EDITORIAL: Putin’s Economy is in Flames, but Much Worse is Coming

EDITORIAL

Putin’s Economy is in Flames, but much Worse is Coming

Two stunning admissions were made last week by the Putin administration, admissions which reveal the true extent to which Putin’s mismanagement of the economy has led to fundamental national collapse.

First, the Kremlin admitted that it will cut the federal budget by a whopping $60 billion next year (that’s two trillion rubles less spending on basic social welfare measures for a population that is already so sick its male population doesn’t rank in the top 100 of the world for lifespan), owing to shortfalls in revenue this year of 30% compared to projections at the beginning of 2009.

Then, the Kremlin admitted that spending cuts, even that draconian, wont’ be enough:  it will need to beg for foreign loans in order to keep the economy afloat next year, the first time it’s had to do this in more than a decade.   Streetwise Professor states believes that the uncontrolled ballooning of the deficit brought on by the dramatically worsening economic contraction will seriously undermine the Kremlin’s ability to deliver a stimulus package as promised, creating a horrific snowball effect.

An 8 percent of GDP deficit (predicated on the current forecast) seems unachievable if the economy indeed contracts by more than 2.2 percent as Kudrin deems likely, so a 5 percent deficit would require deep spending cuts–cuts that would conflict with Putin’s plan for a fiscal stimulus totaling $90 billion(3 trillion rubles.)  How Kudrin can square that circle is beyond me.

Combined, these two horrifying facts bespeak total failure within the Putin regime.  As Natalya Orlova, chief economist for Russia’s Alfa Bank, writes in her Moscow Times column, 2010 is shaping up to be a true annus horribilis for Russia, since “the full effect of the crisis on Russia lags behind developed markets and will likely only be felt here in the second half of 2009, manifesting itself in the form of bad corporate debt.”

If Orlova is right, then Russia hasn’t yet come remotely close to realizing the true extent of budgetary shortfalls in 2009, but has only just begun to feel them.  That means the Kremlin will have to borrow even more, and cut spending even less, in order to operate in 2010. And when the ripple effects of debt default are finished rippling through the economy, the Russian economy will lie in ruins next year.

Orlova warns:

Today, Russian banks are vulnerable to one overarching risk — the palpable decline of economic activity that is affecting all the sectors of the country’s economy. The current economic downturn means that all banks will face mounting nonperforming loans to one degree or another. Exporters are suffering from the decline in commodity prices and the unavailability of foreign capital, and under these circumstances they will certainly face liquidity problems. Furthermore, the decline in the country’s construction sector suggests that the credit quality of companies operating in the manufacturing, transportation and trading sectors will deteriorate. The dramatic drop in equity and real estate prices have caused a reduction in the value of collateral used by borrowers. Retail clients will also have trouble servicing their long-term debt.

The bigger issue for Russia is short-term corporate debt of $220 billion (out of a total corporate debt of $780 billion) that comes due before the end of this year. Half of this amount is denominated in foreign currency loans, which means an additional financial burden considering the significant depreciation of the ruble since September.

The $220 billion debt makes up roughly 20 percent of Russia’s current GDP. Given today’s environment of declining global and local demand, it is indeed difficult to imagine that the real sector of the economy will be able to generate the necessary revenue flows to service its outstanding debt. The peak for nonperforming loans can be expected in the third quarter, at which point Russia will experience its “second wave” of the crisis.

Given the fact that $220 billion has to be paid this year, it appears that a 15 percent level of bad loans is inevitable. A domino effect of bad debt could lead to a level of nonperforming loans as high as 30 percent. Clearly, banks are working to reduce their exposure to troubled borrowers to limit the prevalence of bad loans. This, in turn, is exacerbating the problem for struggling companies that face severe liquidity problems now. Insolvency for many of these companies is a real possibility.

When one combines this intense pressure on banks with the vise-like grip of plummeting government revenues and surging deficits, one has the makings of a far worse economic collapse than Russia experienced in 1998.

And, sadly, as wicked as the economic pain will be, the political pain may be far worse. Already, we have seen open public protests against the Putin regime, with some protesters calling him “Putler” and other demanding he be sent into outer space.  And yet the worst has not yet happened. When it does, and the protests grow more intense and remind the Kremlin of the Orange Revolution in Ukraine and the recent firestorm in Moldova, the Kremlin will crack down hard. Stalin hard.

It has no other alternative.

5 responses to “EDITORIAL: Putin’s Economy is in Flames, but Much Worse is Coming

  1. Wishful thinking on your part does not reality make.

  2. ‘Misha’, again, is this dribble of your’s all that YOU can respond with, by your ‘wishful thinking on your part does not reality make’? Come on, say something more intelligent, ANYTHING!
    When they have nothing intelligent with which to respond to the many highly intelligent& often scholarly students and astute critics of their rotten corrupt KGB-gangster run Russian Federation, they label all their detractors as somehow, ridiculus, or fools, or uninformed or ‘wishful thinkers’ or enemy agents, etc. Why waste our time on this site, with your meaningless dribble?
    R.D.

  3. There really is no more room for belt tightening in the Russian Federation’s remote areas. Moscal influence is being replaced by other economic alliances. After all why should the Kremlin control the routes and flow of Oil and Natural gas from the Caspian and threaten Europe with cuttoffs? Moscali getting desperate, and blowing up gas pipes in Turkmenistan, Georgia and Moldova. Just to get out of Gasprom’s supply contracts with Turkmenistan and others. Reducing the flow in this manner has implications that Turkmenistan has Understood only too well. Fining the Ukrainians 530 million for not purchasing more gas than anybody needs. Petulance that Europeans and Ukrainians want to repair the pipeline themselves. Setting them up for this “fine”, by Putin saying that they will not be fined. Of course there is always Iran who is number 7 in gas reserves of its own, and would like to transfer some of that gas to Europe thru the middle east. Dealings with Moscow always suck anyway since they continue to disregard all their contracts and agreements. Russia has big problems coming at them from the South and East that already caused the Red Army to retreat more than once. Now they are anxious to get out of Chechnya lately leaving their Satrap Kadyrov who really said he hates Moscali, but takes their money anyway. Will they try to invade Georgia again in the summer, causing the Caucasians to Unite and eventually attack the fat center with assymetrical warfare? Even Armenia will go on maneuvers with NATO despite what Lavrov said about it. RaSSiya is going down given another couple of years. Oligarchs have not reinvested in their own country. Moscow has de-facto confirmed the statement made more than a year ago by the emir of the Caucasus Emirate Dokka Umarov in which he claimed that the mujahideen had complete control of the mountainous regions while the foothills were the zone where military operations were carried out. (Itar-Tass) For the first time in recent years the Kremlin has officially admitted that mujahideen are active in at least 10 districts of Ichkeria and that these districts are a combat zone.

  4. The finance industry has effectively captured American government by the assumption of private debt obligations Kremlin Style. RaSSiya meanwhile, needs to squeeze someone, because it is without Ukraine and the rest of the Soviet Union. Obviously ordinary working Rashians will be hit the hardest as usual. The riots will grow as already is happening. Russia will beg for the IMF loan which comes with the “plan”. RaSSiya has no choice but to suck up. A program “goes back on track” with the IMF loan after changes are made to the most offensive abusers of the funds, and puting pressure on the government among the Kleptocrats. Sudden elections or a Bolshevik Style takeover.

    http://www.theatlantic.com/doc/200905/imf-advice

  5. China on Thursday agreed to loan Kazakhstan US$10 billion in return for the right to take a big stake in the Central Asian country’s energy sector. This follows similar initiatives with Russian energy giants and the financing of a gas pipeline from Turkmenistan via Uzbekistan to China.
    http://www.atimes.com/atimes/Central_Asia/KD18Ag01.html

    Now for the Flames mentioned in the story.
    See the Gas Well Moscal Savoks set on fire in Uzbekistan that has been burning for the last 35 years. An Ecological Disaster! http://englishrussia.com/?p=1830

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