Streetwise Professor

December 11, 2008

Crisis, What Crisis?

Filed under: Economics,Politics,Russia — The Professor @ 12:16 am

This article from Business Week requires little SWP comment:

On 9 December, Russia’s State Statistics Service revealed the GDP growth figures for the third quarter. And – lo and behold – they are “surprisingly bad”, “much worse than expected”, “below market expectations”, etc. (Read the reports in The Moscow Times, Bloomberg and Reuters).

You might think that by now economists would no longer be surprised by the stream of dire economic news. For anyone who has been closely following what has been happening in Russia’s economy over recent weeks, it’s increasingly obvious that it has essentially stepped off a cliff. As Danske Bank economist Lars T. Rasmussen writes in a research note: “The question is whether there will be any economic growth at all in Russia next year.”

“But surely 6.2% growth in the third quarter isn’t so bad?” I hear you say. Think again. That figure is the year-on-year change, not the quarterly change. In other words, it includes the rapid growth that took place in the first half of this year and the fourth quarter of 2007, when Russia’s GDP was still growing by 8%. The month-on-month trends show that output is already contracting. Russia’s GDP fell by 0.4% in October, according to government officials.

Now, the signs are that production in Russia is not simply stagnating: It is in fact plummeting like a stone. Industrial output, generally an early indicator of GDP trends, has been falling for months – by a cumulative 5% between July and October. And the output decline appears to have accelerated dramatically in November and December. According to the latest government figures, cited in the Moscow Times article, manufacturing production will have plummeted by an additional 10% by the end of the year.

The latest business surveys also confirm the dramatic speed and scale of the economic deterioration. These show that the situation facing Russia’s service industries (not recorded in the industrial output figures), is even more dire than in manufacturing. <

The gloomy official figures only confirm what has been apparent from anecdotal evidence for weeks. In sector after sector, Russian companies are reporting sharply declining orders and massive lay-offs. Construction, banking, metallurgy and the automotive industry are all in deep and obvious crisis. Russian railways has reported a 20% decline in freight volumes, reflecting the nationwide slump in industrial production. As for the oil industry: that was reporting declining output and insufficient funds months ago, long before the financial crisis escalated and the oil price plunged.

The risk of a GDP contraction has already been highlighted by longtime Russia watcher Anders Aslund, perhaps the first economist to warn of the current Russian economic slump. In October Aslund suggested that Russia’s GDP could fall by 5% next year.

Now those views, which once appeared heretical and extreme, are becoming mainstream. Barclays Capital now predicts “acute declines in output in the first months of the year”.

Nouriel Roubini, a US economist who became famous for accurately predicting the global credit crunch, is also weighing in on Russia’s economy. He writes that the current global outlook “signals a sharp recession in advanced economies, and a very likely recession in Russia too”.

Meanwhile Bloomberg cites Alexander Lebedev, one of Russia’s top businessmen, saying that the economy would “definitely” go into recession next year, and that it is “quite possible” that it will contract by as much as 10%.

Even the dreaded “D” word is now beginning to be heard. In comments cited in The Moscow Times, leading Russian economist Evgeny Gavrilenkov warns that if the latest government figures are accurate, they mean that Russia is now heading into a “severe depression”.

Mr. Gavrilenkov may want to keep an eye on his six, saying stuff like that.

If this article is accurate, and the economic difficulties are that acute, a media management strategy (to put it euphemistically) of denying the severity of the situation, and threatening those that speak the truth, will only make things far worse. For things this severe cannot be camouflaged. When it is clear that the emperor has no clothes, the government will lose its credibility, and the prospect for civil unrest will rise dramatically, for economic hardship combined with the realization that you’ve been lied to is a volatile combination.

I know Timothy, and DR, and others will take issue with this, but I find it hard to believe that a severe economic downturn and a the revelation of a deception campaign orchestrated at the highest levels will not lead to political unrest. Even among famously fatalistic, not to say passive, Russians.

And here, from Time, is perhaps a harbinger (complete with an appearance from Michel’s pensioners’-):

In the Siberian city of Barnaul, pensioners, angry with rapidly declining living standards and rapidly rising bills, last week stormed and occupied the Regional Administration Building, demanding more money. Russian sociologists are expecting a massive wave of similar protests and strikes to roll throughout Russia, not unlike those that shook the country in the 1990s, with angry coal miners blocking railways in Siberia and unpaid workers striking in the cities. Now some enterprises are again failing to pay their workers, while others simply go out of business. But disruptive protests would contravene a new labor code passed under Putin in 2001, which sets tight restrictions on the forms of protest available to trade unions. But a Russian state that narrows the options of legal protest available to its people during a major national crisis may be courting serious trouble — it’s certainly a principle that Czar Nicholas II failed to understand.

And that’s Time, for crissakes.

The volcano is rumbling.   Sometimes the rumbles of volcanoes do not presage an eruption–now.   But they often do.

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1 Comment »

  1. Well, can I say I told you so 😉 On La Russophobe, I had a heated discussion about the coming fall in the Russian GDP (source:

    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:


    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

    “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.


    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


    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.

    Comment by Michel — December 11, 2008 @ 1:07 am

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