Russian economic crisis: Some saw it coming

Thursday, 27. November 2008     0 comment(s)
Igor Torbakov
Senior Researcher

Happy countries, like happy families in Leo Tolstoy’s famous phrase, appear to resemble one another, while unhappy ones – for instance, those struggling with the current global economic crisis – are unhappy in their own particular ways. Russia, as some commentators suggest, has been hit especially hard, facing all the negative aspects of the financial meltdown at once. The country that only very recently has been so self-confident and full of swagger, notes the seasoned Russia hand Stephen Sestanovich in a commentary which was posted on the Council on Foreign Relations website, is now coping with the “sharply declining export earnings from energy and metals, over-leveraged corporate balance sheets and a chorus of bailout appeals, a credit crunch and banking failures, a bursting real-estate bubble and mortgage defaults, accelerating capital flight, and unavoidable pressures for devaluation.”

Here are some depressing figures giving an idea of the quantitative parameters of Russia’s current economic woes. Almost three quarters of the Russian stock value were wiped off the books since the beginning of this year. In particular, Gazprom’s value is down 50 per cent (from $185 billion to $92 billion) in just two months. At the beginning of 2008, its value stood at over $350 billion. Rosneft has also lost half of its value. Finance Minister Alexei Kudrin said the Russian budget might go into deficit at the oil price of $70 per barrel. But the cost of a barrel of Urals crude is now below $50. Meanwhile, the country’s hard-currency reserves have dropped from about $600 billion in August to $475 billion in November. Russia’s Central Bank had to spend $57.5 billion in September and October to support the ruble against the dollar. As these efforts have proved too costly, the government appears to have embarked on the managed devaluation strategy, allowing ruble to gradually depreciate. At the same time, capital flight is on the rise, reaching $50 billion in October.

The Russian leadership has accused the West (specifically, the United States) of unleashing the global economic turmoil -- the result, the Kremlin asserts, of America’s unbridled greed and carelessness. But some astute analysts have long pointed out that Russia’s seemingly impressive economic edifice built over Putin’s two presidential terms is resting on the shaky foundation.

It is an intellectually rewarding experience to reread these days a seminal article by Vladimir Popov, “Russia Redux,” published in the March-April 2007 issue of the New Left Review.

One of Russia’s most original comparative economists, Popov argued -- one year before the current troubles began -- that Russia was again suffering from the overvaluation of the real exchange rate – the main factor that was behind the deceleration in growth in 2001-2006. It was, Popov said, “the typical Dutch disease that Russia has developed once again. It first arose in 1995-98, leading to the currency crisis of August 1998, and it now seems that history is repeating itself.”

Most analysts dismissed Popov’s warnings pointing to Russia’s massive foreign exchange reserves that the country lacked in 1998. But Popov wouldn’t buy this. Here’s his argument: “If oil prices drop and capital starts to flee at a rate of $ 5 billion a week, as it did in July-August 1998, these reserves would be depleted very quickly. A future devaluation could take the form of either a currency crisis or a ‘soft landing’, but there is little doubt that it will eventually take place.”

Popov also criticized government tax cuts. The Kremlin, he asserted, “has failed to use windfall revenues from oil and gas exports…to repair badly damaged state institutions and to restore the provision of crucial public goods, such as law and order, education and health care. Instead, the government cut taxes, allowing profits from natural resources to accumulate as personal and business income, and has amassed a budget surplus.” But too rapid decrease in taxes poses a danger for the country’s economic stability, Popov warned. “Current budget surpluses are based primarily on high prices for energy resources, and therefore, if these prices should fall, the government could once again find itself penniless.”

Some of Popov’s opponents in 2007 have likely called him a pessimist. However, his lucid analysis of Russia’s economic situation has once again confirmed the wisdom of an old quip that pessimist is a better informed optimist.

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