Russians Condemn the Putin Economy

The Moscow Times offers readers a two-part review of the onset of serious academic criticism of the Putin economy.  How long this will be allowed to continue, and indeed how long these courageous academics have to live, is an open question.

First comes an op-ed from Sergei Guriev, rector of the New Economic School in Moscow, and Aleh Tsyvinski, professor of economics at Yale University:

Russia’s economy is collapsing, but the situation could be even worse. The global economic crisis has finally forced the government to adopt sensible policies, thereby staving off disaster — at least for now. Official forecasts for Russian gross domestic product growth in 2009 remain positive, but most analysts, including government officials, are bracing for a severe recession, which appears to have started in the fourth quarter of 2008. The stock market’s collapse — its 72 percent fall is the worst of all major emerging markets — is only the most visible sign of this.

Even Russia’s oligarchs are pawning their yachts and selling their private jets. Signs of political instability are mounting. The approval ratings for the country’s president and prime minister are heading south. Mass street protests have started, and they are led not by opposition political parties but by workers and middle-class families facing job losses and declining wages. More important, protesters are demanding that the government resign, which was unthinkable just a year ago.

With oil prices plummeting 70 percent from their peak, it is no surprise that the country is facing severe economic challenges. Growth is endangered, the ruble is weak, and the government budget is in deficit. Nevertheless, up to now, the government and private sector have weathered the storm reasonably well.

Critics of Prime Minister Vladimir Putin’s regime argue that the political system is too centralized and risks collapse in today’s economic storm. The regime’s ideology, after all, places the state and loyalty to the rulers ahead of private property and merit. When the crisis hits with full force, they argue that the government will nationalize major banks and companies, with the resulting inefficiency then burying the economy, just as it doomed the Soviet Union.

The government has, in fact, made serious mistakes in dealing with the crisis. Taxpayers’ money was spent to purchase corporate stocks in a failed attempt to support collapsing stock prices. The government is unlikely to recover its investment anytime soon.

EDITORIAL: What would Stalin do?

EDITORIAL

Another Russian Selection

A couple of months ago, we wrote about something we called a “Russian selection.” Similar to a “Hobson’s choice,” a Russian selection is the typical situation in Russia, where no matter what option you pick you end up with disaster — as for example when in 2000 Russian voters were presented with a choice between a proud KGB spy and a proud Communist apparachik  for their next president, or asked to select between a shameless Kremlin sycophant and a lunatic fundamentalist for their next pope.

And now, Russians face yet another “Russian selection.”   It seems that when Vladimir Putin is confronted with a dilemma of this kind, he takes a page from American Christians, who ask “what would Jesus do?” and queries his Russian variant:  “What would Stalin do?”

The chart at left shows the recent progress of the U.S. dollar against the Russian ruble.  Pick your poison, Russians. Do you want your currency stable, as it sometimes is at certain points during this three-week period, or do you want it falling against the dollar, as it is doing at other periods? Either way, you lose.

EDITORIAL: A Primer from the Professor

EDITORIAL

A Primer from the Professor

In a January 22nd post, Streetwise Professor reviewed the Russian Central Bank’s decision earlier that day to allow a one-day 10% depreciation in the value of the Russian currency.  For months, the Bank had followed a policy of no more than 0.5% daily depreciation, on only a handful of occasions allowing depreciation of as much as 1% in a single day.

But in the prior week, that policy cost the Russian treasury the stunning amount of $30 billion in foreign currency reserves.  At that rate, Russia’s entire foreign currency account would be exhausted in just 13 weeks!  So, as SWP put it, the Bank “cried uncle.” Earlier this week the ruble experienced it’s biggest two-day drop in a decade as it fell to a stunning 35:1 against the U.S. dollar after being at 24:1 just six months ago.  Russia’s FOREX account stood at a humbling $386.5 billion, close to half what it was six months ago, and the respite they received as the ruble was allowed to enter freefall may be short-lived indeed.   The Central Bank has pledged to begin spending reserves anew if the ruble passes the 36:1 threshold against the dollar.

Moreover, on Friday Russian Finance Minister Alexei Kudrin announced that because of plummeting world oil prices Russia will face a massive budget deficit in 2009 of at least $180 billion and, even incurring massive debt, that will require it to deplete its budget reserves by 25% and would provoke net capital outflow in excess of $100 billion.

It’s important to understand that the consequences of the Putin policy “not to crush the national currency overnight” were disastrous for many reasons, not only because of the horrific deprecision of Russia’s precious cash reserves. 

Russia’s Incredible Shrinking Economy

Business Week reports:

On 9 December, Russia’s State Statistics Service revealed the GDP growth figures for the third quarter. And – lo and behold – they are “surprisingly bad”, “below market expectations”, etc. (Read the reports in The Moscow Times, Bloomberg and Reuters).

You might think that by now economists would no longer be surprised by the stream of dire economic news. For anyone who has been closely following what has been happening in Russia’s economy over recent weeks, it’s increasingly obvious that it has essentially stepped off a cliff. As Danske Bank economist Lars T. Rasmussen writes in a research note: “The question is whether there will be any economic growth at all in Russia next year.”

“But surely 6.2% growth in the third quarter isn’t so bad?” I hear you say. Think again.

EDITORIAL: Diagnosing the Russian Economic Malaise

EDITORIAL

Diagnosing the Russian Economic Malaise

When investors entered this market, there were certain carrots at the end of the stick. All of these carrots either did not materialise at all or came out in some way retarded.”

— Sergei Emdin, the head of EuroSibEnergo, an electricity investment unit of Russia’s richest man, Oleg Deripaska, speaking on investment in Russia’s energy sector at an energy summit on Tuesday in Moscow

Things are getting uglier by the minute on the economic front in Vladimir Putin’s Russia.  The country is in recession, with a 0.4% contraction in GDP last month (industrial production contracted at six times that rate).  Due the Kremlin’s crazed tariff policies, the Moscow Times reports that Russian oil producers, with their costs soaring, lost over $3 billion on oil exports in September and October.  Only now, months too late, has Putin finally cut the export duty, meaning that the Kremlin will finally begin to suffer a massive loss of revenue from the falling market price of oil, placing the state budget at dire risk.

The ripple effects on the oil-dependent Russian economy have been devastating, and angry investors who were stupid enough to trust the Kremlin are demanding answers, and the full brunt of the disaster wrought by Vladimir Putin’s incompetent leadership has yet to be fully felt. Rachel Ziemba, lead analyst for oil-exporting countries for RGE Monitor, has offered an extensive review of Russia economic performance on the organizations’s website.  It highlights several neglected facts that emphasize the increasingly dire economic peril faced by Putin’s Russia.

Ziemba points out that the bleak economic forecast of 3% economic growth for Russia in 2009 put out recently by the World Bank was based on an average oil price of $100/barrel next year.  Even at that price, Russian GDP growth was expected to halve compared to this year, since that price would represent a nearly 50% falloff from the recent record highs.  Thus, if oil prices remain at $50/barrel through 2009, Russia will clearly plunge into a brutal recession and the Kremlin will incur rapidly mounting debt (a deficit of 5% is expected in the 2009 budget if oil prices remain where they are).  Yet, the Kremlin’s recent behavior in repeatedly shutting down the Russian stock markets and invading Georgia hardly make it a prime candidate for lending.  Moreover, Ziemba points out, the Kremlin’s total lack of transparency and trust, combined with Russia’s pandemic corruption, makes it difficult to implement liquidity injections effectively, and may doom such efforts before they begin.

The ruble has lost 17% of its value so far this year, Ziemba says, and the government’s furious attempt to artificially limit the slide is not only costing Russia billions in FOREX reserves, but also “may be exacerbating the outflow from the  banking system (outflows were about 5-7% in October) even as it erodes Russia’s cushion of foreign exchange reserves.  Foreign investment flows have clearly reversed – In 2008, Russia has now had net outflows of investment in contrast to the inflows experienced in recent years.”  The cost to Russia of combatting the economic crisis is truly staggering; some sources are suggesting the price tag will be at least $400 billion, or one-quarter of Russia’s annual GDP and virtually the entire amount of its existing FOREX account.

But that is not the worst of it.

Putin is Responsible: Part I — The Economy

In the first of our multi-part installment today on Russians blaming Putin for the national collapse in the Russian press, Paul Goble reports:

After first trying to deny that there was a crisis in Russia and then blaming it all on events in the West, the Russian government has taken measures that are exacerbating the situation in ways that threaten to create a revolutionary situation, according to an increasing number of Russian commentators. And while some of these suggestions reflect the apocalypticism characteristic of much Russian political discourse, the arguments they offer and the evidence they provide in support of their views merits attention particularly as that country faces more problems ahead given rising anger among both key elites and the population as a whole about what is going on. One of the most thorough and thoughtful analyses of just how serious the situation may be becoming is offered by Dmitry Tayevsky, an analyst who writes for the Babr.ru portal. He argues that the foundation of the current crisis in Russia reflects “not economic problems but serious administrative miscalculations.”

EDITORIAL: Putin’s Russia, Shooting Blanks

EDITORIAL

Putin’s Russia, Shooting Blanks

The latest breathtaking failure by the Putin regime was documented with a report revealing that Russian oil exports have fallen to 25% below their prior level.  The cause of the plunge is quite clear:  The Putin regime has failed to lower oil tarriffs in line with the plummeting price of crude oil on world markets, meaning that Russian producers cannot profitably export their stocks and prefer to hold them and await a price rise.

The Putin regime knows only too well that it cannot simply cut the tariffs, which consitute the Kremlin’s main funding source. Yet, it is between a rock and a very hard neo-Soviet place, because if it does not cut the tariffs it may drive the entire oil industry into oblivion.

And that was only the beginning of an avalanche of bad economic news for Russia as the week began.

Economic Darkness Descends on Putin’s Russia

Panic is sweeping Russia. Half of all Russian people believe they’ll lose their jobs in the next three months.  Nice work, Mr. Putin. Time magazine reports:

The friend giving me a ride swapped just a couple of grim words with his wife on his cell phone, then turned to me. “They fired her,” he said sadly. “There go our plans.” The wife, who had enjoyed a cushy bank job, then joined the tens of thousands of Russia’s new middle class who have found themselves newly unemployed.

Another Original LR Translation: Milov on the Crisis

A word from the translator:  Having translated both Milov/Nemtsov white papers, I have developed a respect for Milov’s way of thinking and am always on the look-out for more from him. This exposition of his appeared in Novaya Gazeta last week and is, as always, interesting and self-evidently right. The sad thing, of course, is that what is self-evidently right to LR readers and anyone with an inkling of good sense, is a тёмный лес (dark wood) to most Russians. It seems to me that if we could discover the reason why this is the case, we would be able to “cure” Russia instantly. Dream on.

We Will Be Last In Line

Why Russia will not be able to rise up from its knees
without help from Western capital

by Vladimir Milov

Novaya Gazeta 

October 31, 2008

Translated from the Russian by Dave Essel

It is quite evident that the growth model followed by Russia in recent years has now collapsed and that there is nothing around that can take its place, at least in the foreseeable future. Because the 7-8% GDP growth of the last four years derived exclusively from the inflow of foreign capital.

Bear in mind that, unlike the three other countries forming the BRIC [Brazil, Russia, India, China], where capital inflow consisted in the main of direct foreign investment, the money that came into Russia was mostly in the form of foreign loans. These were the engine of our development to an even greater extent that oil and gas were. And these loans were not ‘our money’ coming back home, as some assert, but real foreign money. And then, this money was not spent on modernising the country in any way but was instead mostly frittered away: for example, most of the borrowing by the Russian companies which held IPOs in the last few years was spent on buying shares and real estate while only 20-30% went into the implementation of genuine development projects.

EDITORIAL: What about that Economy, Mr. Putin?

EDITORIAL

What about that Economy, Mr. Putin?

If Vladimir Putin were brave enough to be interviewed by the editors of this blog — he’s certainly not, preferring to hobnob with brown-nosed idiots like Larry King and bought-and-paid for stooges at the Valdai convention — the first question we’d ask him would be: 

Why, after nearly ten years of ruling Russia, have you not freed your national budget from dependence on the price of crude oil as established by foreign markets?

Putin’s own deputy finance minister admits that if crude oil prices do not average $60/barrel in 2009 — and they currently stand at $56.80 — then Russia’s budget for 2010 will not be balanced and will have to be “reconsidered.”  And there is no “fat” to cut in that budget. Russians live in squalid poverty and don’t rank in the top 100 nations of the world for male adult lifespan.  So the Kremlin will either go into massive .

The bad news rolls in like a tsunami.  Russia had a shocking $140 billion in capital flight in just August and September of this year (that’s a stunning $1,000 for every man, woman and child in the country, equivalent to a full month’s average wages for each one) and the Kremlin itself now admits it expects consumer price inflation to ring in at a whopping 13% by year’s end, nearly 20% higher than the Kremlin had predicted.  Russia’s foreign reserves have plunged below $500 billion, down $31 billion in just the third week of October as the government flushed away the national savings propping up the stock market and the ruble.  Large firms are imposing massive layoffs.  Russia is even moving to take the draconian step of criminalizing non-payment of debt, a measure civilized nations abandoned centuries ago. And this catastrophe was caused mostly by the fact that the price of crude oil plummeted over the space of a few months by more than half in price, and because the Putin administration has totally failed to build anything remotely like a real economy that could insulate the country from the random choices of world petroleum markets.

The Putin Economic Ship, Foundering

Stratfor reports:

The U.S. Dollar, Soaring in Putinic Russia

Standard & Poor’s rating service lowered Russian long-term sovereign credit rating outlook to negative Oct. 23 because of projections that Moscow will need to inject more credit into the faltering Russian banking sector. A credit rating indicates the agency’s estimation of a state’s ability to maintain debt payments, so in this case S&P believes that ongoing efforts to address the financial crisis could overtax the Russian government. The cut in debt rating comes as the yield on Russian government 20-year bonds has increased eight basis points (a 0.08 percent rise in yield) to 10.94 percent, indicating that the foreign appetite for Russian bonds is quickly dropping as credit becomes scarce and investors seek investments they feel are more secure. The bond yield of Russia’s largest company, natural gas behemoth Gazprom — which is also the single greatest source of Russian total external debt — has thus skyrocketed, and it now stands at almost 700 basis points above emerging sovereign debt. Meanwhile, the Russian stock exchange closed below 550 on Oct. 24, wrapping up a precipitous fall that has destroyed 80 percent of its value since May.

A comprehensive flight of investor capital is occurring in Russia for a number of reasons. This situation is placing great pressure on the Kremlin to use its capital reserves — the third largest in the world — to prop up the Russian banking sector and the main engines of the Russian economy: the energy and mineral sectors. In the short run, Moscow’s massive capital reserves will allow it to weather the global liquidity crisis and increase government control over all sectors of the economy. In the long run, however, Russia might face a dearth of capital as it drains its coffers trying to pump cash into the system, putting vital capital expenditure projects (such as improving infrastructure, improving oil and natural gas field development, and military spending) on hold to the detriment of its ability to face off with the West. The result will be an economy that has far more in common with the Soviet Union than with post-Soviet Russia — even post-Soviet Russia under Vladimir Putin. And that will affect Russia’s bid to reassert itself globally.