The IMF World Economic Outlook makes extremely dispiriting reading. Especially for Russia. The IMF completes the trifecta of major international organizations (after the World Bank and OECD) to revise sharply downwards its prognostication for Russian economic growth. (SWP paging Bob! SWP paging Bob!) Indeed, Russia is the champ, according to IMF. That is, the IMF reduced its estimate of growth for every country, but the reduction in Russia’s GDP growth forecast was the largest, at -5.3 percent. Indeed, the IMF’s forecast of Russian growth is lower than its forecast for any country other than Japan for 2009: IMF estimates that Russian GDP will drop 6 percent, compared to Japan’s decline of 6.2 percent.
Russia is also the champ when one compares 2007 or 2008 growth rates to forecast 2009 growth rates. Whereas Japan’s growth rate in 2009 is forecast to be 5.6 percentage points below its 2008 growth rate, Russia’s 2009 rate is forecast to be 11.6 percent below. Comparing 2007 and 2009 growth rates implies a difference of 8.6 percentage points for Japan, and a whopping 14.1 percentage points for Russia. Say that slowly. Fourteen point one percentage points. That’s huge.
An article in the Moscow Times should only deepen the sense of gloom. The article notes that Russian inflation was 5.8 percent in the first quarter. This is consistent with another SWP prediction that Russia is mired in a deep stagflation. The acceleration of inflation at the same time the economy is plunging is deeply troubling, and reflects the forces that I mentioned in some earlier posts, namely, the quite reasonable decision by people to exchange rubles for goods. I doubt the ruble can maintain its rally under such circumstances. Unbelievably, though, the government is sticking with its forecast of 13 percent inflation for 2009. Dudes. You’re like 45 percent of the way there after 25 percent of the year. Expecting a dramatic slowdown of inflation is very unrealistic, especially given the seemingly entrenched inflationary expectations among the Russian people.
The head of the Kremlin’s anti-crisis task force, Vladimir Mai channels the SWP theme that Russian policy options are extremely limited, especially given the sharp inflation:
“Inflation limits the tools of our anti-crisis policy. Many measures used in the United States and Europe are not available for us. We cannot carry out quantitative easing, we cannot use budget stimulus and we need to maintain high interest rates,” he said.
Mau fears that renewed growth in commodity prices could stall the modernization drive and bring the government back into a complacency mode that characterized the last years of Vladimir Putin’s presidency.
“During an economic boom, it is impossible to carry out a modernization policy,” he said. “If prices for oil and gas are high, there will be no diversification.”
Translation: “We’re screwed.”
The last paragraph is of particular interest. The political will for modernization and diversification is lacking in times of economic crisis because the government is in survival mode then. The political will for modernization and diversification is lacking when the economy is strong due to high oil and gas prices because under such circumstances, who needs modernization? Laissez les bon temps roullez! Especially for the kleptocrats. Where’s the Goldilocks spot? You know, the one that’s just right to facilitate modernization and diversification? Uhm, somebody will have to get back to you on that one.
For the foreseeable future, if anybody (now who could that be?) uses the words “nano” and “Russia” in the same sentence, my immediate reaction will be to think of the order of magnitude of the probability that Russia will achieve the economic ambitions that harbored a mere six months ago, let alone achieve the fantasy set out in the Russia 2020 pipe dream.
In this environment, Putin’s statements about the economy are delusional. Beyond delusional. As are the pursuit of “prestige” projects like Sochi, billion dollar bridges to Godforsaken islands, and large expenditures on new weaponry.
Kudrin may be overly pessimistic in saying that this crisis has set the country back 50 years, but maybe not. The crisis has derailed for the foreseeable future measures necessary to cope with Russia’s serious long term problems, such as demography and health, and infrastructure. I hope to write soon on a couple of articles on Russia’s demographic situation, but given that economic growth of the first decade of this millenium led to only a modest decline in Russia’s downward demographic trajectory, there is a serious prospect that the current crisis will eliminate that faint progress, and lead to the return of the apocalyptic trends of the 90s. Similarly, the prospects for addressing Russia’s serious infrastructure problems are fading fast. The resulting deterioration in human and physical capital undermines the prospects for long term growth. Upon consideration, maybe the “stressed” Mr. Kudrin is an optimist.