from less than 50% of exports in 1999 to 68% today, convinced him that state control of the economy was essential to his ability to hold on to power.  

This classic bubble burst when hydrocarbon prices collapsed, empowering all the built-in inefficiencies and pathologies of Putin’s top-down model to come into full play. These were helped along by Western reaction -- or lack thereof -- to his ever more aggressive behavior, beginning with Russia’s attack on Georgia in 2008. Russia’s economic downfall this time was nowhere near the meltdown suffered after the collapse of the Soviet Union, but was nonetheless dramatic. It has continued to worsen. In 2013, the first year of the current stagnation, Russia had a $2 trillion economy. Today it is roughly half that, and decline is advancing rapidly.

The long-term implications of Russia’s steady decline are particularly troubling, as they raise profound questions not of how one reverses something probably irreversible already, but rather how one deals with the kinds of dynamics that attend the failure of a once powerful state, with the kind of contingencies that flow from that failure.

Decline has gripped nearly every aspect of Russia’s corporate life.  For example:

The Knowledge Industry -- This could be the most serious long-term threat to the Russian economy and status as a global player. Historian Harley Balzer documents how Russia has simply ceased to be a knowledge economy and is rapidly deteriorating further. These problems are punctuated by a tsunamilike brain drain of young educated Russians -- mostly to the West and developed economies -- who no longer see a future for themselves in a declining Russia. This year the number of such emigrants is expected to reach 330,000. Russian education is failing. According to demographer Nicholas Eberstadt, in 1990 Russians made up 6% of the world workers (ages 15 to 64) with secondary and another 6% of those with tertiary education. Current trends forecast that this will drop to 2% or less by 2040, and for Russian males the percentage will be 1%. In most areas of international high tech, Russia is no longer competitive. Thus, it received a miniscule 0.23% of the patents awarded from 2002 to 2015 by the U.S. Patent and Trade Office (USPTO) and only 0.36% of the International Patent Applications in the same period, putting it “neck and neck with Alabama.” As a 2015 Computer and Information Service Exporter, Russia ranks behind Luxembourg (population 563,000) and only slightly ahead of the Philippines. Moreover, with R&D spending of $126.9 per capita, five to ten times less than developed countries, Russia has no chance of catching up.

The Military -- Russia’s main claim to international relevance and Putin’s domestic support rest on an aggressively militaristic and nationalistic posture and constant saber rattling. It is now clear that its militarization campaign has reached the limit of what the economy can bear, which is far below the extravagantly ambitious objectives set by Putin. The defense spending plan for 2011–2020 envisaged a fanciful GDP of $5 trillion in 2020 and a defense budget of $200 billion. The reality is a GDP of $1 trillion and a defense budget of $60 billion, which, in fact, is no longer sustainable. Indeed, two-thirds of the promised military procurement of $700 billion, including 1,500 new aircraft and 2,300 new tanks, has not materialized and is not going to anytime soon. Moreover, in technological prowess the Russian military is rapidly falling behind not only the West, but also China. In one example, 65% to 79% of the electronics needed for Russian missiles are said to be imported from the West and are currently unavailable.

Demographics -- Russia is in the grips of a severe demographic crisis that is getting worse as the economy shrinks. It has had below replacement fertility since 1980 and experienced 14 million more deaths than births in the 1992-2012 period. In the strategic Far Eastern district, Russia lost 22% of its population, mostly to migration. Perhaps most disturbing is the abysmally low life expectancy for Russian males. Russian 15-year-olds can expect to live only to age 52, which is lower than that of most African countries, according to the World Health Organization.

Oil and Gas -- Developments in this sector are of particular interest because many in Russia, including the government, believe that once sanctions are lifted things will go back to where they were in the 2000-2008 period in a kind of deus-ex-machina replay. They will almost certainly be disappointed. What Russia’s current decline has shown beyond doubt is how grossly inefficient and corrupt Putin’s model of state-owned oil and gas resources really is. The western sanctions regime found Russia’s “national champions” Gazprom and Rosneft up to seven times less efficient than, for instance, Exxon and Shell, and very dependent on Western technology and investment. Russian producers, it turned out, lack the technology to do Arctic shelf drilling or horizontal fracking. They have bought 90% of their drilling platforms from South Korea. Putin’s much touted “pivot to China” to deliver gas in return for investment has come to nothing, and neither the “Power of Siberia” nor the “Altai” pipeline has much of chance of becoming reality. The “pivot to China” is just another Putin dud. Instead, Russian production costs are rapidly rising as gas markets are shrinking and Gazprom is currently selling gas to Germany at a loss. With the U.S. shale revolution marching on and LNG supplies continuing to expand, it is very unlikely that the happy days of the 2000s are coming back to Moscow.

The Jamestown project noted these and many other indicators of Russia’s decline, including its brittle political system, rapacious leadership that harvests the state’s wealth and parks it abroad, ethnic imbalances that promise to change the character of critical institutions and regions and indeed of the state itself, and even looming environmental catastrophes. For example, Eurasian expert Paul Goble noted Russian experts’ concern that rapid climate change is melting the permafrost underlying nearly 65% of Russia’s territory, probably rendering it uninhabitable in coming decades.

A Russia in decline is not what most Western policy makers envision. Most lack the conceptual mindset required. Too many are still caught up in stifling paradigms like “re-setting” relations, which imply that the West is dealing with a normal Russian nation.  But “normal” Russia disappeared long ago, and its place has been taken by something very different and infinitely more threatening.  For as Russia declines and its window of competitiveness closes, it will discover large incentives to take more and greater risks to remain in the game. We have already seen some of its first moves -- in Georgia in 2008 and Ukraine in 2013, and now in Syria, too. Its brazen cyberwarfare aimed at the United States, and, at this writing, an attempted Russian-sponsored coup in Montenegro, are part of a menu of Russian stratagems to support its shrinking competitiveness. Russia will increasingly favor its military to support its risk taking; it, too, is in decline, but will remain a good enough instrument for some time to threaten, intimidate, and coerce successfully. And when this fails, Russia’s necessary recourse will be to its nuclear weapons.

The challenges of Declining Russia should be a wakeup call to Western policy makers to understand and acknowledge the nature of this dangerous state. And it will necessitate new kinds of strategies and a willingness to employ them.

Alex Alexiev is chairman of the Center for Balkan and Black Sea Studies (cbbss.org). He tweets on national security at tweeter.com/alexieff and could be reached at alexievalex4@gmail.com.