Russia, the West need each other

Russian president Vladimir Putin's state-of-the-nation speech last week gave little hint of the troubles his country faces. With the rouble crashing amid a falling oil price and Western sanctions, inflation is rising and a recession looms. Hours before he spoke, fresh unrest broke out in the restive Muslim region of Chechnya. His rage against the West for allegedly trying to destroy the nation was predictable, but there was also a measure of realism: that blame alone is no solution.

Oil and gas exports account for half of Russia's budget, which is based on crude trading at US$100 a barrel. The collapse since June to a price about 65 per cent of that has put the economy in a tailspin, prompting the Kremlin to predict GDP next year will shrink 0.8 per cent and real wages decline by 3.8 per cent. The collapse of the rouble is making it increasingly difficult for banks, hit by sanctions over Moscow's annexation of Crimea and support of separatist rebels in Ukraine, to pay off US$90 billion in external debt before the end of next year. Inflation is expected to hit 10 per cent and food, which accounts for 30 per cent of the average Russian salary, is rising fastest.

Putin's address was wide-ranging, but he made no mention of oil. He defended his strong-arm foreign policy, saying how important Crimea was to Russia and that an aggressive approach was necessary for his country's survival. Blaming the US and Europe for Russian ills has been a persistent theme in his speeches and it has ensured high support at home. With the economy faltering, his response was by contrast liberal, with measures to spur growth and an offer of a tax amnesty for capital repatriated from off-shore havens.

Russia's large fiscal reserves can help it weather low oil prices for a few years, but that is not a viable mid- or long-term strategy. Nor is moving closer to China the most viable way forward. There has to be structural changes to the economy to make it less reliant on oil, while there has to be better co-operation with the West over Ukraine and other foreign policy issues. Russia and the West need one another.