Russia faces 6 more years of stagnation under Putin

Russia wants its vodka back
Russia wants its vodka back

Russian President Vladimir Putin looks set to win re-election in March, extending his stay in the Kremlin to 2024.

For Russia's economy, that likely means six more years of anemic growth.

"Expect no significant changes in terms of economic reforms or foreign policy," said Lilit Gevorgyan, an economist at IHS Markit. "Putin's election platform -- if there is any -- is stability or more precisely, no change."

Russia's economy has been on the mend since Western sanctions and crashing oil prices sent it spiraling into a deep recession in 2015. The ruble is stable, inflation is near a record low and unemployment has dropped.

But the former KGB agent's re-election would mean that Moscow is unlikely to tackle reforms needed for the economy to reach its full potential.

In the 18 years that Putin has been in charge, Russia has failed to break its addiction to oil and diversify its economy. It is the world's largest oil producer -- although America is catching up fast -- and the industry is dominated by state-owned firms.

"The problem is that there's no economic dynamism," said Anders Aslund, a senior fellow at the Atlantic Council. "This is not an environment in which you can expect innovation or entrepreneurship."

The International Monetary Fund predicts annual economic growth will average just 1.5% over the next five years. If oil prices fall again, growth will be even weaker.

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Gevorgyan said that Russia should move to stamp out corruption and nepotism, while reducing geopolitical tensions. That would help attract more foreign capital and outside expertise.

"The trouble is [Putin] had almost two decades to achieve these objectives, yet not much has been done," she said.

01 putin russia flag
Putin was first elected president of Russia in 2000.

The chill from sanctions has deterred foreign investors in recent years and the country's reputation for bureaucracy, instability and corruption hasn't helped.

Foreign direct investment in Russia reached $14 billion in the first half of 2017, according to Russia's Ministry of Economic Development, marking a recovery from previous years.

But according to Spanish bank Santander, levels of investment are very low compared to the country's economic potential.

"If you just rely on government investments and companies that are mostly owned by the government... it's not enough," said Carsten Hesse, a European economist at Berenberg Bank.

Political spats and sanctions have limited the ability of Russian firms to do business abroad.

The U.S. Department of Homeland Security, for example, ordered government agencies to remove cybersecurity products from Moscow-based Kaspersky Lab because of security concerns in September.

The secret behind Vladimir Putin's power
The secret behind Vladimir Putin's power

Related: Putin urges 'pragmatic cooperation' with U.S.

There could be a thawing of relations ahead of the 2018 FIFA World Cup, which will be held in Russia in June and July. Hesse predicts Putin will be gracious and welcoming to ensure the event is a success.

But other events could spoil the mood.

The Trump administration has until late January to list potential targets for new sanctions that were approved by Congress in August. The list could name top oligarchs and include Russian government debt.

"International investors should get used to operating in the new environment characterized by tense relations and punctuated by recurring crises," said Otilia Dhand of Teneo Intelligence.

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