Will the Financial Crisis Undermine Support for Market Capitalism in Russia?

As part of CGD’s efforts to track the impact of the financial crisis, I have been leading a series of conference calls to discuss how recent policy responses—or the lack thereof—may affect poor people in the developing world. Our latest call on the prospects for Russia suggests that the government could—and should—do more. This year will be a tough one for Russia. Although any growth projections should be viewed with caution, based on the size of the fall in oil prices, the Russian economy may contract by 5 or 6 percent and the unemployment rate will reach double digits. These are the expected results even if the government runs its own version of a “stimulus package” and runs a sizeable fiscal deficit (of around 8 percent of GDP) in 2009.Is the Russian government’s response signaling a change in course regarding its support for markets? So far it does not seem so. Instead of nationalizing banks and firms hurt by the financial crisis, the government is providing support by other means. However, some moves—such as “buy Russian” clauses—are of a clear protectionist bent. Like many other previously Communist countries, Russia lacks adequate social protection systems to cope with the consequences of the crisis. Spending on unemployment benefits, retraining and relocation-assistance programs, for example, will be small by comparison—and below what is necessary.The bulk of rescue monies will go to firms and banks—and not to all of them. Those that fail will generate more unemployment. While antipathy towards the market system used to be mostly confined to the older generation but increasing numbers of younger Russians become unemployed they, too, will become resentful.It is puzzling why a government machinery of the size and sophistication of the Russian state—and so keen on exercising political control—is not devoting more institutional attention and funding to programs designed to cushion the blow for those who get hurt by the crisis. As I showed in Crises and the Poor: Socially Responsible Macroeconomics, economic crises cause the sharpest increases in poverty, and not only in the short term. They can have long-lasting consequences and trap younger generations in poverty as well. Safety nets are good investments in people's wellbeing. They are also good investments for political and social stability. Russian policymakers should know this.