EDITORIAL: The Russian Economy continues its Freefall

EDITORIAL

The Russian Economy Continues its Freefall

idx08-10-01 Last week the price of crude oil went on a bender, shedding 15% of its value before recovering slightly late in the week. Unsurprisngly, by last Wednesday, the day after Barack Obama left Russia, the RTS dollar-denominated stock index (see chart, left) lost nearly 4% of its value and plunged below the important 900 point psychological barrier, closing at 889.  The MICEX ruble-denominated index was doing the same.  The RTS has now lost 300 points or one-quarter of its mid-June value, itself a gigantic dropoff of two-thirds from its high a year and a half ago.   It confirmed once again that the Russian economy is helplessly enslaved by a crude oil price set by foreigners with no regard for Russian interests.  The ruble’s value fell in lock step right along with the price of oil, almost as if it had no value indendent of crude (which is in fact the case).

The repercussions in the wider economy were predictable and plain to see.

The John Deere company announced that because of draconian new protective tarriffs implemented by the Kremlin, its sales in Russia have plummted by half. Both GM and Ford announced they were shutting down production for months.   It’s certainly not that Russian’s aren’t crazy about American products, since Pepsico has just announced it is building the world’s biggest soda bottling plant in Russia. It’s just that the Kremlin’s crazed, self-destructive polices regarding big-ticket items are wrecking any possiblity for foreign investment.  Russians seem unable to understand that their market is so hollow and one-dimensional that no normal firm like Deere can expect reasonable profits except when the oil market is surging, and that makes Russia a gambling casino in the best-case scenario. It doesn’t take much more bad news to make any sane investor run for the hills, and right now Russia needs foreign investment desperately.

On the other hand, the picture for Russian exports is even more bleak.  Russia is on pace to post a stunning loss of nearly $200 billion in export revenues this year, nearly a 50% drop from 2008.  So, as is usually the case with Russia, the protective tarriffs had no appreciable affect other than to wipe out foreign investment even as exports still collapsed.

And macroeconomic indicators continue to plummet as well. The Kremlin revised its budget forecast last week to increase the projected 2010 budget deficit from 5% to 6.5%, a massive expansion of 30% indicating the Kremlin knows there won’t be appreciable growth in 2010 and budget revenues will continue to fall.  Its budget reserves will exhaust, and Russia will be forced into the Soviet pattern of massive borrowing and accrual of foreign debt, creating a double whammy of dependence on both foreign capital and foreign energy prices.  Meanwhile, Putin goes merrily on biting the foreign hands that are feeding him in the most crazed fashion imaginable. 

The Kremlin is in full-on panic mode.  A few weeks ago, it said it would not enter the WTO except as part of a coalition of former Soviet states. Then last week, it suddenly changed its mind yet again and announced it might be interested in single admission, even though it still is not remotely close to establishing such credentials.  The utter cluelessness of the Putin Kremlin was perhaps best emphasized, however by the report that Russia had shot down at least three of its own jets during the war with Georgia last August.  That news could hardly suprise anyone since Russia’s command-and-control system was so wretched during that war that officers were reduced to communicating with each other on the battlefield by personal cell phone.

But the Kremlin was plumbing new depths.  In a really crazy moment, Medvedev told the G-8 that it was impossible to regulate oil prices and the price should be  regulated at $70-$80 per barrel.  He was babbling incoherent gibberish because he has absolutely no clue what to do as he watches his country’s economy collapse just like the USSR’s did not so very long ago.  And to be fair, neither Medvedev nor Putin have the remotest qualifications to address such a crisis (or indeed to avoid causing it), so the blame really belongs with their bosses.

And that would be the people of Russia themselves.

13 responses to “EDITORIAL: The Russian Economy continues its Freefall

  1. ULAN-UDE, July 9 (Itar-Tass) – Russia’s average inflation rate will comprise 12-12.5 percent in 2009, Finance Minister Alexei Kudrin said on Thursday.

    “In annual terms the inflation rate as of March totalled around 14 percent, while as of June it was a bit lower – 12 percent,” he said. “We already observe the inflation of less than 12 percent.”

    http://www.itar-tass.com/eng/level2.html?NewsID=14134100&PageNum=0

    That’s a huge individual wealth killer. And it is so immediately felt in your wallet.

  2. OK. Now let’s talk about the prosperity in the “Golden State” of California to feel the difference. What is “felt in California wallets” if I may ask – Arnold bucks?

    • Why would we want to do that? This blog isn’t about California. If you’d like to, go find such a blog and do not pollute ours with your pathetic spam.

      Oh and, by the way: People in California live TWENTY YEARS longer than Russians on aveage and have a vastly greater standard of living.

  3. La Russophobe: “Why would we want to do that? This blog isn’t about California.”

    Seems I’ve often heard that kind of talk before. In an increasingly globalized market, the ties of trade and finance binding companies and countries could transmit the economic pain more widely than ever before. California added the best portion of the “economic pain” by its debts to the current global financial meltdown.
    Is that your larussiphobic dream to consider Russia, OIL EXPORTING ECONOMY out f the context of this global world, economically globalized by the USA/IMF in the first place?Read your text one more time to see the names of “Russian” companies you’ve mentioned about in your editorial.

    http://www.imf.org/external/np/speeches/2003/030903.htm

    La Russophobe: “If you’d like to, go find such a blog and do not pollute ours with your pathetic spam.”

    Your out of range blog is based on polluting “pathetic” russophobic spam, the right place for sentimental Russia lovers just like me to balance it a bit.
    And why “ours”? – Might I ask you to be more specific on this? What did you mean by saying “ours”? If this is sort of private blog of “pathetic” Russia haters do not make it public with so many inviting ads on the right of your front page, if it is not, face the music and go to dance. — Hey buddy don’t you be no square.
    If you can’t find a partner, use a wooden chair
    :-)

    Is this an American blog or an outlet of Russian Novaya Gazeta “but in English”?

    And just in case you’ll change your mind, I still think American reality is much a tougher game than Russia in any thinkable aspect and there’s such a thing as mirror analitics yet.

  4. California, despite its current situation, still produces masses of wealth and innovation, which naturally contrasts it sharply with Russia. When I think of California, I think of silicon valley, Hollywood, great wines, San Francisco and its incredible cuisine, Berkeley and Stanford and UCLA, Malibu and Venice beach, Yosemite, Disneyland, the Getty Center, and so on. When I think of Russia I think of OMON, the horrible Sheremetyevo II, Red Square, rude people, bad food, decent subway systems, and that dreary flat expanse between cities. And the crowded and clogged Leningradskii Prospect, and the Khrushchebii that my friends live in.

    It’s simply not a contest – which is why most Russians would jump at the chance to move to America, despite their nationalistic “pride”.

  5. As the economy crumbles Putin is stepping up using OMON against protestors, as per Paul Goble’s site:

    Vienna, July 10 – The Russian Federation today moved another step closer toward the kind of violent confrontation between angry workers and the country’s armed forces that Moscow sociologist Yevgeny Gontmakher warned about in his November 2008 article, “Novocherkassk – 2009” (www.vedomosti.ru/newspaper/article.shtml?2008/11/06/167542).

    Workers from five plants in the Altay Republic blocked a highway between Novosibirsk and Mongolia in the hopes of attracting attention to their economic plight and possibly a visit by a senior official like the much-publicized one Prime Minister Vladimir Putin made to Pikalevo last month after workers there took a similar step.

    But instead of that reaction, the authorities this time sent heavily armed OMON forces who pushed the workers off the highway and detained those the militia believed were behind the action on administrative charges.

    http://windowoneurasia.blogspot.com/2009/07/window-on-eurasia-moving-toward.html

  6. Adrian

    I don’t think most Russians would jump at the chance to move to America, despite their nationalistic “pride”. There are losers and winners in every nation. You must be talking about the losers. Like most American losers they are ready to jump to any place where there’s a flow of money and jump off the train in their search of greener pastures the very momemt things start going down the hill. Since the US wealth disproportiontly to innovations from the Silicon Valley is being generated by the Fed printing machine it’s a small wonder there are a lot of people in the world dreaming about the “moving to America” to enjoy the Great American Parasitic Way. The problem is in the times that are changing and more productive nations like India and China are on the rise. They will do their best to stop the Global Parasit of the US that way or another. Russia will willingly help them out.

    To sum it all up the USA is in many ways is an excellent country. The problem is that this is so often at cost to the rest of the world, both in wealth and lives. Americans think that their excessive consumption is an indication of their moral superiority, but in fact the opposite is true. America is seen by the rest of the world as a global parasit and a predator nation addicted to war.
    America, there’s little time left.

    “The West won the world not by the superiority of its ideas or values or religion but rather by its superiority in applying organized violence. Westerners often forget this fact, non-Westerners never do.” – Samuel P. Huntington

  7. Is that the Samuel Huntington that argued in the 1960s that apartheid South Africa was a “satisfied society”? And whose election to the National Academy of Sciences was scuttled when another professor uncovered his bogus use of mathematics to prove an untenable point?

  8. Sockpuppet Alert!!!

  9. Hello RTS,

    California is one of the wealthiest US states. The reason it is handing out IOUs is because the state will not raise taxes because it would mean death at election time. The state is then forced to cut expenditures, usually worthy expenditures , not the bad ones.

    This situation is entirely different from Russia’s. Its economy is a wreck and the people do not have the funds to keep it going.

    Gary Marshall

  10. Hello RTS,

    The US pays for the goods it buys with money that certainly does not depreciate at a value of 14% a year as Russia’s. It does not invade countries with the objective of making them colonies subject to US appointed dictators as Russia does.

    Your argument is about as absurd as you are.

    Gary Marshall

  11. Really there are nothing seriuous problem in Russian`s economy. So you just hope to find something wrong about my country. I have looked at your blabber since august 2008 and you are writing the same things. Very stupid things. You are constantly promising crach to us. But until now your predicts are failed. LOL.

  12. Yes RTS,…
    “The West won the world not by the superiority of its ideas or values or religion but rather by its superiority in applying organized violence. Westerners often forget this fact, non-Westerners never do.” – Samuel P. Huntington

    Ergo….”The East lost the world by the superiority of its ideas, values and religion not by its inferiority of
    applying disorganized violence. Easterners often forget this but Westerners never do.”-Homer Simpson

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