Streetwise Professor

October 25, 2008

Russians Anonymous

Filed under: Economics,Politics,Russia — The Professor @ 9:15 pm

This article from the Wall Street Journal doesn’t include much that hasn’t been discussed here on SWP, but a couple of things caught my eye:

  • “President Dmitry Medvedev devoted his video-blog entry on the Kremlin’s Web site Thursday to the financial crisis, saying Russia could avoid the economic damage other countries have suffered from the crisis. ‘I will tell you honestly, Russia has not yet been caught in this whirlpool and has the opportunity to escape it.'” “Honestly”? Not caught in the whirlpool? Huh? If a 75 percent drop in the stock market, a banking crisis, and a 20 percent decline in the ruble isn’t a whirlpool, I’d hate to see what one really looks like. (And usually when somebody starts a sentence like this with “Honestly” you should immediately suspect the opposite.)
  • “Kremlin officials and state-run media have stressed that the U.S. is the epicenter of the financial crisis, and Russia’s financial system is fundamentally sound. Some Russians say they believe the crisis was manufactured to undermine Russia’s greatness in the same way the West undermined the Soviet Union.” The financial system is fundamentally sound. Right. Look, the system was overbanked to begin with. The banks are/were more heavily leveraged than Western banks, and recent reports suggest that a substantial fraction of those loans were to major natural resource firms that are suffering acutely as a result of the plunge in commodity prices–that’s not an encouraging sign. The stock prices of the big banks that have been the beneficiary of Kremlin largesse, VTB and especially Sberbank, are down hard; a lot harder than even most US or European banks. As for the statement that the West ginned up this crisis to undermine Russian “greatness”–what can I say? I am usually dubious of “some say” journalism–if somebody actually said it, tell us who did. But . . . the statement sounds all too real. The narcissism (yeah, we are soooooo obsessed with Russia that we’d tank our own economy just to spite those darned Russkies; the very thought that Russia might achieve greatness is something we just cannot abide); the paranoia; derzhavnost.

So, what is the response to an economic shock that is shaking Russia to its foundations? Denial and blame. Sounds like somebody needs to enter a 12 step program. Or maybe, 140 million somebodies, of whom I can name the two that should be first to speak at the meeting. “Hello, my name is Vlad . . . “; “Hi, my name is Dmitri . . . “

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  1. I couldn’t read the entire WSJ article, but I would add one point. It is in the political interest of Medvedev to blame the United States, while at the same time keep their finger crossed that the same United States can solve the global economic crisis quickly. Their fear: that the population will come to see the crisis that will invariably will hit Russia not as a consequence of global factors, but rather as a Made in Russia crisis. has an enlightening article based on research conducted by the Levada Center. They write:

    Однако согласно тем же опросам, наблюдается очевидная связь между ответами на вопрос о причинах кризиса и оценками его глубины и дальнейших перспектив. Причины нынешнего кризиса большинство опрошенных связывают, прежде всего, с ситуацией на международных финансовых рынках (54%), тогда как возлагают ответственность за нынешнюю ситуацию на российскую экономическую политику последних лет только 34%.

    При этом сторонники версии про сугубо внешние и привнесенные причины кризиса как раз и думают, что все быстро рассосется. А те, кто видит проблемы во внутреннем развитии, склонны думать, что кризис – это всерьез и надолго.

    Тут и проходит главный водораздел – признавать или нет, и в какой мере признавать внутренние причины кризиса. Объяснять или нет элите и обществу, что если наша модель экономического развития последних лет была не совсем верна, то не стоит думать, что мы к ней вернемся, пересидев год-полтора на накопленных резервах. Вернемся к той модели, которая была основана на сырьевой ренте от дорогой нефти, пирамиде внешних кредитов и заимствований и случайном, не заработанном благополучии потребительского общества.

    So far, those who are aware of the crisis, a slight majority believes that the cause is due to international factors. Interestingly, these respondents who believe that the blame lies elsewhere, also expect the crisis to pass quickly. In other words, they would accept Medvedev’s line that it’s not Russia’s fault and Russia won’t suffer duly from it.

    However, you have 34% of the population who put the blame on the internal policies of Russia and that the model of economic development put forward in the last 8 years was wrong. This minority expects the crisis to hit Russia hard and to last a long time. These of course are those who are the most critical of Medvedev and Putin.

    Politically, then, the danger for the Russian state is that the minority will be proven right. If the crisis does hit Russia and causes long-term economic pain, then the percentage of people who will blame failed Russian policies will grow. In the good years, we were always told that Putin’s was very popular, with popularity ratings well above 70%. What will happen if this popularity dissipates as a consequence of an economic crisis in Russia whereby the actions of the state are reevaluated?


    P.S. The photo they used for this article is interesting. You have a really pitiful looking Medvedev at the podium with the Russian flag as the background.

    Comment by Michel — October 26, 2008 @ 11:34 am

  2. Agreed. You are right that their political fate is dependent on the US solving the crisis. The “made in the USA” approach is not going to save them if the economic picture worsens substantially in Russia, as it undermines the entire “Russia is back” and “Russia is finally standing on its own two feet” narrative. Dependence of Russian prosperity on the US economy is humiliating to those invested in the Russian Greatness meme. How great can you be if you catch pneumonia when your worst enemy (in your own mind, anyways) catches a chill? How can you say that you’ve freed your country from a humiliating dependence on another when your economy’s fate hangs on the performance of the one from which you are supposedly independent? Blaming the US can buy time (which options pricing theory implies is valuable, especially in highly volatile situations), but it cannot save them if the economy tanks, or merely performs below expectations.

    And you are also right that the picture of Medvedev is pretty pathetic. He looks small, meek, and almost defeated. There is often a reason for choosing such pictures . . . but that almost brings us into the realm of Kremlinology;-)

    The ProfessorComment by The Professor — October 26, 2008 @ 3:58 pm

  3. The Financial Times has a good piece on Russia: “Onward to 1998: Russia”. An excerpt:

    In Russia, however, matters have been exacerbated by the country’s vulnerability to the shifting tides of foreign investment. Cheap credit lines from foreign banks were a critical source of funding for long-term investment. “Our entire financial system was based on foreign money, not on domestic savings,” says Elena Sharipova, senior economist at Renaissance Capital, another Moscow investment bank. When the inflow reversed, “this made us tremendously vulnerable”.

    What is more, Russia’s status as a leading exporter of oil and gas is looking like much less of a cushion. With crude prices down to around $65 a barrel, the Russian budget for 2009 barely breaks even. After two months of crisis, meanwhile, Russia’s currency reserves have dropped from $597bn in August to $515bn on October 17, partly as a result of defending the rouble. Capital flight is running at $12bn-$16bn a week. The Moscow interbank lending rate hit 22 per cent last week before settling back to 17 per cent, by far its highest level this decade, reflecting the scale of the stress in the banking system. Domestic banks are seeing depositors’ confidence evaporate – four retail banks have experienced runs and been sold off in a hurry.

    This month, the central bank instituted the first measures designed to prevent a speculative attack on the rouble when it banned currency swaps. But analysts are starting to ask how long the authorities can stand as substitute for the cut-off foreign investment and seized-up credit markets. “They have enough reserves to last a year at this rate, maybe 18 months,” says an economist at a Moscow bank.

    As elsewhere, the crisis in the financial sector has started to hit the real economy. Factories have begun shedding jobs or even closing, buyers cannot pay suppliers and many oligarchs are in trouble – they may forfeit many of their assets to the state in exchange for bail-out funds, in an ironic reversal of the chaotic 1990s privatisations. That could set the stage for a massive redistribution of property. “There will be a very big adjustment similar to 1998,” adds the Alfa chief. “But the reasons are very different. In 1998 there was purely a state debt crisis. Today … it is mainly a private sector problem.”

    As a result of inflation, the proportion of Russians who according to marketing surveys constitute the middle class – meaning they can afford to buy household appliances and mobile phones – has shrunk this year for the first time this decade, from 25 per cent to 18 per cent.

    He says that as a result of the crisis, consumer credit will further be reduced which will mean access to a consumer lifestyle, important to prestige-conscious Russians, will be further reduced. This could have political consequences: “It’s one thing to be the head of a country that is prosperous and quite another to be the head of a country that is entering a systemic crisis.”

    Peter Aven, president of Russia’s Alfa Bank, agrees that the crisis will have political consequences for a country where real income has been growing so steadily. “Over the last decade, people here became used to living 10 per cent better every year. But we will start a period of much more moderate growth and a much different trend.

    “The popularity of the government mainly depends on economic results,” he adds. “This government is popular because of the successful development of the economy over the last several years. Any economic slowdown hurts the government’s popularity.”

    For his part, Mr Delyagin does not need to be the highly trained economist that he is to see there is something wrong with Russia’s economy.


    Comment by Michel — October 27, 2008 @ 1:13 am

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