Monday, February 14, 2011

Window on Eurasia: Russia’s Structural, Fiscal and Demographic Trends Producing a Disaster, Standard & Poor’s Says

Paul Goble

Vienna, February 14 – Unless Russia carries out serious fiscal and political reforms, within 40 years, its state debt will rise to almost six times its GDP, a situation that will exacerbate and be exacerbated by its demographic decline, in which by mid-century, the “weight” of pensioners on working age Russians will be twice what it is today.

Those are the stark conclusions of a study conducted by the Western rating agency, Standard & Poor’s, and a disturbing reminder of the way in which the structural, fiscal and demographic trends of Russia, like those of many other countries, are interconnected and thus that much more difficult to solve (

And while such interconnections are often the subject of discussion in Western countries, most research on Russia, including by Russian specialists, have typically focused on one or another of them, thus ignoring the ways in which they compound each other and the ways in which Russia too finds itself in a bind from which it is almost impossible to escape.

As reported on Saturday by the “Novy region” news agency’s Olga Radko, if current trends continue, Russia’s state debt will be 585 percent of GDP, its population will fall to 116 million, and 39 percent of its people will be over 65 compared to only 18 percent now, something that will place a far greater burden on the working age cohort.

Given the likelihood of the continuation of low and sub-replacement fertility rates and the relatively high mortality rates – Russia’s current mortality rate of 14.6 per 1000 is nearly twice that of the OECD countries where is it on average 8.1 – Russia’s population will continue to decline and to decline with specific consequences.

The share of the working population by 2050 will fall from the current 72 percent to 60 percent, an aging that the study suggests will have a negative impact on economic growth and public finance as well as increasing demands for spending on health and long-term care for the elderly.

“If the government does not conduct new reforms,” Standard & Poor’s concludes, “the general expenses of Russia connected with the demographic factor [alone] will increase from 13 percent of GDP in 2010 to 25.5 percent of GDP in 2050,” a rise similar to but in some ways even worse than that in other countries.

Moreover, the ratings agency says, while the increases in these burdens will be relatively moderate in the immediate future, they will then accelerate as those born earlier when birth rates were higher reach retirement age and push up pension payments from 9.4 percent of GDP now to 18.8 percent of that annual measure in 2050, despite the relatively low level of pensions there.

Under these conditions and unless Russia “carries out fiscal or structural political reforms,” its state debt could reach 585 percent of GDP by mid-century compared to the 11 percent of GDP that Finance Minister Aleksey Kudrin reported last year, something that would dramatically increase servicing costs.

But if Russia does conduct “radical structural reforms,” including the freezing of “all expenditures connected with the demographic factor at the current level,” then the rating agency which is concerned above all with fiscal order and the willingness of bond holders to purchase debt, Russia’s budget “will be balanced by 2016.”

Unfortunately, as the agency does not say, if Russia takes such steps, two things are likely at least in the short term. On the one hand, many of the poorest groups in Russian society, including pensioners, will suffer. And on the other, the country’s demographic situation will worsen, with the fertility rate falling still further and the mortality rate possibly going up.

In short, Russia, just like other countries but in a more intense form, faces few if any good choices. If it meets popular demands, it will face a mounting debt crisis to go along with its demographic ones. But if it doesn’t, it may avoid the former only to see the latter problems become even more serious than they already are.

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