It was quite an interesting discussion. To pat myself on the back, I will say that I was quite prescient and accurate in my forecasts

An excerpt, two of my comments. This is what I posted close to two months ago:

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Michel // October 17, 2008 at 9:54 pm

I agree with La Russophobe. Russia has already spent 10% of its reserves, and this does not take into account the hundreds of billions promised to banks and Russian businesses. These hundreds of billions will come out the Russian budget, which will lead to massive deficits if oil prices remain low. These deficits will have to be paid using money coming out of the reserves. In other words, Russia is putting off spending the reserves as much as it can in the hopes of a miraculous recovery whereby oil prices will recover to their previous highs. Not exactly the best strategic planning in my opinion.

Nonetheless, even the regional governors are not buying it. According to an article in vedomosti.ru:

“Спасаются сами

Губернаторы, не надеясь на помощь из центра, урезают областные бюджеты и предпринимают свои антикризисные меры. В основном они касаются помощи банкам, строителям и сельхозпроизводителям”

Quick and rough translation:

Save yourselves.

Governors, not hoping for help from the center, are cutting their regional budgets and are implementing their own anti-crisis plans. Basically, they are helping banks, builders and the farm industry.

Source: http://www.vedomosti.ru/newspaper/article.shtml?2008/10/17/165104.

Regional governors in Russia expect the GDP to fall and they are cutting back on what they are planning on spending next year. In other words, they are not confident that the Russian state can come to their rescue, and they have no illusions about the Russian state that allegedly “remains awash with cash” according to The Japan Times.

Michel // October 18, 2008 at 3:26 pm

Cathy,

Oil, gas, and revenues from other natural resources accounts for two-thirds of the Russian government’s revenues. The Russian state also has a sliding scale of royalties: the higher the price of oil, the more it collects for every dollar sold. As a consequence, the fact that oil prices have dropped by half, will leave the Russian government with a deficit, likely starting in a few months. This will lead to the Russian government quickly eating into its reserve funds, and if it lasts too long leaving the Russian state broke and with no way of protecting the ruble. This can lead to a devaluation of the ruble and a drop in imports from food to BMW’s.

Also, small and medium sized companies account for only 15% or so of the country GNP IIRC. Most of the country’s GNP and GDP is generated by its large resource based corporations. When prices for natural resources drop (as they are now doing), they are hit as well. If it lasts, this will mean fewer profits and eventually layoffs. This will hurt the country’s GDP, but I have to read an article in a Russian newspaper speculating as to how much the GDP will fall if it falls in the next year.

As for citing the decline in the Russian GDP, WB and IMF official reports are slow to react to rapid change. I, for one, would consider the governor’s of Russia who have a lot better insider information than the IMF or the World Bank. If they already expect to have to cut expenses because they will have less money, this is a good indicator of where they think the economy is heading in the next year.

To answer Barb’s question, the challenge is as follows: the governors are hired and fired at the whim of the Russian President, but if memory serves me right the president’s choice has to be approved by the local legislature. If they don’t approve, the legislature can be dissolved with new elections held. When times are good and the local legislatures are subservient, then the system works well. The question remains as to what might happen if the economy is hard hit and local legislatures get uppity and start to stand in opposition to the President’s governor. It will be interesting to watch what will happen then.