Russia’s Looming Depression
Ask not for whom the bell tolls, Russia. It tolls for thee.
The humiliation just keeps rolling in for a Russia plagued by Putinomics. Russia can’t afford to host its Russian Open golf tournament this year, and when it can’t even maintain its matroshka nesting-doll industry, you know the writing is on the wall. National disgrace follows on national disgrace when you hand the reins of power to the an unqualified KGB spy.
We learned last week that Russia’s budgetary reserve fund shrank an amazing 12% last month, as the Kremlin squandered over 400 billion rubles to keep Russia’s current fiscal year from sliding into freefall. Well over one trillion rubles have now poured out of the fund since the ecnomic crisis begin. The Kremlin has seen its projected revenues plummet as demand for Russian oil and gas has evaporated; as we reported last week Gazprom, Russia’s leading industrial enterprise has seen its book value fall by two-thirds and slashed its dividend by nearly 90%. So it needs money to cover operating costs, and there are only three ways to get it: (1) print it (but then inflation would go crazy, and Russia already has double-digit inflation); (2) borrow it (but then Russia would become the helpless slave of the lenders) or (3) spend the rainy-day fund. It’s chosen the latter option, but the reserves are distinctly finite.
If Russia were to continue spending its budgetary reserve at this rate, it would not last 0ut the year, and the Kremlin would lose control of its budget in January 2010. And the fact is, spending may not simply continue at the current rate, it may dramatically accelerate if the price of oil falls or other government intervention is required, for instance to deal with defaulting loans. Soon, very soon, Russia will be at the mercy of foreign lenders just like the USSR always was, and its ability to deliver even the meager services it now provides to its desperate population will evaporate. The International Monetary Fund says Russia will experience no significant economic growth in 2010 after a massive contraction this year. The World Bank agrees. That means budget revenues won’t improve and the reserve will surely exhaust next year, if not this one.
The scope of Russia’s potential banking crisis is terrifying. We learned last week that Russia’s banks may require a massive infusion of nearly 500 billion rubles in order to stave off default as a legion of bad loans comes calling. If the Kremlin is forced to buy these loans, the drain on the budgetary reserves will grow even more intense, and if the price of oil begins to fall again, those reserves will be quickly wiped out. Mortgage loans increased their delinquency rate by a jolting 50%, indicating that Russia has its very own subprime crisis to worry about. Finance Minister Alexei Kudrin guaranteed it was coming, saying Russia hasn’t yet seen the worst of the crisis, directly contradicting “president” Medvedev.
At that point, Russia will become totally dependent on foreign loans in order to preserve even minimal outlays for the public good. But Russia has few friends abroad. The bell of reckoning is tolling, loud and clear.
These days in Russia, even the good news is bad. The price of oil has rebounded somewhat, and this has bolstered Russian stocks and the value of the ruble. But the rising ruble is potentially deadly, as Russian exports then become more expensive and less competive on world markets. “The current oil price is the least comfortable for Russia because it is too high to carry out a modernisation of the economy but too low to sit back and spend,” said economist Vladimir Mau, who advises the government’s anti-crisis commission.
And of course there’s more, much more.
In our last issue, we carried an essay by a Russian economist pointing out that an average Russian worker is four times — yes, four times — less productive than his average American counterpart. This shocking ratio is confirmed by our report below showing that Russia has fared four times worse under the global economic slowdown compared to America.
So far this year, Russia has averaged 1.36% inflation per month, putting it on pace to record 16% inflation for the year, similar to what Russia experienced between May 2007 and May 2008. Since May 2008, Russia has experienced 12.3% inflation. Russia is cutting interest rates in the desperate hopes of spurring investment, but his will increase the money supply and that could make already horrific inflation even worse.
LUKoil announced a horrifying 71% drop in profits for the first quarter of this year, even though oil prices have been recovering somwhat. Those losses came anyway because of the Kremlin’s barbaric tax polices and the plunging ruble. Gazprom had previously announced a similar catastrophe, and slashed its dividend nearly 90%.
Calling recent gains unsustainable as the price of oil began once again to retreat, Citibank and Morgan Stanley both urged investors to sell Russian equities, and the Russian stock market plunged nearly 8%.
And perhaps the most damning news of all was that Russia’s so-called “leaders” continued to respond to the crisis by Soviet means, suppression of facts and intimidation of critics. Sberbank, controlled by the Kremlin, actually fired an analyst who predicted a banking crisis in the fall, and “president” Dima Medvedev threatened to do the same to Finance Minister Alexei Kudrin after Kudrin suggested the crisis would be long-term. These are the “economic policies” of la cosa nostra.
No economy, even one with solid fundamentals, can sustain this kind of brutal bashing, and Russia doesn’t have any fundamentals at all. It’s economy is totally dependant upon the price of crude oil, and its workforce remains as feeble and unproductive as it ever was in Soviet times, with fewer and fewer workers around with each day that passes.
Russia is headed for a Great Depression from which it may not ever emerge.