Capping what president Vladimir Putin must feel has been a good year for Russia, Moscow’s stock market is one of 2016’s best performers. Despite sanctions restricting banks’ and oil companies’ access to western finance, Russian equities are up about 27 per cent in local currency and 47 per cent in dollar terms.
Yet this recovery is linked almost entirely to short-term external factors rather than long-term fundamentals. Oil prices, Russia’s economic lifeblood, are up about 50 per cent from a year ago.
Little surprise, then, that equities and the rouble should have strengthened. Investors are also betting on a “Trump trade” - a deal between Mr Putin and the incoming US president that eases sanctions.
The outlook remains anaemic. Russia is just pulling out of a two-year recession. Output contracted about 0.6 per cent this year. Assuming sanctions remain, international forecasters see economic growth of perhaps 1.2 per cent next year, and 1.5 per cent in 2018 and beyond. That lags behind global growth, the US, and even the EU.
The Russian president has boosted his popularity by seeking to restore his country’s great power status, starting with the 2014 annexation of Crimea. But the cost of sanctions and isolation - on top of weak energy prices - has been high.
Though Mr Putin promised healthy growth when he returned as president in 2012, aggregate growth over his six-year third term is set to be about 1 per cent at best - while the global economy has been expanding at well over 3 per cent a year. In a country with a freer press and more competitive politics, voters would surely judge such broken promises harshly.
There are ways to boost growth. Easing sanctions might add a percentage point. A similar amount could come from expanding Mr Putin’s efforts to make Russia’s bureaucracy and state management more efficient and chisel away at endemic corruption.
The fundamental problem, however, is that domestic and foreign investors, uncertain about Russia’s prospects and protection of property rights, are not putting sufficient capital in new capacity or productivity improvements. Investment is running at about 20 per cent of output. Mr Putin pledged in 2012 to lift it to 27 per cent.
To address the investment problem, Russia needs not just long-delayed structural reforms, but sweeping institutional changes to boost political competition and rule of law, and to establish an independent judiciary.
Alexei Kudrin, the liberal former finance minister apparently still trusted by Mr Putin, has been asked to draw up reform plans to be unveiled next year. But there is little optimism that they will ever be implemented. The business community long ago concluded real reform was unlikely as long as this president and his circle remain in place. Reforms robust enough to boost the economy would threaten their hold on power.
Will Russians accept years of stagnation? Their phlegmatic response to the belt-tightening demanded of them since 2014 suggests they might. Mr Putin’s propaganda machine is adept at distraction, and Russians see little alternative to their current leader.
The image of market democracy, moreover, was tarnished by the hardships and distortions of Russia’s 1990s post-communist transition. The EU and US have ceased to be seen as positive models.
Other world leaders may have to get used to the idea of Mr Putin being around for a long time yet - even as he slowly allows Russia’s economy to slip ever further behind.
