EDITORIAL: A Primer from the Professor


A Primer from the Professor

In a January 22nd post, Streetwise Professor reviewed the Russian Central Bank’s decision earlier that day to allow a one-day 10% depreciation in the value of the Russian currency.  For months, the Bank had followed a policy of no more than 0.5% daily depreciation, on only a handful of occasions allowing depreciation of as much as 1% in a single day.

But in the prior week, that policy cost the Russian treasury the stunning amount of $30 billion in foreign currency reserves.  At that rate, Russia’s entire foreign currency account would be exhausted in just 13 weeks!  So, as SWP put it, the Bank “cried uncle.” Earlier this week the ruble experienced it’s biggest two-day drop in a decade as it fell to a stunning 35:1 against the U.S. dollar after being at 24:1 just six months ago.  Russia’s FOREX account stood at a humbling $386.5 billion, close to half what it was six months ago, and the respite they received as the ruble was allowed to enter freefall may be short-lived indeed.   The Central Bank has pledged to begin spending reserves anew if the ruble passes the 36:1 threshold against the dollar.

Moreover, on Friday Russian Finance Minister Alexei Kudrin announced that because of plummeting world oil prices Russia will face a massive budget deficit in 2009 of at least $180 billion and, even incurring massive debt, that will require it to deplete its budget reserves by 25% and would provoke net capital outflow in excess of $100 billion.

It’s important to understand that the consequences of the Putin policy “not to crush the national currency overnight” were disastrous for many reasons, not only because of the horrific deprecision of Russia’s precious cash reserves. 

The drawn out process of stepped reductions in the value of the currency, with no end in sight, created a cottage speculation industry.  With the stock market virtually useless as an investment vehicle, traders began placing bets on when and by how much the ruble would drop next, and this practice began to consume larger and large amounts of the nation’s liquid capital, which moved away from actual investment projects and starved industry.  Industrial production plunged by more than 10% in December alone. The natural result was falling wages and unemployment, about which we wrote on Friday.  For the past two months, everyone was just speculating [against the ruble],” said Yevgeny Gavrilenkov, economist at Troika Dialog, a Moscow investment house. “They weren’t paying debts, barter was rising.”

Why would the government engage in such a crazed practice, so clearly placing the nation’s very survival at risk? SWP explains that the Kremlin had two reasons for doing so.

First, the Kremlin cares far more about its own short-term survival than about the nation’s long-term well being.  The Kremlin knows that there is nothing it can do to hide from a plummeting ruble, not when every Russian street has a currency exchange office with the current rate prominently displayed outside.  It knows that the lay public associates a stable ruble with a successful government. It knows that if unemployment and inflation are rising and the ruble is falling dramatically, its surival could be in danger.  So it’s willing to squander the national savings account, regardless of the consequences, to keep the lid on its kettle of power.

And second, there’s the oligarchs.  They’ve borrowed massive sums of Western capital to expand their various business enterprises, businesses that earn revenue in rubles.  To repay those obligations, the oligarchs must convert rubles into dollars and euros; any loss of value in the ruble makes their loans much more expensive to repay.

To antagonize both the oligarchs and the mass public simultaneously would be a fatal cocktail, more lethal than the one the Kremlin fed to Alexander Litvinenko.  So the Kremlin had no problem following a policy that amounted to national financial suicide. 

And SWP points out the extremely devious way in which the Kremlin responded when the sand finally ran out of this crooked hour glass.  It waited until it could time the 10% announcement with a “periodic increase in the demand for rubles that business use to make VAT payments” and it made one final splurge on rubles out of its own coffers, with the result that on the day of the announcement the ruble actually gained value rather than falling.

But this sleight of hand is futile, neo-Soviet in character. SWP quotes  Alexei Moiseyev, economist at Moscow brokerage Renaissance Capital:   “It’s inevitable that the ruble will move to the limit of the new band. This had to be done, but it should have been done faster.”

SWP’s running commentary, applying sophisticated knowledge of economics to the Russian financial scene, is unique in the blogosphere and indeed the world, a must-read for anyone concerned about Russia’s future.

11 responses to “EDITORIAL: A Primer from the Professor

  1. When will russians take to the street to protest Putin’s economics?


    It will probably take as long as it took them to go the streets against Stalin’s mass murder campaign.

  2. Blaze, they already took to the streets: drivers blockaded streets in the Russian Far East to protest the new import duties that Russia was putting on importing used Japanese cars. The Kremlin had to send in OMON troops from Moscow and Dagestan to viciously break up the protests.

    The Kremlin expects more popular unrest. They did give big raises in recent weeks to the commanders of the MVD presumably to buy their loyalty ;)

  3. Pingback: EDITORIAL: A Primer from the Professor

  4. It looks like the Kremlin is running scared. How else to explain their financial efforts and losses these last few months.

    They may be able to silence a few influential critics, but unemployment and financial set backs will only hearten dissent and opposition.

    The worst of the crisis will continue at least 2 years. I do not think the Kremlin will last 1 year.

    Putin just might be house hunting in Davos. I know I would be.

    Gary Marshall

  5. Michel, with all respect to Far East protesters, it’s not the same. Significant segment of Vladivostok economy is supported by Japanese imports. Vladivostok local government is as corrupt as the central one; so the higher imports affected their well-being (through bribes and other payments) as much as it affected the drivers. Therefore they tacitly (and not so tacitly) supported the drivers; therefore Kremlin had to send Moscow OMON troops to crush the dissent.

    I think Blaze’s question is when will the people stop being sheep (whether the shepherd is in Moscow or locally) and start voicing their opinion regardless of circumstances.

    The economic situation in Baltics and Iceland is not nearly as gruesome as it is in Russia – but people are in front of the parliaments demonstrating.

    Unfortunately, Russia knows only two options: servitude or riot (бунт). As Pushkin wrote almost two centuries ago – Не приведи Бог видеть русский бунт, бессмысленный и беспощадный! (Beware of Russian riots – senseless and merciless). Not much changed…

  6. Andrei Illarionov at Gazeta.ru has a detailed piece on the current industrial decline in Russia date:

    “Even the word «Disaster» has hardly applies to what is happening now in Russian industry.”
    “The rate of decline recorded in November and especially in December last year, have no analogues in the modern Russian economic history. ”
    “Similar rates of decline in production may have occurred in Russia only during the Great Patriotic War – the end of 1941 and spring – summer 1942 on. ”


    Sorry, Gary, democracy isn’t going to happen from the top down in Russia ever and there is no real demand or understanding of it in the bottom and the middle. No one will starve in Russia. Pockets of unemployed in the mining and manufacturing sectors will protest, bread will be thrown at them after a show of force by OMON. The Kremlin faces may change, but, the whole sick culture won’t. 60% of Russians are rural and have hardly participated in this past boom cycle. They aren’t going to be that angry at the Kremlin.

    There are places on this planet that are perpetually mired in bad ideas, ignorance and rotten governments. Look no farther than the tribalism and non-secular anti-democratic Islam effect in the ME. Or tribal Africa. Or SA where right wing military regimes alternate with communist idiots like Chavez .

  7. Felix, you might want to look back to what happened a few years back with monetization in 2005. Putin was facing demonstrations in the streets with pensioners taking to the streets. La Russophobe actually has a good piece on this: https://larussophobe.wordpress.com/2008/02/29/the-putin-legacy/. Putin got lucky then because the price of oil started going up drastically later in the year and he was able to throw money at the problem and make it go away. As it stands, Russia will be left without a kopeck in its reserves by the end of the summer and Putin is unlikely to get lucky a second time around.

  8. Perhaps the most startling indicators of Russian sentiment right now are two widely diverging figures in current polling. About 40-50% of the Russians polled think their country is going in the wrong direction. But those same people polled give Putin about an 80% favorable rating.

    It will be interesting to see how things will play out in six months when the currency surplus runs out (assuming oil is still in the cellar, which seems reasonable enough given current trends.) Still it’s hard to imagine the Russian people breaking out of the “Ty nachalnik, ya durak” (“You’re the boss, I’m an idiot”) mentality which makes Putin’s popularity a reality in such tough times.

  9. Michel:

    I hope this mass protestation against the Kremlin materialize because i’m sick of Putin and his Kremlin thugs.

    While i’m an Obama supporter and understand that he can’t rock up the boat too fast on the Kremlin , i worry that he may think Russia can be trusted.

    I’m hearing that he talked or placed a call to the Kremlin on the same day that he talk to the leaders of Germany and France….Now , i dont think too much of the French and the german , but they are at least more trusted then the Kremlin , and the fact that Obama called them alongside the Kremlin is worrisome.

  10. 2000 marched in Moscow – that’s almost cause for optomism…

  11. err… optimism!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s