Russian President Vladimir Putin, named the “world’s most powerful person” last year by  Forbes magazine, has won a series of geopolitical victories lately. Even before seizing Crimea, he  managed to broker deals that rescued Syrian President Bashar Assad from U.S. military attack and eased debilitating economic sanctions against Iran’s nuclear program.

Yet Putin’s real power base – the Russian economy – is “crumbling,” according to Ruchir Sharma, chief of emerging markets at Morgan Stanley Investment Management.

In a Wall Street Journal op-ed, Sharma writes that Russia’s economy grew by just 1.3 percent last year – a steep drop from the 7 percent pace of the previous decade. The brokerage arm of Russia’s largest state bank projects there will be zero growth this year.

Sensing trouble may lie ahead, “wealthy Russians have been moving money out of the country at one of the fastest rates in two decades – $60 billion a year since 2012 – and now foreign investors are pulling out too,” according to Sharma. The ruble has fallen 22 percent against the U.S. dollar over the past three years, and the Russian Federation’s central bank “has been fighting to prevent a ruble collapse since the Crimea crisis began.”  

The London Daily Telegraph reported Tuesday that “capital flight from Russia has spiked dramatically” since Putin first sent troops into Crimea, and “may reach $70 billion over the first quarter of the year,” raising concern that Russia may soon impose capital controls to prevent further losses. 

Sharma regards Putin's economic strategy – focused on expanding Moscow’s domination – as self-defeating. While nations like Mexico are moving to open up the state oil industry to foreign investment, Putin’s Russia is going in the opposite direction, with the state firm Rosneft  buying out private companies and launching its own oil field-services enterprise.
While the economy grew substantially during the past decade, Russia did little to develop new manufacturing industries, leaving the country heavily dependent on oil and gas income.

With its population aging, “demographics are putting a squeeze on public finances, as roughly a million Russians are retiring each year, and too few young people are replacing them in a workforce of about 100 million,” Sharma writes.

Following a five-year period during which the Kremlin increased pension payouts by 25 percent annually, there are fewer taxpayers left to finance an increasingly expensive pension system – leaving the country even more vulnerable.

Although the Russian federal budget has a surplus today, the country is dangerously dependent on oil revenues. When that funding source is taken out of the equation, Russia had a $222 billion  deficit last year, or approximately 10 percent of gross domestic product, according to the International Monetary Fund.

Recent commodity pricing trends indicate that oil prices “may be poised for a downshift – which would have a crippling effect on the Russian economy,” Sharma writes.
The world “should not be fooled,” he adds. “The world’s ‘most powerful man’ is scoring his geopolitical victories from an increasingly vulnerable economic position.”

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