Russia Enters a Massive Recession

Streetwise Professsor reports:

RIA Novosti reports that the Russian economy contracted 8.8 percent year-on-year in January.  That’s pretty bad, but in fact understates the steepness and intensity of the drop.

Consider the Russian economy was growing about 6 percent through August.  So, normalizing January 2008 GDP to 100, in August GDP was approximately 104.  Now, it’s 91.2.  This means that the drop from August to January is 12.3 percent.  Annualizing that gives an almost 30 percent per year rate of decline.

Economic Development Minister Elvira Nabiullina recently stated that the decline in January vs. December was 2.4 percent.  Annualizing that gives a 25 percent per year annualized decline.

To put things in perspective, the Japanese economy contracted at a 12.7 percent annualized rate in the fourth quarter of 2008.  The US economy contracted at a 3.8 percent annualized rate in the fourth quarter.  UK GDP fell at a 6 percent rate in that quarter.  For Germany, the figure is about 8 percent.  For the entire Eurozone, about 6 percent.  The OECD, 6 percent annualized.  Canada–can’t forget Canada!–well, didn’t forget, but can’t say, because its 4th quarter numbers are not out yet.  Ditto for Oz.

Given Nabiullina’s estimate of a 2.4 percent decline in January alone, it is heroic to put any faith in the government’s just revised estimate of a 2.2 percent drop in GDP for the entire year.  Given that the budget is based on a 2.2 percent number, that the projected deficit based on that number is 8 percent of GDP, and Kudrin has said that the country cannot afford a deficit of bigger than 8 percent of GDP without sparking greater than 14 percent inflation–well, draw your own conclusions.

For those (not naming names;-) who still believe that Russia is not among the nations hardest hit the global economic crisis, The Professor has some extra credit homework for you;-)  Find a country that has contracted more rapidly than Russia since August.

And, for those who persist in insisting that Russia is in better economic circumstances than the US, please choose a metric or metrics by which we can make the comparison.  Hint: Don’t use GDP growth.

In brief, the Russian economic condition is dire.

19 responses to “Russia Enters a Massive Recession

  1. Hope, and Change.

    I feel like I won the lottery, only I didn’t.

  2. lol, again I laughed at this post.

    You have just measured Russia economic position on the basis of one months GDP based on the same month the previous year and annualized it. Even the most uneducated economist can spot the fundamental flaw in that. It completely ignores seasonal or one off events. Thats the problem with annualizing one months results. For example the gas supply cut off to Europe etc. Maybe we use the month the US borrows $1.5 trillion to bail out its economy and annualize its debt to and additional $18 trillion this year. Then we will not talk about the problems with calculation Russias GDP in dollars instead of the ruble as it reflects differences in currency rather than GDP growth.

    As for other economic problems. Lets look at national debt for example. Russia has $575 billion while the US has 13.5 trillion. The US government has put 3 times Russias national debt into its banking system alone. How about public debt, Russia is at 6%, Japan 120% and the US 60%.

    https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

    https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html

    The Euro is slowly but surely eating into the dollar as an international currency. Already Hilary Clinton has been to China to ensure China continues to buy treasury paper. Oil has bottomed out according to the chief executive of Total (FT Feb 2009) as output is nearing its peak.

    Russia has protected its reserves by keeping them in several currencies. It can cover its national debt and has low public debt. It has put itself in this position in just 20 years.

    The US can hardly scratch the surface of its massive national debt and its public debt is over 60% of its GDP.

    LA RUSSOPHOBE RESPONDS:

    Just checking: You’re not so stupid as to be unware of the fact that this post was not written by us but by a PhD in economics who has nothing to do with us, right?

    Are you laughing at the fact that Russians work for $4/hour and don’t live to see age 60, suffering from all manner of horrific dangers and illnesses resulting from their extreme poverity and costing them 1 million people in net loss from the population each year?

    If so, you are an evil maniac who should be in prison. Why do you hate the Russian people so much? What did they ever do to you?

  3. John writes: “You have just measured Russia economic position on the basis of one months GDP based on the same month the previous year and annualized it. Even the most uneducated economist can spot the fundamental flaw in that. It completely ignores seasonal or one off events.”

    It you were to go to the RIAN article you would read the following: “Economic Development Minister Elvira Nabiullina earlier said Russia’s GDP, adjusted for seasonal factors, fell by 2.4% from December 2008.” It does not take a PhD to understand that the monthly figures were already adjusted for seasonal factors, and you can’t shrug off bad statistics on “seasonal factors.”

    Also, the 8.8% decline is based on comparing January 2008 to January 2009 statistics. How can seasonal factors be the cause of the decline? Any seasonal factors would have been at play both in January of 2008 and 2009, so you cannot blame a 8.8% decline on “seasonal factors.”

    In other words, your critique is unjustified and unfounded.

  4. “Russia has protected its reserves by keeping them in several currencies.”

    That’s silly. Russia has used most of their reserves propping up the rouble and bailing out favored oligarchs. Not a good choice when you have an aged population and responsibility for their pensions.

    90% of their food is imported and inflation is running at 13% . Foreign capital won’t be back any time soon. So, John, while you are laughing at the LR’s post others most likely are laughing at you.

  5. “Russia has $575 billion while the US has 13.5 trillion.”

    Oh, and, John, Russia’s economy is only the size of California’s. When you compare national debt that’s pretty critical. Besides oil and raw commodities which can stay crashed and burned for years, even decades as in past commodity cycles, Russia hasn’t got much else going for it. It’s nothing more than another backsliding emerging market.

    Get back to us in a year and tell us how things are going there. LOL.

  6. Again, the real crisis is yet to come in Russia. While the state is flush in cash, owing only $30 billion on about $300 bn remaining in reserves, the Russian business world is not. It owes something along the lines of $600 bn with little or nothing to pay it with.

    The question is – what will the state do, and who will it effect? Will the state subsume the debts and pay off what it can? That will eat up the remaining reserves but will cover a good deal of what is owed. Will it hang the oligarchs out to dry? Doubtful – I don’t think either government or citizen want a bunch of European banks foreclosing on their key revenue-earning industries. Will it let the oligarchs default and tell Europe “Come and get it. We dare you!”? That is the most likely outcome and frankly is much more ominous for the EU than it is for Russia, although one can expect a run on the ruble and the evaporation of any access to credit Russia may have remaining.

  7. “Just checking: You’re not so stupid as to be unware of the fact that this post was not written by us but by a PhD in economics who has nothing to do with us, right?”

    Tell me at what point Minister Elvira Nabiullina in the article you posted claimed “Annualizing that gives an almost 30 percent per year rate of decline.”

    “Are you laughing at the fact that Russians work for $4/hour and don’t live to see age 60, suffering from all manner of horrific dangers and illnesses resulting from their extreme poverity and costing them 1 million people in net loss from the population each year?”

    Tell me what Russians you know who gets paid in dollars? Secondly the cost of living is less than in western europe etc. Many people can cope quite well on their wage. russia has a fast growing disposible income and a growing middle class.

    “Also, the 8.8% decline is based on comparing January 2008 to January 2009 statistics. How can seasonal factors be the cause of the decline? Any seasonal factors would have been at play both in January of 2008 and 2009, so you cannot blame a 8.8% decline on “seasonal factors.””

    There was one large event that happened in January 2009 that I clearly identified that did not happen in 2008. The gas cut off.

    As for the Russian economy time will tell who is right or wrong. I hope la russophobe is willing to admitt error if the Russian economy shows signs of recovery and does not hit the 30% contraction it predicted.

  8. enough_with_crapology

    Thank you for not publishing my comment. It just goes to show your pathological inability when it comes to argumentation and a fear of the truth which underlies personal abuse either from you or your thuggish advocates.
    Instead you opt to keep your blog, which had a theme with potential, to limit itself to sensationalist propaganda, vile rants and a deterring environment for any rational being.
    Your problem is essentially that of the Russian opposition. You have failed to create a credible agenda and end up absorbed in the pettiness of your writings and your choises. It is in reality the likes of you and those like you that keep the Putin “regime” in its place.

  9. One quick update as to the “reserves.” As of February 1st, Russia had $221 billion left in their gold and forex reserves. Given this was from a month ago now, the reserves are now certainly must less than $200 billion, and the way that Russia burns through its reserves, this will last at best two months.

  10. Michael,

    At least Russia is using its reserves not increasing national debt. All nations at this time have higher unemployment and companies going out of business. This means each government gets less money through taxes therefore less money to spend. this applies across the board Russia, UK, US.

    The result of using the reserves to bailout companies etc is that national debt does not grow. The UK has public debt at 50% of GDP the US over 60%, Russias is just below 7%. National debt in the UK and US is spiralling of of control, where as Russia has been using its reserves. Russias reserves have put of borrowing for at least 6 months. The UK could have done this but new labour have been reckless and wastefull with cash,

  11. John,

    You write: “At least Russia is using its reserves not increasing national debt.”

    So, it was best to spent $200 billion to slow down the devaluation of the Ruble? This when Russia needs to invest $200 billion to ensure that it will have natural gas to export? This when Russian would need billions to upgrade its roads, hospitals, schools, etc…

    If you believe that $200 billion spent to have a slow motion devaluation, then I truly have to question your values. All that it did was to ensure that the oligarchs and the friends of the regime to get top dollars as they were shipping as much money as they could to their overseas bank accounts.

  12. John –

    No one argues (well, no one can reasonably argue) with your contention that it’s better to use reserves than take out more debt. And having cash reserves is a good thing at the moment. It’s why as long as China can keep off the civil unrest, it should end up ahead. As should Brazil. The billion dollar question, though, is will the reserves last long enough. If they do, Russia will probably do fine. If they don’t, then it’s in trouble.

    I’d like your opinion on the question of corporate debt, which is really where the crisis lies for Russia, rather than public debt as it does in most of the West.

  13. “So, it was best to spent $200 billion to slow down the devaluation of the Ruble? This when Russia needs to invest $200 billion to ensure that it will have natural gas to export? This when Russian would need billions to upgrade its roads, hospitals, schools, etc…”

    The ruble was overvalued and needed to be devalued. There are pros and cons to managing that devaluation the pros being it avoids panic. Remember many Russians still do not trust banks since the break up of the USSR and this luxury that the Russians can afford is required to maintain what little consumer confidence there is in the banking system. Most Russians have dollar and euro bank accounts not just the oligarchs. Roads, hospitals and schools will not pull any country out of this recession. Though currently Russia plans to build 9,000 miles of new roads and 5,300 miles of railways by 2015. Of course this target cannot be meet in the current economic situation.

    If Russias reserves do run out before the end of the world wide crisis then they are at least 6 months behind in borrowing behind most western nations.

    Also Russia cleared many debts when oil prices where high. The reserves not only allow Russia to put of borrowing, but then gives it room to borrow if needed. Everyone knows Russia will repay its debt when gas and oil prices rise again. Tell me how the US and UK will repay any debts they have?

  14. John,

    You write: “Everyone knows Russia will repay its debt when gas and oil prices rise again.”

    Why is this known? Also, how will the lenders know when the prices for gas and oil will rise again? Will they rise in a year or in five or then? Why should they lend to Russia, which defaulted in the past?

    So, your stance is the same as the Russian state’s: deny the obvious, say that things are worse elsewhere (even though the Russian GDP is falling faster and harder than the USA and the UK), believe in magical thinking, and wait for the prices of oil to return to $140+ dollars per barrel.

    Michel

  15. “Why is this known? Also, how will the lenders know when the prices for gas and oil will rise again? Will they rise in a year or in five or then? Why should they lend to Russia, which defaulted in the past?”

    Its known because gas/oil prices allways go up and down. Its based on the boom and bust cycle that makes the world go round. We are in a recession oil goes down, when we recover it will come up again.

    Russia only defaulted on domestic debt and a moratorium on payment to foreign creditors. This if anything makes it even more secure. Creditors got their money.

  16. Prices may always go up, but when is always the question. When oil prices collapsed in the early 1980s, it took until the 2001 for prices to start going up in any significant way. Perhaps it won’t take two decades for prices to go up, but where is the guarantee?

    Also, you can only sell oil that you pump out of the ground. Given that Russia has invested little in production during the good years, it will be harder for them to invest in the bad years. This means that Russian oil production will go down.

    What is the solution? The treatment of investors in the Russian oil industry shows that Russia cannot be trusted to fully honor its agreements and respect foreign investors.

  17. “Prices may always go up, but when is always the question. When oil prices collapsed in the early 1980s, it took until the 2001 for prices to start going up in any significant way. Perhaps it won’t take two decades for prices to go up, but where is the guarantee?”

    Of course nobody has a crystal ball. though the slump in 1998 only took 2 years to recover. What is clear is the current drop in oil price is due to the current situation in the global economy resulting in lower demand. This quite accurately allows us to predict a recovery in oil price when the global economy recovers. This also with reduced production by OPEC countries and Russia should further increase the cost of oil. Already since febuary the price at the pump has been increasing.

    “Also, you can only sell oil that you pump out of the ground. Given that Russia has invested little in production during the good years, it will be harder for them to invest in the bad years.”

    Not really true certainly not recently. Gazprom are now on the verge of signing a $2.5billion deal in exploring Nigeria for oil and gas. Investment in Sakhalin 2 allows Russia to enter markets further afield and is being use to develope eastern markets.

    As regards to foreign investors I do not know who you are talking about.

  18. John writes: “Gazprom are now on the verge of signing a $2.5billion deal in exploring Nigeria for oil and gas.”

    John, GAZPROM is always on the verge of signing some wonderful deal, and the Russian armed forces are always on the verge of releasing its newest generation missile and fighter jet, and the Soviet Union was always on the verge of achieving Communism….

    Haven’t you realized that being on the “verge” of something, especially when it is an announcement coming from the Kremlin or GAZPROM headquarters is absolutely meaningless and empty propaganda?

  19. John,
    Privately owned oil companies were big investors in new projects which Russian oil companies were unable to tap without their know how. Then after the work was done, they were swindled by Putin and his thug boys. It will be harder to get the Exxon’s/BP’s of the world to come and help them find new oil discoveries now, they burned some bridges with that bit of greed. Gasprom couldn’t find there ass if they were sitting on both hands, say anything about new oil discoveries.

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