EDITORIAL: The Man behind the Curtain

EDITORIAL

The Man behind the Curtain

A little dog called “bourse” has snuck up behind the Wizard of the Kremlin and pulled back the secret curtain to reveal the little man behind it.  Suddenly, the world sees a very different Vladimir Putin, stripped of his illusions and seeming very ordinary indeed.

The most crucial reality underlying the recent collapse of the Russian stock market is the implication for economic growth.  Economist Konstantin Sonin says:  “It appears that the healthy economic growth that Russia has enjoyed for the past seven years will soon come to an end. The Kremlin’s efforts to stimulate the economy by increasing government spending will only create an illusion of growth, which means that when this temporary windfall wears off, there will be a sharp economic decline. ” Finance Minister Alexei Kudrin predicts 2009 growth will fall by over 20% compared to this year.

The reason for this is obvious.

As Sonin states:  “The main driving forces behind the Putin-era boom — high oil prices and a devalued ruble after the devastating government default in 1998 — are a thing of the past.”  Falling world markets reduce the demand for Russia’s crude oil, and so its price collapses.  Russia claims that accident of that price rise for the lion’s share of its growth, meaning that growth must fall.  In fact, where Russia is concerned we need to refer to “growth” using quotation marks, as we must in regard to terms like “elections” and “president” and “prime minister” — for none of these terms carry their normal meaning when used in a Russian context.

Sonin also points out that Russia lacks any developed system of credit investment, meaning that growth is tied to the ability of companies to use existing assets to leverage financing.  The stock market crash wipes out the value of those assets and makes borrowing to expand impossible.  And on top of all that, Russia must face the ravages of the business cycle just like any other nation must do, except that the Russian economy lacks the solid diversification and fundamentals that would allow it to ward off the business cycle’s worst effects.

The world will now see a Russia unassisted by a soaring price of oil, left to its own devices. It will see that Russia will respond not be enacting real policy but by using the windfall revenues it generated from spiking oil prices to paper over the problems and hide them from view.  It will see, in other words, exactly the same tactics that were employed by the USSR.

4 responses to “EDITORIAL: The Man behind the Curtain

  1. They just sell Oil for very high prices and that is all. That is their business model. Sell our oil and hope it costs A LOT.

  2. Putin’s main mistake was that he consolidated instead of diversified. He put all his cards on oil and the bubble burst. Had he diversified the economy, Russian might have been able to become a world economic power. Instead he squandered his country’s wealth on his moronic KGB buddies and on forays into South Ossetia.

  3. Kolchak, you are being generous. If Putin had at least put some cards in the oil industry. He coasted on what had been done in previous decades, invested little in oil and gas production, and GAZPROM sunk money into buying television stations and other media as opposed to actually putting that money into ensuring production. He not only failed to diversify the economy, he also let oil and gas production stagnate in spite of the fact that it is their main source of income. It is certainly a classic case of killing the goose that lays the golden egg simply because you wanted a midnight snack.

  4. Kolchak, you are also overlooking WHY Putin didn’t invest and diversify. That would have meant bringing “evil” foreigners, especially Americans, into the country. Those foreigners would have expected profits. They and their friends wouldn’t have been easy to control. Saying Putin should have encouraged economic diversity is like saying cats should learn to swim so that they can survive better. Russia is run by KGB xenophobes who don’t understand economics, business, or the modern world. So long as that is the case it will not grow economically.

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