Investors Business Daily reports:
In contrast with the West’s otherwise tepid response to Moscow’s new nationalism, one group has taken a tough stance — investors, who are leading the march out of Russia’s markets.
On Friday, Russia’s central bank announced that its foreign currency reserves — a key part of its economic stability and an indicator of foreign investor support — had plunged $16.4 billion in the most recent week, to $581.1 billion (see chart).
Until Russia’s move into Georgia, there seemingly had been only massive capital inflows, thanks mainly to the rising price of oil, which makes up 20% of Russia’s gross domestic product.
Now, it seems, investors are fed up with the rampant militaristic nationalism, red tape, corruption and anti-investor sentiment in Vladimir Putin’s Russia. Some have decided to head for the door and take their money with them.
Last week’s decline was the largest since Russia’s 1998 currency crisis, which led to a collapse of the ruble and rampant triple-digit inflation. So far this time, there’s no major visible impact on Russia’s economy. But if the flow of money leaving Russia turns into a flood, it could send Russia’s markets into a tailspin, creating massive problems for Prime Minister Putin and his handpicked president, Dmitri Medvedev.
No doubt, foreign investors weren’t cheered by another signal sent by Russia’s regime last week. Without comment, Russian authorities decided to keep oil tycoon Mikhail Khodorkovsky, whose biggest crime seems to be he became Putin’s political foe, in prison — despite his being eligible for release.
Any continued movement of capital out of Russia could prove disastrous. As we noted above, Russia really is a hollow economy, its growth kept afloat by soaring oil prices and a commodity boom which have both boosted investment in Russia and made its overall economy look much better than it is.
In fact, Russia is an economic nightmare in slow motion. Due to poor health care and widespread alcoholism, its population is declining by 500,000 a year — a trend that’s expected to accelerate in coming years. Inflation is revving up again, after declining for several years, and now is growing at about a 14% yearly rate — and rising.
Moreover, data from the European Bank for Reconstruction and Development show that, despite the oil-fed boom, Russia’s GDP per capita is just 2% above where it was when the Berlin Wall fell.
That means, essentially, there has been no growth at all for 20 years. Of the 15 former Soviet republics that got their freedom after the collapse of communism, 11 are growing faster than Russia.
This is Russia’s big vulnerability under Putin. With oil prices falling, Russia’s reserves will come under more pressure — and the import boom that has kept the new class of Russian oligarchs happy will come to a screeching halt.
This year, foreign investment is expected to fall for the first time in six years — just as lower oil prices kick in. Russia could be in real trouble, and it couldn’t happen to a nicer regime.
Putin needs his hard-currency earnings from oil sales to bolster his military. With grand designs on controlling key choke points in the world economy via a revived Russian military, he’ll need lots of money in the coming years.
Can he do it? Without a sustainable economy, it’s doubtful. With just twice as many people, the U.S. economy is 29 times as large as Russia’s. There isn’t an area of technology we’re not ahead in. Russia will spend about $31 billion this year on defense, and has planned a $189 billion, 5-year expansion. Even so, that’s about what the U.S. spends in five months.
Based on its demographic implosion and lack of a non-oil economy, our guess is Russia is in for a rough couple of decades, not the boom times many have predicted. If foreign investors keep looking for the exits, Russia’s good times may be over for good.
Putin may seem menacing now. But he’s likely to discover the same thing Mikhail Gorbachev did — no matter what he does, he’s still going to be too far behind the U.S., both militarily and economically, to challenge us. He’d be better off worrying about China.