This should be the dawn of a golden decade for Russia. Prices for key commodities such as copper and palladium are at an all-time high. The price of aluminum is again close to the highs of 2008, and even oil is selling at more than $70 a barrel. Russia is a leading exporter of all these things, and 20 years ago, a similar scenario brought the country a rapid upswing.

And yet, this time around, the commodities boom is of little use to the country. Corruption, repression and political despotism are paralyzing the economy and preventing innovation. In the meantime, the regime is spending what money it does have on adventurous projects. Russian economists, as a result, are forecasting only meager growth for this and the years to come — despite bubbling sources of money.

President Vladimir Putin's initial economic successes are one of the big reasons he's been able to hold on to power for 20 years now. Early on, everything ran smoothly, or at least better than it did during the era of his predecessor, Boris Yeltsin, in the 1990s. In fact, Putin likes to cite Yeltsin's period in office, which was marked by economic decline, as a counterpoint to make his era shine.

What Putin does not mention is that when Yeltsin took over the country after the Soviet collapse in 1991, the price of oil, Russia's most important export commodity, was just over $20 a barrel. Over the next decade, it even dropped even more — to just $10. Nor does he mention that his arrival at the helm came just as the biggest worldwide commodity boom of all time began.

The economic engine won't start humming again.

By the time it reached its historic all-all-time high in July 2008, the price of oil had climbed to $147. The evolution was similar for natural gas, Russia's second most important export product. The country was literally swimming in money, and its economic performance, boosted by an initially reform-minded Putin, exploded. The commodity state was back in the game.

Today, more than a decade later, with prices again on the rise, economists are reminded of that commodity boom and Russia is still one of the top producers of many raw materials. It is the world's second-largest oil exporter behind Saudi Arabia, and is Europe's top supplier of natural gas. When the oil price turned negative for a short time last year, it was a catastrophe for Russia. But at $70 and more, as is the case now, there is no need for financial despair.

Large parts of the world have a significantly higher demand for oil, especially now that the COVID situation is showing signs of improvement. The International Energy Agency (IEA) recently predicted this trend to continue in the medium term.

In the meantime, the agency is trying, together with environmental advocates, to persuade Western oil companies to turn away from investments in oil production, and that, says Eugen Weinberg, a commodities expert at Commerzbank, could push prices higher still in the years to come.

It would seem, in other words, that things could hardly be better for Putin and Russia. A commodities boom like the one that occurred 20 years ago promises, at least on paper, to boost the economy, and that in turn could dampen discontent among the Russian people put Putin in an even better position of power. Win win!

A golden opportunity

Unfortunately, though, things just aren't working out that way: The economic engine won't start humming again. The Ministry of Economic Affairs predicts that Russia's gross domestic product (GDP) will increase by about 3% this year and the next. This is after Russia got off relatively easily last year with a decrease of 3%, thanks in large part to the lifting of lockdowns. But the OECD estimates that the global economy will grow much faster — at twice the rate, in fact, of Russia's economy.

That alone would be a bitter disappointment for an emerging country that wants to catch up with the big players. Worse still is that things could actually deteriorate when the COVID recovery phase is over, at least according to the renowned Moscow School of Economics.

As early as mid-April, the school presented a study showing that the country is not only in danger of missing the boat when it comes to future technologies, but is also facing 10 to 15 years of stagnation. During this time, annual growth will be 1.4-1.8% at best. The reason for this is that the number of people capable of working is declining. In addition, productivity is down and investment in human capital is low compared to the West.

Putin meets with Minister of Economic Development Maxim Reshetnikov — Photo: Mikhail Klimentyev/Kremlin Pool/Planet Pix/ ZUMA

The Ministry of Economic Affairs does not want to know anything about this and continues to set the long-term forecast at 3%. The Central Bank, for its part, predicts 2.5% growth. But even that would be rather modest for an emerging market. In the years of the commodity boom before the financial crisis, the Russian economy grew by an average of 7% per year.

The experts at the business school are not alone in their forecast of stagnation. The Moscow Center for Macroeconomic Analyzes and Short-Term Forecasts (ZMAKP) recently predicted a growth of 1.5-2% for the next 10 years. Moreover, in January an entire series of leading economic experts — including Oleg Vjugin, chairman of the supervisory board of the Moscow Stock Exchange — caused a stir with a comprehensive analysis that also predicts a decade of stagnation for the country.

It's more of the same, in other words, for a country that has essentially fallen in a stagnation trap since 2009. Since then, growth has averaged just 1%. Contrary to Putin's expectations, the gap with the global economy has not shrunk but grown. And now the government has resigned itself to the fact that it is entering a second decade of stagnation, the analysis says.

"Russia has to prepare for hard times," says Sergei Guriev, co-author of the study and professor at the elite Sciences Po university in Paris. One of the main reasons is that the economic structure is still based entirely on raw materials and there is no change towards innovative industries.

Punishing the private sector

That's where politics come into play. "The bad investment climate is to blame," Guriev explains. "Capital is fleeing the country, and the state prefers to invest in state-owned companies, the secret service and the military instead of health and education."

In addition, there are constant attacks on private entrepreneurs, such as the recent attacks on private steel companies. Andrei Beloussov, first deputy prime minister, went after the companies because they had increased their profits in the crisis year of 2020. He demanded that they hand those profits — about 1.1 billion euros worth — over to the state.

The Putin-controlled state then uses such funds to bankroll geopolitical ventures, such as in Belarus, or dubious infrastructure projects, that then provide Putin's inner circle with favorable contracts. As one billionaire tycoon (who does not want to be named) told Die Welt: "If I dig a hole one day and fill it the next, that technically counts as economic growth."

In order to grow economically ... the country would have to become democratic.

Konstantin Sonin, who teaches at the University of Chicago and the Moscow School of Economics, believes that the biggest cause of stagnation is repression. "When media are branded as 'foreign agents' and not allowed to expose corruption or other inefficiencies, a main mechanism for progress no longer works," he explained in a recent radio interview.

It is significant that in his State of the Nation address, at the end of April, Putin did not reveal any plan for growing the economy, Sergei Guriev says. Growth before 2008 was only driven by the price of oil and therefore politically harmless. "But to stimulate growth and investment now would require a determined fight against corruption, more competition in the market and independent courts," he explains. "And that would threaten Putin's system of power."

In order to grow economically, there would have to be a separation of powers as well as control of power in Russia. In short, the country would have to become democratic, and that, of course, completely contradicts Putin's ideas. The result, then, is that Russia instead risks another decade of stagnation.

At the same time, there are a lot of people in Russia, according to Guriev, who are acting responsibly and competently, including the Central Bank. The state budget is more or less balanced, furthermore, and international gold and currency reserves are high. This is helped by the fact that the Russian government introduced a budget rule in 2018 stipulating that only revenues from oil exports above a price of $42.40 per barrel may flow into the current budget. The rest must be added to the foreign exchange reserves.

These currently stand at $605.9 billion, which is $7.8 billion higher than during the peak of the commodity boom in 2008. Moreover, despite a slight increase during the COVID crisis, the total national debt is just 19% of the GDP. Putin has money. He just lacks the strength and will to use it in a way that benefits the economy as a whole and, by extension, the Russian people.

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