NY Dispatches: COVID-19 and Russia – part 2

This week, following a warning from Moscow mayor Sergey Sobyanin, the number of registered COVID-19 cases in Russia has surged as the country stepped up testing. The government now encourages people to stay home and has sought emergency powers. Vladimir Putin, however, is still optimistic – or complacent, depending on how you look at it – and beyond postponing a constitutional plebiscite, refused to call for stricter lockdowns or offer a substantially bigger relief package. It seems that the role Putin created for himself in the past two decades was simply not made for unorthodox crises like this.

On 27 March, the number of registered COVID-19 patients in Russia rose above 1,000 for the first time, and increased again by 228 today. Actual figures might be several times higher and as Russia steps up testing, the curve is expected to go further up. The number started going up on 25 March, shortly after Sergey Sobyanin, the mayor of Moscow publicly warned Vladimir Putin that the actual number might be significantly higher than the official figures as testing, especially in the regions, was insufficient. Sobyanin’s words, which broke somewhat sharply with the official line and may have been an attempt by the ambitious mayor to raise his national profile, sounded like a wake-up call. Above all, they seemed to confirm the worst fears of those who thought that the optimistic and complacent statements coming from Putin and the government in the past weeks had been based on systematic underreporting.

This would not be surprising. As Mark Galeotti pointed out in a Moscow Times op-ed, authoritarian political systems where officials are accountable to their superiors instead of voters often implicitly encourage underreporting in case local and regional officials think that this might go against more powerful political interests and therefore endanger their own political survival. And as I pointed out last week, the Russian government did indeed seem to struggle with the dilemma of risking major political projects or even the image of the government as an efficient manager by acknowledging the emergency. This led to the awkward situation where, while many of Putin’s friends and admirers were busy preparing various forms of power grab under the pretext of the crisis, Putin was busy protecting his constitutional reform – a de facto power grab that predated the crisis.

Two days after Sobyanin’s call to action Putin, in an address to Russian citizens, let go of this semblance of business-as-usual. The constitutional plebiscite will now be postponed to an unspecified date (though it is rumored that the Kremlin wants it to take place in late May or early June). Next week will be an “extraordinary non-working week” for Russian citizens who are encouraged to stay home. Putin also announced a package of economic support for citizens as well as businesses and two new taxes on bank transfers and income gained from large bank deposits to pay for it, although these will likely not be introduced before next year.

What is most striking about Putin’s address is how little it promises and how, even with the constitutional vote now out of the picture, it refuses to acknowledge the seriousness of the crisis. The promise of an extraordinary holiday without strictly enforced social distancing measures prompted scores of Russians to book seaside holidays in Sochi. Even as Moscow and St. Petersburg have introduced partial lockdowns, the government has so far only called for these measures to be extended across the country and introduced a bill allowing it to declare a state of emergency. A day after his address to the nation, Putin told investors that the situation would be resolved “in less than three months”.

The relief package promises little to struggling small and medium-sized enterprises who were warned against laying people off but could face criminal charges if they do not pay salaries. As many pointed out, keeping promises made to SMEs had not been the government’s priority even before the crisis.

The price tag of the government’s relief package is also hotly debated. The cumulative effect of tax cuts, social measures, credit deferments, cheap loans, etc. announced in the past weeks could be no more than roughly 1 trillion rubles, less than 1 percent than Russia’s GDP. This is paltry in international comparison for a country the size and with the GDP of Russia. Sergey Guriev, a renowned economist claimed that the Russian government had decided that certain things were more important than human lives. An open letter by leading economists urged the government this week to introduce a relief package of between 5 and 10 trillion rubles.

This would clearly be beyond the means of a budget that is already squeezed by falling oil prices. While the budget’s dependency on oil has fallen in recent years to around 35%, this figure does not take into consideration various forms of budgetary income (e.g. income taxes paid by oil workers) that directly or indirectly depend on the industry. To put the 5-10 trillion rubles suggested by the economists into perspective, the National Welfare Fund, which accumulates income in excess of around $40 per barrel, held 10.1 trillion rubles worth of currency in early March. Many now urge the government to use this reserve to build a cushion for the economy. Originally – that is, before the pandemic and the oil price war – the government planned to invest a total of about 1 trillion into Putin’s “National Projects” in 2020-22 (which will now be put on hold). With oil prices now moving between $20-30 a barrel, the government is not only unable to accumulate more reserves in the NWF, but will likely have to use funds to cover the deficit of the budget. However, if the liquid part of the NWF is less than 5% of GDP (about 5.5 trillion rubles) this sum cannot exceed 1% of Russia’s GDP annually.

This may explain Putin’s hesitation somewhat. The vast uncertainty that the pandemic has created makes risk aversion difficult anywhere simply because risks can hardly be calculated. And Putin is highly risk-averse. However, the nature of Russia’s political system with its highly centralized power structures and money flows, and especially its entrenched interests, exacerbates this situation for a leader who at this point has hardly anything to win but a lot to lose. While it is difficult to come up even with a rough figure on how much negative impact the COVID-19 pandemic will have on Russia’s growth and budget this year, it should be easier to figure out is where the pandemic will hit and prioritize the allocation of resources accordingly. Even with the stringent budgetary rules it should be possible to plan, or loosen rules, as the government is planning to do. Of course, the more entrenched interests there are, the more difficult such an adjustment will be. It is difficult to explain a pandemic away even with a state-of-the-art propaganda machine, even if further restrictions are put in place, citing the emergency. At the same time, the crisis, especially in a state of emergency, may very well expose Russia’s structural inequalities (as it has in the United States) from politically connected billionaires hoarding ventilators to struggling regional health care systems. As Paul Goode of the University of Bath pointed out, it might even reveal that the regime’s coercive power is much weaker than commonly thought because it is usually applied selectively, not simultaneously across the country, e.g. to enforce lockdowns.

Even so, it is likely that as Sobyanin, the politician pushes for stricter measures and Putin, the aging leader is looking to mitigate risks, Mishustin, the manager will introduce measures that enable the state to enforce a stricter discipline. These measures are likely to be punitive rather than coercive and some of them will likely stay with Russians even after the pandemic, just as the constitutional plebiscite postponed to May or June will likely allow the authorities to engage in wider or novel forms of rigging.

Just because we have seen little if any desire in the Kremlin to declare an emergency, we should not assume that there are no plans to make the most of the crisis.

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