Chapter 3 - Russian futures to 2018
Pessimism characterises much Western analysis of Russian futures. One prominent report suggests that Russia faces "mounting internal difficulties, including a weakening economy and a political climate that stifle enterprise and society". Such problems, the report continued, "imperil both security in Europe and stability in Russia". Necessary reforms face "daunting political obstacles", while the influences that have dragged the Russian economy into recession are "structural, conjunctural and geopolitical" and "market pressures and external conflict pose additional challenges of uncertain duration". If the country "continues its current course—in both economic management and international relations—this will be increasingly dangerous for Europe and costly, if not disastrous for Russia". Indeed, the report went so far as to say that the "new [Russian] model is not sustainable and Western governments need to consider their responses to various scenarios for changeFootnote 18".
In Russia the prognosis is also pessimistic, though some points of focus are different. Economists note that if the economy stands at a cross-roads, there is a 45-50 per cent probability that the future will bring a “frozen economy”, in which Russia has a "semi‑closed, stagnant economy" with ageing technologies and an ever greater concentration of resources in the defence industry, ultra-high concentration of property, nationalisation, de-industrialisation and low growth rates. According to Yakov Mirkin, head of the department of international capital markets at the Institute of World Economy and International Relations, the next most probable outcome, with a 30-35 per cent likelihood, is a “controlled chill”. This is a slightly more sophisticated version of the frozen economy, which includes "rescue teams" of young technocrats introducing certain elements of modernisationFootnote 19.
In broader terms, the consensus appears to be that the future is alarming. Russia’s struggle for its place in the world has not finished, one Russian futures analyst has suggested, as a result of Russia’s position between European, Middle Eastern and Eastern civilisations—and if Russia’s civilisational border with the East is more or less clear, it is in constant movement to the West and South, where foreign powers constantly attempt to increase their spheres of influence at Russia’s expenseFootnote 20.
Some note that developments in the world have been so "many and so turbulent lately that one can expect every year to bring a revolution or a major change in the global balance of power". This year will hardly be an exception, Fyodor Lukyanov, research director of the Valdai discussion club, has argued: the reconstruction of the world order that began at the beginning of this decade will continue to gather momentum, characterised by chaos, until the new order emerges by 2030Footnote 21. The "major mega-trend in global politics", Sergei Karaganov suggests, is the "war of all against all" in the Middle East. Furthermore, the sharp escalation of the conflict between Russia and the West has led to increasing talk of the possibility of a new war—which some say is inevitable—and the re-emergence of the nuclear issueFootnote 22.
In attempting to adapt to the difficulties of imagining the future, most Russian futures analysis focuses on scenario planning as a means of stepping beyond the immediate problems of the day and reflecting on alternative possible outcomes, including possible black swans or wildcards, as they look a decade ahead. This paper, however, will offer short-term foresight of Russia in the period to 2018. In this case, foresight can be usefully based on analysis of longer-term mega-trends, the structural context in which developments take place, and the relative certainties in specific themes that are unlikely to change greatly over the comparatively short timeframe. These mega-trends provide definition of possible futures. The paper will focus on three mega-trends: economics, domestic politics and the international environment. Woven into each mega-trend are game‑changers, developments that can affect the course of events within these broader definitions. Game-changers can be both active, in terms of how policy‑makers are making conscious attempts to influence the course of events, and passive, including external, often unpredictable developments. Together, analysis of mega-trends and game‑changers serves to frame themes to guide foresight, based on extrapolation from more tangible evidence.
Specific predictions about Russia in 2018 cannot be made with confidence. But the contextual trends are very clear, since they are both structural and emphasised by the Russian government’s explicitly repeated active game‑changers, and thus less likely to be significantly altered even by adverse events. Indeed, adverse passive game-changers may serve to emphasise them.
The shorter timeframe brings into sharper focus some of the major questions being debated in Russian futures analysis. But it also means that some of the questions central to most discussion about Russian futures are not addressed in depth. First, the Russian government consistently attempts to engage in long‑term planning, both in wider terms, but also in specific technical areas. During the last decade, numerous strategies framing the period to 2020 have been published, and discussions to plan a strategy to 2030 are well underway. Though it is outside the remit of this paper, this commitment provides the background to some of the active game‑changers driving the mega-trends discussed below.
Reform of the economy away from its reliance on hydrocarbons is not at the centre of the analysis. The Russian government has made its timeframe explicit. The Russian Energy Strategy to 2030 sets out a three‑stage development plan, and only in stage three, from 2022 onwards, is the shift to the “economy of the future” envisaged. Thus the Russian policy-making community "expects oil and gas to remain the locomotive of growth not only in energy but in the national economy broadly until 2022". Only gradually will the relative importance of fossil fuels decline. This also relates to Russian plans to diversify its energy trade. The energy ministry has stated that the main task is to speed up entry into Asia-Pacific markets, but only by 2035 will all energy exports to Asia reach 23 per cent.
Russia’s demography is another often central theme to futures analysis. The steep population decline since the 1980s, combined with low fertility and an ageing population, has long-term negative ramifications for the economy and military, and, given higher rates of fertility among Russia’s Muslim population, the ethnic mix of Russian society. If most of these problems will be felt only in the next decade, two points nevertheless warrant mention.
First, the government’s long-term family development and transport policies have shown some signs of success. Life expectancy increased to 71 years in 2013, and fertility rates increased from 1.3 children per woman in 2006 to 1.7 in 2012. Demographic data suggests that the decline in population was reversed in 2012, and 2013 saw the first positive increase in natural population growth since 1991. Serious health problems continue, but mortality resulting from transport accidents, murder and suicide have substantially declined.
Second, though Russia has a high rate of emigration, it is also the second largest immigration nation. Some 300,000 immigrants arrive in Russia every year on average, approximately 50 per cent of whom are ethnic Russians. Much of this immigration comes from within the Eurasian region and has been substantially increased by flows of migration from Ukraine since 2014. Some 2.2 million immigrants arrived in Russia in 2014, 89 per cent from Ukraine, and in 2015 a further 3 million came in, also largely from Ukraine. This is likely to sustain Russian population growth over the period to 2018, even as natural growth begins to decline again due to the sharp contraction of the fertile population.
Mega-trend one—The Russian economy: Slow adaption to adversity
The Russian government enjoys a financial cushion of considerable foreign exchange reserves, including increasing holdings in gold, reaching USD 371.6 billion in January 2016. It also runs a substantial trade surplus. However, 2015 saw a decline in industrial production of 4 to 5 per cent, in retail trade of 8 per cent and in real wages by 10 per cent. Indeed, the economy faces a wide range of problems, from high levels of capital outflow to ageing, obsolete industrial machinery and limited and decrepit infrastructure, which have all contributed to a longer-term slowdown in economic growth that began in late 2011. The combined impact since 2014 of the fall in oil prices (decreasing export revenuesFootnote 23), the financial sanctions (reducing access to capital) and economic sanctions (affecting equipment supplies) have compounded these structural problems.
The broad downhill trend in economic growth over the last three and a half years accelerated in 2015, with official statistics suggesting a 3.7 per cent contraction in GDP in 2015. Speaking in January 2016, Prime Minister Medvedev stated that 2015 was "perhaps the most difficult year in a decade for Russia" and the country faced "forceful and synchronised challenges". There is continued pressure on the budget, since the 2016 budget assumes an average oil price of USD 50/barrel and a budget deficit of 3 per cent—but the oil price has remained below USD 50. The Russian government is attempting again to cut back budget expenditure by 10 per cent, and Medvedev has stated that the only protected areas will be Russia’s international obligations, security, agriculture and social policy.
If Medvedev has stated that the stimulation of investment activity and the removal of barriers impeding private money from entering the market are important priorities, the most obvious active game‑changer is the Russian leadership’s increasingly obvious subsumption of the economy into its wider security concerns, as emphasised in the recently published national security strategy. This is because the Russian leadership is seeking to enhance its self-reliance, both to reduce Russia’s vulnerability to external measures and increase its ability to act as an independent state. This has led to emphasis on state control of key strategic sectors, the prioritisation of import substitution and the implementation of shadow systems to replace the SWIFT international payment system if necessary. It has also led to shifts in organisational structures, such as the establishment of government commissions to supervise import substitution. More broadly, as the government attempts to consolidate and streamline its budgetary resources, the finance ministry’s jurisdiction was extended in January 2016 to include the federal tax, customs, alcohol and budgetary supervision services. In turn, the Kremlin is increasing its control over macro-economic policy and the finance ministry itself.
…the most obvious active game‑changer is the Russian leadership’s increasingly obvious subsumption of the economy into its wider security concern …
These measures were being implemented before the sectoral sanctions were imposed by the US and the EU, and the substantial resources and legislation devoted to them suggest that it is a long-term policy. While the Russian economy is more open and integrated with the global economy than before, the potential for at least the partial reversal of either domestic liberalisation and international integration is also much greater. This trend faces numerous obstacles—not the least one being a lack of consensus across the economic block and a lack of focus—and as a result, success in measures such as import substitution to 2018 will be uneven, limited to key areas, and likely only achieved more broadly after 2020.
Nevertheless, over approximately the next two years, the state’s economic course seems broadly set, tilting Russia’s political economy towards security rather than economic freedom, with numerous ramifications for resource allocation and prioritisation, as well as the scope of Russia’s external economic activitiesFootnote 24.
Two potential passive game‑changers relate to the Russian economy in the coming years, and they are the two most important external constraints on the Russian economy. The first is Western sanctions, and if US sanctions are likely to remain in place for longer, it is probable that the EU’s sanctions on Russia for their part will be lifted at some point before 2018. While disagreements over the implementation of the Minsk II agreements remain a sticking point, senior European leaders have begun to voice their objections to maintaining the sanctions. Vladimir Putin has also stated that he is certain that, sooner or later, "normal relations" with the EU will be re-established.
More important is the oil price, which is perhaps the least predictable game‑changer, depending as it does on many interlocking factorsFootnote 25. There is an ongoing debate in Russia about potential oil price fluctuations. If some see low oil prices as the “new normal”, others see a tightening in the oil market by late 2016, which could lead to a slight price increase, towards USD 50 to 60 per barrel. The Central Bank of Russia’s (CBR) baseline scenario, for instance, envisages a stabilisation of the price of approximately USD 50/barrel to last for the period 2016-2018Footnote 26. Either way, the predicted rise in this time frame is not considered likely to be substantial.
In the context of the longer-term mega-trend and active game‑changer of the government’s deliberate securitisation of the economy, neither of these “passive game‑changers” are likely to alter substantially the broad trajectory of Russia’s economic development. Instead, the economy is more likely to slowly adapt to the adverse environment. The CBR suggests that while the economy is gradually adapting, it needs another year to adjust to negative external conditions. In all its scenarios, external financial conditions will continue to constrain the growth of the Russian economy over the period from 2016 to 2018, though their impact will "gradually abate". Thus the CBR’s baseline scenario suggests continued GDP contraction in 2016 of -0.5 to 1.0 per cent, moving firmly into positive territory in 2017 with growth of 1.5 per cent to 2.5 per cent in 2018Footnote 27.
Mega-trend two—Russian domestic politics: Consolidating the system
The Russian domestic political landscape is dominated by Vladimir Putin’s leadership team and, in parliamentary and regional terms, the United Russia (UR) party, which has held the majority of seats in parliament and the huge majority of regional governorships for over a decade.
The leadership team dominates the strategic heights; however, the Russian governance system is often dysfunctional. Systemic mega-trends in domestic politics are therefore shaped by three factors: the long-term continuity in the Russian leadership team, the leadership’s consistent struggle to shape strategic planning and invigorate the bureaucratic system, and an electoral cycle during this period. Parliamentary elections are scheduled for September 2016 and presidential elections in 2018.
Active game‑changers will be visible in two ways. The first relates to the election cycle, which will be guided by the leadership’s search for wider stability. While support for United Russia (UR) dropped in the parliamentary elections of 2011, it has subsequently consolidated its position and appears likely to benefit from the introduction of a mixed electoral system in which half of the Russian parliament’s 450 members will be running on party lists, and the other half on single mandate, independent constituencies. The precise balance of the next parliament’s make-up will depend on how this legislative change affects support for URFootnote 28, how much the Communist Party of Russia, which remains the only substantive opposition across RussiaFootnote 29, can attract a protest vote, as well as the role of the All-Russian Popular Front (ONF)Footnote 30.
This sense of imposed stability will be enhanced by the leadership’s concern about anything that looks like a potential Colour Revolution in Russia, as well as the extensive measures that have been put in place to prevent that from happening. These measures range from the curbing of external support for Russian NGOs and civil society to legislation to prevent mass demonstrations, to the preparation of the Interior Ministry (MVD) to cope with outbreaks of civil disobedience (as demonstrated by the Zaslon-2015 exercises, explicitly framed by the MVD as preparing to deal with a “Maidan-type” situation).
The second relates to the combination of the make-up of the leadership team and the attempts to increase the effectiveness at all levels of the Russian bureaucratic system. In the coming years, there is likely to be a slow evolution of the team as it seeks to adapt, and as younger members of the elite position themselves for promotion. The age of many of the most senior officials means that there are likely to be retirementsFootnote 31; this is likely to be supplemented by the leadership moving officials aside if they are unable to bring the required results. There will therefore likely be an ongoing slow rotation as well as recruitment and promotion of officials.
Two particular passive game‑changers may contribute to the political context in the next two years: social protest and terrorism, but on current evidence, neither is likely to substantially alter the broader mega-trend. Since the protest demonstrations in 2011‑2012 faded away, there has been little political protest; there have, however, remained aspects of social protest, such as the health care protests in November 2014, and the more recent long-haul trucker protest. These have been limited in scale, however, and have not gained wider public support—or led to a substantive change in government policy.
…it is not clear that a successful terrorist attack would substantially alter the political environment or Russian foreign policy.
Similarly, the threat of terrorism in Russia, from both the North Caucasus and international jihadism, is substantial. But the Russian government has implemented robust, not to say brutal law-enforcement measures against terrorism over the last decade and poured money into attempts to address the problem. Furthermore, given the experience of terrorist attacks in the past, it is not clear that a successful terrorist attack would substantially alter the political environment or Russian foreign policy. Russia has suffered numerous major terrorist attacks, from Nord-Ost to Beslan, from bombings on the Moscow metro and at Domodedovo airport, and, most recently, the bombing of the Russian airliner in Egypt in November 2015. Yet none of these have altered the wider political context.
Over the coming years, therefore, despite potential influences, the push and shove of political life, and some contradictions within the system, the main trend in Russian domestic politics is one of evolving consolidation. Active game‑changers will continue to influence the political mega-trends more than visible passive game‑changers throughout this period.
Mega-trend three—Russia on the world stage: Assertion in an unstable world
The broad contours of Russia’s foreign policy have remained consistent for some time and are unlikely to change dramatically in the next two years. The Eurasian space remains a priority and the Russian leadership has sought to cultivate its position as a hub in the region with the Collective Security Treaty Organisation and the Eurasian Economic Union. China is another priority, and the Russian leadership has for over a decade sought to improve its relationship with its neighbour to the east. This has resulted in an ambiguous but burgeoning economic and security relationship, with major energy and arms deals being signed. Despite these deals, and although this is indeed a priority, it is most likely to come to full fruition after this decade.
…the main trend in Russian domestic politics is one of evolving consolidation.
Although Moscow sees Western influence in international affairs to be in strategic decline and that of Asia as increasing, it is with the West that the main issues will arise in the near future. Long-term contextual trends are visible here, too. Russia’s relations with the Euro-Atlantic community began to stagnate in the mid-2000s, and, despite the most recent “reset” of 2009-2012, they have been deteriorating for years. The war in Ukraine only served to highlight the range of disagreements between the Euro-Atlantic institutions (particularly NATO and the EU) and Russia. While Russia retains more positive relations with some member states, many of the mechanisms for multilateral relations have been suspended.
The prospects for Russia’s relationship with Western institutions therefore appear ambiguous. There are strong lobbies, particularly in continental Europe, who seek to stabilise relations with Russia—and, as noted above, the Russian leadership has also stated its belief that Russia’s relationship with Europe will return to some form of “normality” sooner or later. Thus it may be that over the next few years, EU sanctions are lifted and dialogue is resumed at different levels as the parties attempt to move beyond the Ukraine crisis.
Nevertheless, the war in Ukraine has left a deeply negative mark in both the Euro-Atlantic community and Russia, and the accelerating deterioration over the last five years has been based on fundamental disagreements over many issues ranging from the US withdrawal from the ABM treaty in 2002 and the US-led invasion of Iraq in 2003, to concerns about US-led regime‑change operations and the West’s rejection of Moscow’s initiative to draw up a new European security treaty in 2009-10. There are clear policy disagreements between Russia and NATO over a number of issues—both long‑term, such as NATO enlargement and the missile defence programme, and those heightened by the war in Ukraine, such as the permanent basing of NATO equipment and forces on the territory of member states in Eastern and Central Europe. All of these issues are likely to remain serious points of contention and, most immediately, at NATO’s Warsaw summit in summer 2016. The Alliance will endorse further enlargement (Montenegro), probably missile defence (the Readiness Action Plan) and possibly other related measures. The tension between the desire to move the relationship beyond Ukraine and these fundamental disagreements will dominate, exacerbated by differences within the communities, but the policies set in motion in both NATO and Russia will reflect the increasing competition between them.
As noted above, however, the main thrust of Moscow’s international policy is not related to specific bilateral or even regional priorities, but driven by the desire to enhance Russia’s self-reliance in international affairs. This is the main mega-trend. The broad consensus among expert observers and officials alike is that the world is entering a period of considerable turbulence and insecurity, partly as a result of both Western regime change operations, and partly as a consequence of increasing competition between states over resources and values—competition that may result in the outbreak of war. These concerns drive two important themes in Russian foreign and security policy—the need to be able to defend Russia against a possible strategic strike in the mid-to-long term, and the need to be able to project power.
This underpins the active game‑changer: the leadership’s programme of major military reform and investment in the wake of the Russo-Georgia war in 2008. Since 2010, the leadership earmarked 20 trillion rubles (approximately USD 640 billion at 2010 exchange rates) for the modernisation of the Russian armed forces by 2020. The plans envisage half a million military personnel under contract and ensuring that 70 per cent of the armed forces’ weapons are modern. This includes the acquisition of 400 intercontinental and submarine-launched ballistic missiles, 20 attack submarines, 50 combat surface ships, 700 modern fighter aircraft, and more than 2000 tanks and 2000 self-propelled and tracked guns. After a sluggish start, and despite high levels of corruption and ongoing technical problems, these reforms and investments are bearing fruit. Russian officials have stated that by the end of 2015, 30 per cent of weapons were new (more in some areas) and this should reach 50 per cent by the end of 2016.
Furthermore, Russian ground forces have undergone constant exercising at all levels over the last five years, emphasising command and control and combat readiness. The command and control aspect is noteworthy, as a new National Defence Centre was opened in late 2014, the hub from which Russian military operations are being conducted. The exercises have addressed the quality and quantity of equipment and servicemen and were about fighting large-scale interstate war. By 2015, therefore, a Swedish observer has suggested that the Russian armed forces had become "most likely capable of launching large-scale conventional high-intensity offensive joint inter-service operations, or (…) to put it simply, to conduct big war-fighting operations with big formations". Furthermore, each of the exercises during this period demonstrated ambitions to increase Russia’s military power, and were conducted in coordination with other agencies, suggesting that the focus was not just the fighting ability of the armed forces, but improving the state’s capacity to wage warFootnote 32.
Even if defence spending faces possible cutsFootnote 33 and some of the re-armament programs are being postponed into the early 2020s, by 2018 (and again by 2020) the Russian armed forces will be transformed, with new equipment increasingly available and combat lessons learned from exercises in Ukraine and Syria.
Additionally, the Russian leadership is investing heavily in bolstering both its strategic deterrence and the defences of both the Crimean peninsula and the Arctic, increasing its military capacity in these areas and its ability to respond to emerging threats. This is changing the strategic landscape.
This is the issue on which passive game‑changers such as the evolving tension with Turkey and the situation in Syria can have most effect, since conflict can spin unpredictably. But two points are worth making. First, although much Western attention has focused on so-called hybrid warfare, which has emphasised the informational and special services aspects of Russian power, it is Russia’s conventional warfighting capacity that is most notably evolving over the next few years. Second, the primary disagreements and tensions are evident and the Russian leadership shows little sign of softening its position, even under economic duress. Quite to the contrary: Russia has become more involved in Syria to seek to prevent the collapse of the Assad regime; in the wake of Turkey shooting down the Russian bomber in late 2015, Moscow responded not by changing course, but by reinforcing it. Of all the mega‑trends, this is the one for Western audiences to watch most closely: it is what drives the subsumption of the economy into security concerns and the attempt to consolidate the Russian state and society.
Russia in 2018
“More of the same” is an unfashionable and, given the tense and uncertain international environment, risky conclusion for a foresight paper. This is perhaps especially so for Russia, when the majority of Western observers have spent much of the last twenty‑five years looking to the future with hope for change. Since 2011, Western observers have persistently hoped to see the end of the Putin era, asserting that Putinism was unsustainable; that economic pressures would oblige the Russian leadership to soften and reform the Russian domestic and international position; or that it would otherwise face a popular revolution or an elite split or coup to overthrow the president. In this way, some observers had expected (“liberal”) change in Russia as illustrated first in their view by the protest demonstrations in 2011-2012.
The two main passive game‑changers are fluctuations in the oil price and tension spinning into conflict with unpredictable consequences. But on the evidence available, and given the relationships between, on the one hand, the economic, political and international mega‑trends, and on the other, the active game‑changers of Russian government policy, evolving continuity over the next two years is the most probable course of events for Russia. Smaller, day-to-day, passive game‑changers will play a role, but they are unlikely to alter substantially the overall direction of Russia’s development.
…it is Russia’s conventional warfighting capacity that is most notably evolving over the next few years.
Thus change over this short period is most likely to be evolutionary, taking place either within the system or at its fringes. These may include the evolution of the leadership team, slight fluctuations in the make-up of parliament and a continuation of fringe social protest. The economy—burdened by structural problems that would take longer than three years to reverse even in favourable conditions, and even if desired by the leadership—faces a period of adaptation, perhaps with a return to some slow growth (within the overall trend of a longer‑term slowdown) if oil prices increase. Changes in the economic situation are more likely to be driven by the government’s security agenda, designed to protect Russia against external instability, than by reform towards more liberal efficiency.
The main direction of Russian foreign and security policy is likely to remain consistent: numerous long-term disagreements with the Euro-Atlantic community (even if some are temporarily patched up with continental Europe); attempts to block and prevent the collapse of regimes both in the former Soviet area and in the Middle East and North African regions, which may lead to greater tension with some states (such as the US and Turkey); and the development of relations with China. Such issues are encapsulated in the broader thrust of Russia’s foreign policy when attempting to secure its interests in a period of international instability and to defend its interests abroad.
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