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How much?

Russia’s economy is not in great shape—but it’s nowhere near as bad as in 1998

By Steve LeVine in Moscow

Russia’s economy is not looking great: The country appears on track for just 0.3% growth this year compared with 1.3% in 2013, and  3.4% in 2012—and the effect of recent Western sanctions will only make things worse. Russians are sending their money abroad at a pace four times greater than last year.

This is a turn of events. In 2013, Forbes magazine named Russian president Vladimir Putin the world’s most powerful person. This year, his “power base, the economy, is crumbling,” writes Morgan Stanley analyst Ruchir Sharma in the Wall Street Journal (paywall). “The world’s ‘most powerful man’ is scoring his geopolitical victories from an increasingly vulnerable economic position,” Sharma says.

Yet how bad is it? The last time Russia was in truly grave economic peril was 1998, when the Asian financial crisis punctured the price of oil and exposed Russia’s inherent economic weaknesses. The ruble crashed, the stock market plunged, and Russia defaulted on its debt. Few foresaw the plunge; up until the crash, Russian markets were a place of mad glee.

Clifford Gaddy, a fellow at the Brookings Institution, and Barry Ickes of Penn State University did probably the best analysis of the situation. Their 1998 Foreign Affairs article, “Russia’s Virtual Economy,” (paywall), remains a classic takedown of the illusions that  underlie investment booms. In their rendering, it turned out that almost nothing was as it seemed in Russia’s economy.

Does the current malaise compare? I emailed Gaddy to ask. He replied:

I have noticed a trend in people picking up on the idea that the ‘Russian economy is in horrible shape,’ etc. It seems more a part of the ‘let’s console ourselves that Putin will lose in the end no matter what’ line than serious analysis. On your specific question: Yes, of course the Russian economy has troubles. But not enough to stop Putin. It’s nowhere near the condition it was in the 1990s.

Then I went back to Sharma with the same question. He agreed with Gaddy that things do not look like 1998—yet, he added. But one must pay attention to the price of oil. Sharma said:

I wouldn’t say the Russian economy is in as bad a condition as it was in 1998 as its external debt is very low. However, if the price of oil falls by 15-20%, then the economy could really suffer. As I mention in the piece, the economy is already stagnating with oil still around $110 a barrel but given its low external debt it is not as yet as vulnerable as in 1998.

The analyses in the major international press do seem to contain a strain of gloating—many of them gleeful about the possibility that Russia might tank. If it does, the thinking appears to go, Putin is bound to back away from his march across Ukraine. That conclusion may or may not be valid.

The main thing is that the starting assumption appears to be wrong. Putin’s is still sitting on $493 billion in gold and foreign exchange reserves, and external debt of about $30 billion, or only 2% of GDP. Unless global oil prices take an unexpected dive, this is not the picture of an existential crisis.