Diagnosing the Russian Economic Malaise
When investors entered this market, there were certain carrots at the end of the stick. All of these carrots either did not materialise at all or came out in some way retarded.”
— Sergei Emdin, the head of EuroSibEnergo, an electricity investment unit of Russia’s richest man, Oleg Deripaska, speaking on investment in Russia’s energy sector at an energy summit on Tuesday in Moscow
Things are getting uglier by the minute on the economic front in Vladimir Putin’s Russia. The country is in recession, with a 0.4% contraction in GDP last month (industrial production contracted at six times that rate). Due the Kremlin’s crazed tariff policies, the Moscow Times reports that Russian oil producers, with their costs soaring, lost over $3 billion on oil exports in September and October. Only now, months too late, has Putin finally cut the export duty, meaning that the Kremlin will finally begin to suffer a massive loss of revenue from the falling market price of oil, placing the state budget at dire risk.
The ripple effects on the oil-dependent Russian economy have been devastating, and angry investors who were stupid enough to trust the Kremlin are demanding answers, and the full brunt of the disaster wrought by Vladimir Putin’s incompetent leadership has yet to be fully felt. Rachel Ziemba, lead analyst for oil-exporting countries for RGE Monitor, has offered an extensive review of Russia economic performance on the organizations’s website. It highlights several neglected facts that emphasize the increasingly dire economic peril faced by Putin’s Russia.
Ziemba points out that the bleak economic forecast of 3% economic growth for Russia in 2009 put out recently by the World Bank was based on an average oil price of $100/barrel next year. Even at that price, Russian GDP growth was expected to halve compared to this year, since that price would represent a nearly 50% falloff from the recent record highs. Thus, if oil prices remain at $50/barrel through 2009, Russia will clearly plunge into a brutal recession and the Kremlin will incur rapidly mounting debt (a deficit of 5% is expected in the 2009 budget if oil prices remain where they are). Yet, the Kremlin’s recent behavior in repeatedly shutting down the Russian stock markets and invading Georgia hardly make it a prime candidate for lending. Moreover, Ziemba points out, the Kremlin’s total lack of transparency and trust, combined with Russia’s pandemic corruption, makes it difficult to implement liquidity injections effectively, and may doom such efforts before they begin.
The ruble has lost 17% of its value so far this year, Ziemba says, and the government’s furious attempt to artificially limit the slide is not only costing Russia billions in FOREX reserves, but also “may be exacerbating the outflow from the banking system (outflows were about 5-7% in October) even as it erodes Russia’s cushion of foreign exchange reserves. Foreign investment flows have clearly reversed – In 2008, Russia has now had net outflows of investment in contrast to the inflows experienced in recent years.” The cost to Russia of combatting the economic crisis is truly staggering; some sources are suggesting the price tag will be at least $400 billion, or one-quarter of Russia’s annual GDP and virtually the entire amount of its existing FOREX account.
But that is not the worst of it.
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