Despite the tough road ahead, the Russian economy looks stable in the medium term, writes Evgeny Pudovkin.

A wave of anti-elite protests in Russia, the first since 2012, sparkled a new phase of debate on how well the country's political system can hang together in the face of mounting challenges. The main setback for the political elite concerns the sorry state of the Russian economy.  According to research by Evsey Gurvich and Ilya Prilepskiy, during the period between 2014 to 2017, the Russian economy lost 2.4 per cent of its GDP growth compared with what it would have otherwise achieved due to the effect of Western sanctions. The damage the economy incurred due to the 2014 oil price collapse is estimated by the authors to have amounted to about 8.5 per cent of GDP.

Hopes for alleviating the political tensions are swiftly unwinding. If Emmanuel Macron wins the French elections (an opportunity he would have to struggle hard to bungle), it will reinforce a firm approach towards Russia that mainstream politicians in the EU have hitherto pursued. For Moscow, this means no lifting of sanctions in the near future. And as expectations for a "bromance" between President Trump and Vladimir Putin begin to cool off, so to do investors' sanguinity regarding Russia. The country's stocks have plummeted since Trump's decision to launch Tomahawk missiles at a Syrian airbase, rendering them the cheapest among the emerging-market peers since 2015.

There is indeed a sense of fear (or, for some, agitation) that economic troubles may not just undermine the Kremlin's ballooning ambitions abroad, but erode the regime's stability at home. "Russia's ambitions are ones of a first world country," the former Conservative Party leader, Iain Duncan Smith, recently explained in a BBC interview, before adding: "Its economy however is close to the third world". Meanwhile, President Vladimir Putin has promised to prevent "colour revolutions" in the country, warning of the destabilisation these might entail.

And yet, the situation, however worrying, is not dire enough to warrant a serious concern over the possibility of economic collapse or serious domestic unrest. In relative terms, Russians still fair better under President Putin than under any previous leader they can remember. Despite falls in the standard of living over the past the last three years in absolute terms, people's wallets are still thicker than they were in the start of the noughties or, indeed, during the 1990s.

As Andrei Movchan, a senior associate and director of the Economic Policy Program at the Carnegie Moscow Center, pointed out in his report, Russia's per capita GDP in 2016 is roughly 8,500 US dollars. This puts it around the 70-80th place in the International Monetary Fund's world ranking, alongside Mexico and Turkey. Measured by Purchasing Power Parity, Russia performs better, and is ranked on a par with Latvia and Chile.

While these figures might not radiate much confidence, neither are they a death sentence. According to Movchan, real political volatility risks kicking in once per capita GDP approaches 6,000 dollars. That was the level of impoverishment seen in Egypt, Colombia, Syria and Ukraine, when the political troubles arose there.

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As to the question of how soon this potentially fateful deterioration may come, muddling through, it appears, remains a viable strategy. The Russian budget deficit stood at 3.5 per cent last year and the fiscal holes can at this point be plugged without causing alarm. A low level of sovereign debt – standing at 17 per cent of GDP – means that the option of more borrowing is still open to the government.

The current sanctions regime prohibits the government borrowing from Western banks. Nevertheless, it can still increase domestic borrowing. A further plunge in the rouble's value will increase the government's export revenue, thus easing fiscal pressure. Additional sources of money include the country's two sovereign wealth funds, the Reserve Fund and Russia's National Wealth Fund.[1] These may last for about a year. According to Movchan's estimations, assuming oil within the current 40-50 dollar per barrel price range, the Russian fiscal position is likely to be sustainable until at least 2020.

There are two main factors which may adversely affect these calculations. First, should oil prices plummet to around 30 dollars per barrel or lower, the fiscal problems facing the country may reach crisis point as early as next year.

The second potential risk factor is a change in policy on behalf of the government and Central Bank of Russia (CBR). Both the Ministry of Finance and CBR have so far pursued a hawkish line on inflation (targeting it at four per cent) and the deficit, putting the task of maintaining macroeconomic stability above all else. This approach has its critics. A move away from targeting inflation and relaxing fiscal rules to help domestic industry has its most vocal advocate in Sergei Glaziev, one of Putin's economic advisers. In the most extreme case, rapid monetary and fiscal expansion ? possibly accompanied by moves toward economic nationalism ? risks eating through the reserves much quicker than currenlty predicted.

Yet, the prospects for this Venezuelan-type scenario are slim. Putin has long been lukewarm towards a "command economy", while Elvira Nabiulina – a head of the CBR, competent technocrat and a fan of Kenneth Rogoff – has enjoyed his firm support.

None of this alters the fact that Russian economy is facing considerable challenges, however. The country's bloated state sector ? which has expanded to 70 per cent of GDP ? needs reform. The investment remains sluggish. Western sanctions may hinder the technology transfer required to create a new productive base. Given the context, it will prove difficult to find the substitute for all the resources that have hitherto come from the oil revenue. As Russia's finance minister Anton Siluanov admitted himself, without serious reforms, growth is likely to hit a ceiling of 1.5 per cent of GDP.

To use Nassim Taleb's vocabulary, Russia's economy may not be 'anti-fragile', but is, at least for the moment, quite robust. The government's dream of beating the average world level of growth (presently set at 3.5 per cent of GDP) may not be within reach and there will clearly be whimpers along the way. But it would be overly pessimistic to predict a crash in the next couple of years.

[1] As for the Reserve Fund, according to the Financial Ministry's website, it has about 1,1% GDP left; there is about 19 billion dollars accumulated in the National Wealth Fund, but a predominant chunk of these savings are allotted for pensions.

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