Foreign Affairs

The Russian Economy Is Not Equipped to Withstand COVID-19

Moscow is in deep trouble.

For a nation to develop an adequate response to any public health crisis, it must first have a solid economic foundation. Russia was already in a financially dire situation before the pandemic began, not to mention that Russia has been in a perpetual public health crisis for the past thirty years.

What do I mean exactly? First, Russia currently faces an internal and multi-lateral demographic crisis. No, I don’t just mean the current COVID-19 pandemic. I mean the growing issues of high mortality, low-birth rates, low life-expectancy, and debilitating disease.

Russia’s population has steadily been on the decline for decades with a 4.4% decline from 1995–2007. That’s an astonishing 6.5 million people leaving Russia bringing its total population to roughly 142 million.

This population issue is related to instances of high mortality and premature death primarily caused by cardiovascular disease and stroke, closely followed by suicide, violence, vehicle accidents, and disorders developed from drug and alcohol abuse. Further, it is estimated that 1.3 million Russians are infected with HIV (behind only Sub-Saharan Africa) and is the 10th cause of premature death.

The World Health Organization shows that Putin has not made this demographic crisis a priority with healthcare expenditures today at an unimpressive 5.5% of its GDP. These issues are not as important compared to military funding, and Russia’s public health services have greatly suffered as a result.

This fragile state of public health means that Russia was not even remotely prepared for a global pandemic that would harm even more of its general citizenry and contribute to worsening financial losses.

For the sake of argument, let’s say public health becomes the priority it should be. Let’s say the current pandemic shakes the Kremlin such that national health services enjoy a larger amount of funding. Well, that still wouldn’t fix the problem given that Russia finds itself in systemic and self-afflicted economic ruin.

Simply put, there isn’t any money to appropriate in the first place.

Russia’s economy is not structured in a way that can make up for its financial losses during a global recession. This is because Russia depends on non-renewable resources for the majority of its growth and buying power.

If you recall from your last trip to the gas pump, the oil and gas industry isn’t doing too well these days. In late April, oil prices dropped below zero for the first time in history.

At first glance, oil and gas seem to make up only a moderate amount, around a quarter, of Russia’s overall GDP. However, at a closer look, it’s evident that this number is not telling the whole story.

Beyond the approximately 25% of GDP directly tied to hydrocarbons, Russia pays for its imports with the revenue gained from its exports. Russia imports around 60% of its annual consumption, which means Russia’s purchasing power is heavily reliant on the oil and gas industry.

Further, approximately 20% of Russia’s GDP is made up of state expenditures coming, either directly or indirectly, from taxes and duties placed on the oil and gas industry. The Carnegie Moscow Center estimates, based on these calculations, that the hydrocarbon portion of GDP is closer to 70%.

When oil prices fluctuate dramatically, Russia losses massively in the revenue game.

So, while Russia enjoys an abundance of non-renewable resources, its presence has been more of a curse than a blessing. Academics call this phenomenon the ‘resource curse’. In short, this refers to the relationship between an abundance of resources and an unhealthy economic dependence on those resources.

The resource curse doesn’t magically materialize, however. Afflicted countries are themselves responsible for focusing on merely one industry for revenue. The resource curse takes root most predominately in countries that choose to not diversify their economies in a multitude of industries.

This old model of energy exports is not a sustainable plan for economic prosperity, but Russia clings to it desperately.

This is why Russia cannot fall back on other industries to supplement their oil and gas losses. There aren’t any other industries that could begin to scratch the surface.

Further, Russia’s choice to nationalize their oil and gas industry contributes to over-dependence on non-renewable resources and exacerbates an already present non-diverse economy. Even worse, these conditions promote Russia’s well-known and powerful oligarchy along with a poor institutional framework.

There is a considerable amount of blame that can be applied to Russia’s leaders in failing to invest in other sectors of innovation in science, healthcare, technology, and manufacturing. Instead of diverse investments, they continue to focus most of their energy on non-renewables. This old model of energy exports is not a sustainable plan for economic prosperity, but Russia clings to it desperately.

Modernization of the economy by means of investment in alternative industry is a necessary condition in propelling Russia into the 21st century, but there are no current signs that this transition will take place any time soon. The current pandemic exacerbates all of the conditions that were already present in Russia, and the country will greatly suffer as a result.

[1] Cohen, Ariel. “Domestic Factors Driving Russia’s Foreign Policy.” The Heritage Foundation, 19 Nov. 2009, www.heritage.org/europe/report/domestic-factors-driving-russias-foreign-policy.

[2] Movchan, Andrey. “Just an Oil Company? The True Extent of Russia’s Dependency on Oil and Gas.” Carnegie Moscow Center, carnegie.ru/commentary/61272.