Streetwise Professor

December 23, 2008

A Growing Chorus

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:45 pm

Two subjects of several SWP posts, and considerable discussion, are drawing increasing attention in the wider world.

Regarding the ruble, the World Bank recommends that Russia cease its intervention to prop up the currency:

The World Bank called on Russia to abandon the ruble’s managed exchange-rate policy in order to moderate capital outflow, which is set to reach at least $100 billion this year, and safeguard the country’s massive monetary reserves.

A Russian man stands near a currency exchange point in Moscow earlier this month. Shrinking revenue, which has been falling in lockstep with the more than 70% drop in oil prices since summer, has put enormous downward pressure on the ruble.

The recommendation, the World Bank’s firmest on the subject yet, capped a week of economic data making it seem more likely Russia will fall from robust growth to recession.

Zeljko Bogetic, the World Bank’s lead economist for Russia, said that an average price of $30 a barrel of oil over the next two years would be ruinous for an economy that relies hugely on revenue from crude exports. Shrinking revenue, which has been falling in lockstep with the more than 70% drop in oil prices since summer, has put enormous downward pressure on the ruble, which economists consider a commodity currency. This, in turn has led Moscow to try to keep the currency from sliding and avoid widespread fears that another 1998 crash is looming.

. . . .

Meanwhile, monetary authorities have remained determined to defend the ruble and dip frequently into the country’s amassed oil wealth. As a result, Russia’s gold and foreign reserves have shrunk by more than $160 billion since August.

“We’ve seen the monetary reserves dwindle as a result of the central bank’s policy,” Mr. Bogetic said. “We also see now that the policy is increasingly less sustainable.”

Regarding the potential for civil unrest, from Gideon Rachman at FT:

I was in Ukraine last week – and a Russian economist mentioned to me that there were demonstrations in Vladivostock against the new tariff on car imports. The FT is now reporting that the trouble is spreading.

More broadly, the Russian government is facing a serious economic crisis on several fronts. Just six months ago, its huge pile of almost $600 billion in foreign reserves seemed a symbol of the country’s new-found strength. But they have got through roughly a quarter of that in just three months – mainly through supporting the rouble. At this rate, it will all be gone well before the end of 2009. That is not an entirely implausible scenario, because the fiscal pressures on the Russian government are only likely to grow over the next year. Official projections are still that the economy will grow by about 3%; but private-sector economists in Moscow are talking about a deep recession. With oil down at just over $40 a barrel, the cash-spigot has been turned off.

There is a danger that, as  the government comes under increasing fiscal pressure, it will be tempted to raid the foreign reserves for ordinary budget spending – espescially if the alternative involves cutting social spending and risking further popular unrest. Local governments are also likely to be screaming for financial support from Moscow.

The whole Putin phenomenon has been based on oil wealth and economic growth. So what happens now?

Very good question, Gideon.

And from Vladimir Ryzhkov in the Moscow Times:

The government’s attempts to play down the seriousness of the crisis are becoming increasingly difficult to pull off. There is simply too much bad economic news hitting Russia from all sides. For example, industrial output fell 11 percent in November. The AvtoVAZ, KamAZ and General Motors auto plants have announced temporary halts to their production lines. There have also been major production cuts in the construction, metallurgical and chemical sectors. The crisis has struck hard in regions that had shown strong export-oriented growth over past years, such as Kuzbass, Chelyabinsk, Lipetsk, Belgorod and Cherepovets. After the long New Year’s holiday, hundreds of thousands of employees will learn that they have just been laid off. An even larger number of workers will face cuts in their salaries even though the average salary before the crisis was only $600 per month.

Exacerbating the problem is the fact that the economies of about 700 Russian cities are dependent on a single major local industry or factory. If those factories shut down, the majority of the people in those cities will have no way to make a living. Kremlin leaders do not have a clear strategy for coping with this looming disaster.

As the crisis is spilling over into the real economy, the people’s tolerance level for government policies is reaching its breaking point. Even before the crisis, the people’s anger over runaway inflation and their eroding purchasing power had been building up over the past few years. In addition, corruption has gotten markedly worse as the level of monopolization in the economy and bureaucratization of government has increased. All of this is pushing people’s discontent to the surface.

Prime Minister Vladimir Putin’s decision to raise import duties on used foreign cars in an attempt to support the country’s struggling automakers unleashed a wave of demonstrations by drivers who will now be forced to pay through the nose for their favorite foreign models. In essence, the government is trying to force new car purchasers to buy far more inferior Russian models — something they would have never done absent the import duties. Drivers protested all across the country — from Kaliningrad to Vladivostok. Riot police brutally dispersed demonstrators at protests in Vladivostok during the past two weekends — a rare example of police using force against ordinary citizens defending their everyday interests. This marks an escalation in the government crackdown on dissent, which up to now was limited largely to breaking up Dissenters’ Marches and roughing up and arresting their members.

The anger over increased import duties is particularly strong among residents of the Far East, the majority of which — perhaps as high as 80 percent — make a living either directly or indirectly connected with the sale or servicing of imported automobiles. The government’s decision only exacerbates the region’s sense of alienation from Moscow. It also strengthens the region’s separatist tendencies and increases the already high rate of emigration from that area.

In Alapayevsk in the Sverdlovsk region, 17 miners are staging a hunger strike to protest unpaid wages. In Magnitogorsk, people have held rallies against layoffs at the city’s iron and steel works and against price hikes for utilities and public transportation. People are also staging rallies in the city of Senezh in the Karelia region where the local pulp and paper mill is on the verge of closing, and the cost of heating and water have shot up by 20 percent and 27 percent respectively.

Moreover, hundreds of banks across the country might go bankrupt in January and February. That could lead to protests by depositors who are unable to retrieve their money, despite the limited government guarantees on bank deposits. In addition, people are upset with the government’s decision to increase utility prices for all homeowners in 2009. This might have been tolerable during a time of steady economic growth and rising standards of living, but it is unacceptable in the midst of a crisis.

For the first time in eight years, demonstrators not affiliated with marginal opposition parties are making harsh political demands. Drivers in Vladivostok demanded that Putin step down, that media censorship cease, that the government reverses its decision to amend the Constitution on increasing presidential and State Duma deputy terms, that the proposed changes to the Criminal Code broadening the definition of treason be annulled and that popular elections for governors be reinstated.

Despite the increasing number of protests against the government, Putin is still maintaining a 83 percent approval rating. But this won’t last for long as the crisis spreads and the protests intensify next year. When Putin gathers with his friends and family on New Year’s Eve, he should forget about raising his glass of champagne and toasting to his eternal popularity. Instead, he should make a wish for a lot of good luck in 2009 — the only thing that can get him out of this terrible mess.

Translated, “Good luck” means “a miraculous recovery in the world (esp. American and European) economy that causes a serious rebound in the price of oil.” So much for that island-of-stability-unconnected-to-the-world’s-economic-trouble thing.

By the way, how could anybody possibly buy the line that an economy largely dependent on energy exports be immune from a world economic slowdown?

Sorry to say, but good luck as defined above seems unlikely any time soon.   Given the fundamental dependence of the Russian economy on the price of oil, and the dependence of the price of oil on world economic activity, the drumbeat of bad economic news sounding in the Americas, Europe, and Asia bodes ill indeed for Russia’s economic prospects.

In light of these facts, it is distressing to see Finance Minister Kudrin dating Rosie Scenario: “Russia is not in recession ‘yet’ and the economy will grow by as much as 3 percent next year, Finance Minister Alexei Kudrin said yesterday.”   The “yet” reminds me of the joke about the guy who jumped off the roof of a fifty story building.   As he passed the 25th floor, he yelled to horrified people watching from the windows: “So far, so good!”

I see 3 percent as a huge stretch.   The most recent data show a 1.6 percent year-on-year growth November-to-November.   The previous 12 months showed a 6.5 percent year-on-year growth rate.   That means that growth in November was roughly -4.5 percent–and that’s NOT an annualized number.   Given that (a) the situation appears to be worsening, especially in the manufacturing sector (which is exacerbated by the ruble policy), and (b) the oil price continues to decline, worse is likely to come.

Kudrin is evidently in a very weak position, beset by myriad enemies earned over the years.   (And, since you can often judge a man by his enemies, the number and identity of his speaks highly of him.)   Thus, he may be echoing the party line out of self-preservation.   I am therefore willing to cut him some slack.   But I cannot credit his optimism as a realistic forecast.

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  1. Add to that the horrifying plunge in Russia’s industrial production as exposed by Andrei Illarionov

    and you begin to see cracks in Putin’s foundation that will either bring him down or force him to
    go Stalin on the population in a big way.

    And let’s not forget: The people of Russia made this bed. They are not victims, but perpetrators.

    Ask not for whom the bell tolls, Russian. It tolls for thee.

    Comment by La Russophobe — December 23, 2008 @ 3:13 pm

  2. LR – I couldn’t agree more, Russians made a pact with the devil. They surrendered without public protest Putin’s monopoly of the airwaves whereas in Caracas at least they took it to the streets when Chavez tried turn the lights out on a opposition station. They never took to the streets when Putin switched governor elections to appointments. His transparent lunge at their Constitution isn’t bothering the grey lumpen masses there that much.

    Putin is going to be up to his eyeballs comforting the little people in the months ahead. And that takes money. When, not if, he and his economically illiterate KBG cronies run Russia into the ground will the masses figure out that they need a new paradigm or will they grovel before another loser czar?

    Socialism is a disgusting system, at odds with individual autonomy and democracy. It breeds sheeple that rely on the central government and citizens that are willing to give up liberties as is happening with Brussel which rules the EU with the tyranny of unelected bureaucratic committees.

    America is flirting with socialism. The next decade is going to be very interesting.

    Comment by penny — December 23, 2008 @ 10:33 pm

  3. Merry X-Mas SWP, Michel, Timothy, penny, and LR!

    Comment by Da Russophile — December 26, 2008 @ 12:04 am

  4. Thanks, DR.

    And a (belated) Merry Christmas and an (early) Happy New Year to all SWP readers. I very much appreciate that you have taken the time to visit, read, and (sometimes) comment. Thanks to all, and Happy Holidays.


    The ProfessorComment by The Professor — December 26, 2008 @ 12:47 pm

  5. A belated Merry Christmas to everyone from me also.

    Comment by penny — December 27, 2008 @ 1:50 pm

  6. My wife and I just came back from a lovely trip to Mexico, so I did not see this message in time. But, Orthodox Christmas still has not passed, so Da Russophile I will wish you a Merry (Orthodox) Christmas and a Very Happy New Year! Though we disagree on many things, I do wish you all the best for 2009 and I do wish that 2009 will be a great year for all, Russians and non-Russians!

    Happy New Year to you, to the SWP and to all the other readers and participants to this great site! Craig, may 2009 bring you much joy and happiness!

    Comment by Michel — January 1, 2009 @ 5:07 pm

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