“I don’t think all these events will have a strongly negative effect on the Russian economy,” Ignatiev said at a conference in St. Petersburg today. “The Russian banking system is better prepared for external shocks than it was in 2008.”
The economy is protected by sufficient liquidity, a “much more flexible ruble,” and large international reserves, the world’s third biggest after China and Japan, according to Ignatiev. While the Russian currency reflects external volatility, it can better withstand external shocks than it did before the global financial crisis, he said.
Of course, that’s what Putin, Medvedev, and even my boy Kudrin said said in 2008, when the storm clouds were breaking in the United States and Europe. And we know how that worked out: rather than being a safe harbor from the storms buffeting other economies, as Putin and Kudrin had claimed, Russia was hit harder than virtually any economy. Indeed, only months after boasting about his country’s immunity from the world crisis, in a speech at Davos Putin raged at the West for creating a “perfect storm” that had swept over Russia.
Putin’s confidence in September was based on many of the same factors Ignatiev cites, notably its reserves. But its reserves have been depleted, and its economy has not recovered from its battering in 2008-2009. There is also considerable reason to doubt his happy talk about the banking system.
It’s interesting to compare what Ignatiev said to what Kudrin said in January, 2008, when the strains on the world financial system were becoming manifest:
Russian Minister for Finance, Aleksey Kudrin, released a sensational statement Wednesday. Speaking at the World Economic Forum in Davos, the Russian minister offered to mitigate the world credit crisis with the help of Russia’s reserves. Kudrin stated that Russia was an “island of stability in the sea of the world crisis.”
“Investors will continue to invest billions of dollars in the rising Russian economy. Stock market crises and their consequences will not be utterly negative for us,” Kudrin said. “Our country managed to achieve economic stability and to save considerable gold and currency reserves which play the role of an air bag for the national economy,” Kudrin said.
Mr. Ignatiev, it appears, has learned nothing, and forgotten nothing. Russia’s reserves did not save it from the crisis, let alone the world. Why would Ignatiev think things would be any different a second time around? That would be a triumph of hope over bitter experience.
If Europe spins downwards, as is still possible, or if China runs into turbulence (trying to deflate asset bubbles, for instance), the same dynamic that ravaged Russia before will do it again. A recurrence of the financial crisis, this time driven by a sovereign debt crisis instead of a real estate crisis, would again crater demand for Russian material exports, reducing national income sharply and putting added strain on government finances. The “flexible currency” Ignatiev touts is unlikely to prove so, as the same terror at repeating the 1998 ruble collapse would induce Russia to spend its reserves to prop up the currency.
If you’ve been following the volatile markets lately, you’ll have noticed that oil prices have swooned as worries about the sovereign debt crisis have waxed, and have rallied as these worries have waned (like today). You’ll have noticed too that the Russian equity market and the ruble have been riding the same roller coaster.
As I said often during the crisis, Russia is a high beta economy. Due to its commodity price exposure, and the sensitivity of commodity prices to world economic conditions, Russia remains hostage to world economic conditions; when Europe and/or the US and/or China get the chills, Russia catches pneumonia. The European debt crisis threatens those conditions, and Russia with it.
So Ignatiev is either a fool, or whistling past the graveyard when he responds with such insouciance to the European crisis. If the European situation turns for the worse–as I think it is likely to do, today’s market euphoria notwithstanding–Russia will awake to the strains of “I’ve Got You Babe” and relive the terrors of 2008-2009.