Is the Russian economy on the verge of collapse?

iStock | 360 | Getty Images

iStock | 360 | Getty Images

When visiting Moscow in October 2013, what was supposed to be a fairly brief encounter with a Russian oligarch turned into a nine-hour dinner and one of the most insightful views into Russia’s future I’ve ever received.

Ten months ago, before anyone ever dreamed that Russia’s President Vladimir Putin would invade Crimea and stir unrest in eastern Ukraine, the oligarch, who keeps a low profile and asked not to be named, was very concerned.

“The economy is so unstable and will not survive at the current pace. And Russia does not make anything on its own,” he said. (President Barack Obama repeated that theme in an interview with The Economist recently, saying that Russia as a nation “doesn’t make anything.)

Fast forward to the end of March 2014 when, during a trip to Israel, another oligarch’s wife told me that she was asking her friends of similar wealth and stature when it was time to pack up and leave Moscow for good.

And now, in August 2014, Edward Mermelstein, an attorney who works with affluent Russian clients looking to purchase real estate or do business in the U.S., has never been busier.

Mermelstein told CNBC that his firm, Rheem Bell & Mermelstein, has been getting regular inquiries from Russians who are looking to relocate entire families.

“They are extremely scared of the whole dual citizenship issue and many have children born outside of Russia and spouses with foreign passports,” Mermelstein said.

Read More Russia to Western businesses: Everything is fine!

“Those inquiring on relocation are clients that I would have never heard from a few months ago.”

The Russian economy had already been suffering from inflation, a bloated pension system and dependence on high oil prices.

With the latest round of sanctions and with U.S. crude recently settling below $100 per barrel, things are only getting worse.

Prices for food and other essential items have already risen, according to Russians who live in Moscow and the surrounding regions.

But Putin’s approval ratings are still at all-time highs. One of the main reasons for having more than 80 percent of the population’s support is his being able to control the public narrative, especially for the older population who rely heavily on Russian state-owned television for news.

While much of the Western world is criticizing Russia’s aggressive actions in Ukraine, Russians who watch TV or read state-owned newspapers believe that Russia’s recent agricultural ban will be a positive for its economy, particularly Russian farmers.

A newscast on Russia’s “Channel One” pointed out that prior to the ban, domestic farmers could not compete with prices, and now they finally have an opportunity to do just that.

Viewers also learned that Russia has backup plans with countries like Brazil and that it would only take a few months to restructure its import-export system.

Read More Proxy warriors: Putin’s separatists

Alternative news channels, though, say that would actually take years, not months, to accomplish.

Russian news consistently makes the point that the ban will actually damage the European Union economy, with countries in the bloc losing about $12 billion per year by discontinuing business with the Russian market.

“EU went on America’s leash and it will damage the EU economy,” said Channel One.

Still, several Russian media sources reported that Minister of Labor and Social Affairs Maxim Topilin announced the decision to freeze Russian citizens’ pension savings in 2015.

Deputy Minister of Economic Development Sergey Belyakov then took to his Facebook page to apologize to the Russian people for what he called “stupid” policies, saying that going after pension funds was “harmful to the economy.”

Belyakov was fired shortly thereafter for making that statement in a public forum.

In March 2014, Irina Prokhorova, the politically outspoken sister of oligarch Mikhail Prokhorov, told alternative news channel “TV Rain” that Crimea would most likely be paid for on the backs of pensioners.

Matthew Rojansky, director of the Kennan Institute at the Wilson Center, told CNBC that this could be an early indication of what the Russian side of economic decline coupled with Western sanctions and isolation will mean.

“However, I wouldn’t jump to the conclusion that it means economic pressure will be sufficient to change the Kremlin’s foreign policy priorities, especially on Ukraine,” Rojansky said.

What it certainly does is give one more reason for ambitious and productive younger Russians to consider hedging their bets abroad, Rojansky added.

Several sources CNBC spoke with said that Putin’s option at the moment is to redirect national opinion with military and nationalistic rhetoric, a plan he has put into play since the beginning of the crisis in Ukraine.

Read More Ukrainian move against Putin easier said than done

So what will Putin do next?

Vladimir Frolov, author and president of the LEFF Group, recently wrote inThe Moscow Times that Putin has two options: “The disastrous and the cynical.”

Frolov correlated the former “disastrous” option with the move by former Soviet leader Yuri Andropov of escalating tensions with the West to the point of near catastrophe, and the latter “cynical” option with the move by former Russian President Boris Yeltsin to rearrange the government while throwing domestic allies turned enemies under the bus.

For now, though, where Putin will finally stop remains unclear.

This entry was posted in Europe. Bookmark the permalink.

Leave a Reply