Stormclouds over the Putin Economy
“We note that at this point Russia, in financial terms, is not ready for a new global crisis, which is inevitable, unfortunately. To change the situation, it needs to liberalize its currency policy, look at ways of cutting the budget deficit and avoid accumulating external debt.”
Those were the words of Renaissance Capital economist Alexei Moisseev in a new report on Russia’s financial future.
Next year, Russia’s deficit looks set to rise 15% compared to last year’s deficit, the first in a decade. The absence of a massive budget deficit and the presence of substantial foreign currency reserves have long been the sole bedrock supporting Russia’s economy, and now they are vanishing. Ironically, as Russia’s runway inflation has somewhat abated because the country’s massive economic downturn has curtailed demand, there has been a vicious effect on the Kremlin’s revenues from taxes. Fast-rising prices mean fast-rising tax revenues, and now the Kremlin is facing devastating shortfalls and the need to borrow to meet operating expenses.
The dire conclusions to be drawn from these facts are obvious, yet the Kremlin it seems still refuses to acknowledge them.
Moiseev’s report concludes that “new sustainable growth sources have yet to be found” and therefore an “analysis of the federal budget indicates that any build up in spending is no longer possible. Moreover, if the current budget policy remains intact, we believe Russia could face a budget crisis depending on the market situation for major export goods.”
The only way the Kremlin can balance its budget is for the price of crude oil to average in excess of $100 per barrel. In other words, the Russian economy is utterly enslaved to world markets over which Russia has no control.
Blogger Julia Ioffe points out that Russia’s so-called “president” Dima Medvedev has “published a glowing op-ed in the Russian business daily Vedomosti about the upcoming second annual BRIC summit” which betrays Russia’s fundamental economic weakness better than any criticism could have done. She writes:
Medvedev was arguing that not only was BRIC a necessary conglomeration, but that Russia deserved to be included — which is far from certain these days. Back in October, economist Nouriel Roubini argued quite forcefully that it didn’t. At a Moscow economic forum in February, a panel on the future of the BRIC countries was nearly unanimous on this point. “Russia doesn’t quite fit with other countries in terms of growth,” said one of the panelists, reminding the audience that the BRIC countries are supposed to have “dynamic, fast-growing” markets. “The official estimate,” he added, “is -7.9% GDP growth. How can that be a dynamic fast-growing market?”
The BRIC summit starting in Brazil next week, Medvedev writes, may be a young group “but from its first steps, it has won much international authority…And this is not surprising,” he adds, since the member countries comprise “26% of the world’s territory, 42% of its population, and 14.6% of the world’s GDP.”
Landmass, fine. Russia’s big, and has always been a size queen. Population? Russia’s is shrinking. 14.6% of the world’s GDP? At a wobbly, shrinking $1.3 trillion, Russia’s is just over 2% of the world economy. And it looks like it’ll stay that way: Economists estimate that, in a few years, China and India combined will make up 45-50% of world GDP, while Russia and Brazil will make up around 4%.
Russia is continuing, in other words, to live in a world of bizarre self-deception, just as in Soviet times, making transparent efforts at propaganda that only leave the world laughing while the unreformed economy continues to implode.