Streetwise Professor

May 27, 2010

How Do You Say “Groundhog Day” in Russian?

Filed under: Commodities,Economics,Financial crisis,Politics,Russia — The Professor @ 8:32 pm

Russian central bank head Sergei Ignatiev claims that the European crisis poses no threat to Russia:

“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.

Print Friendly, PDF & Email


  1. I’m not going to make any predictions this time, but a few observations some may wish to comment on.

    1. “But its reserves have been depleted” – according to the CBR, they are not at 450bn $.

    2. “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”. First, if it’s a sovereign debt crisis, then investors will have to start looking for safe havens. US Treasuries may be a solution, but not a reliable long-term one since America is also fast losing credibility on balancing its budget. The best longer-term bets, from this perspective, seem to be China, commodities, and Russia.

    I doubt China is going to be running into turbulence any time soon. Commentators seem to have predicted a few dozen of its past zero recessions.

    Comment by Sublime Oblivion — May 27, 2010 @ 10:39 pm

  2. And here is how you say “Parliament” in Russian: .

    A perfect illustration for Marquis de Custine’s age-old observation: “They are much less interested in being civilized than in making us believe them so… They would be quite content to be in effect more awful and barbaric than they actually are, if only others could thereby be made to believe them better and more civilized”.


    “Russia” and “long-term” in the same sentence, huh? .I wonder what those French investors were thinking when they were getting back a fraction of their original investment as settlement from Russia, a century too late. Now, that’s your long-term Russia.

    Comment by Ivan — May 28, 2010 @ 1:07 am

  3. Groundhog Day in Russian is Den’ Surka, or in this case: Den’ Surkova (ha ha)

    Actually, no one knows the holdings of the two funds since the govt signed a directive just before the May holidays that strips away the requirement to publish the figures every month. Did anyone notice this in the West? Seems like a big admission. They really don’t want anyone to know what they have there, or don’t have there. In the same directive, starting Jan 1 2013 they don’t have to publish income and expenditures from oil and gas. Kudrin warned that the Reserve Fund would be empty by the end of 2010. They’ve had deficit budgets for two years in a row. I can’t find this right now, but in 2008 they made a big show of moving some of their dollars to euros, so they must be grinding their teeth now.

    I think Ignatiev’s comments are for domestic consumption. The main message is: it’s all their fault.

    Comment by mossy — May 28, 2010 @ 2:34 am

  4. MOSSY, even if they DID publish the figures, that would not mean the accurate figures would be published. The biggest failure of the West is to remember that Russia is ruled by a proud KGB spy who spent most of his adult life learning how to lie and doing so.

    Comment by La Russophobe — May 28, 2010 @ 4:40 pm

  5. Ivan, under Tsarist Russia the debt-to-GDP level was well over 100%, if memory serves right. It certainly went well over this figure by 1917. Today, this figure is about, 8% I think?

    Comment by Sublime Oblivion — May 29, 2010 @ 2:09 am

  6. Phoby, Phony, Phoby….

    You still have not prduced even one instance ofRussian statistics being fiddled with under Putin.

    And with you, the lame, utterly unsubstantiated claim is the usual thing, when you’re not lying outright.

    Comment by rkka — May 30, 2010 @ 6:59 am

  7. Indeed, the Prof should be more concerned about the U.S. (and for that matter, Japanese and EU) debt to GDP ratios than Russia allegedly exhausting its reserves.

    Comment by Mr. X — May 30, 2010 @ 12:01 pm

  8. And speaking of the EU, old man Primakov and Gorby’s ideal of a ‘Common European Home’ with the Motherland is drawing nigh by the minute. Which means more Russians all over the EU very soon. The EU’s logic from the beginning when it sputtered was to always expand. So much for the notion that joining the Eurozone represents freedom from the Shadow of the Kremlins…

    Russia seeks EU’s help with visas, technology
    By NATALIYA VASILYEVA, Associated Press Writer Nataliya Vasilyeva, Associated Press Writer – Sun May 30, 6:23 am ET

    MOSCOW – Russia will press the European Union to scrap visas for its citizens and seek the EU’s help in modernizing its economy at a two-day summit beginning Monday.

    Comment by Mr. X — May 30, 2010 @ 12:12 pm

  9. Mr. X–oh, but I am deeply concerned about US, EU, and Japanese debt. Read the freaking piece, would you?–and other stuff I’ve written. The point of the whole damn thing is that (a) those things are a matter of deep concern, and (b) if those fears become realities, contrary to Ignatiev’s delusional learned-nothing-forgotten-nothing happy talk, Russia will be among the hardest hit, reserves or no.

    Look, the parallel to what Ignatiev is saying today, and what Kudrin and Putin said in early-2008 is eerie. Even as the crisis loomed in September, 2008, Russian officialdom was saying that it would be immune.

    Sorry. Wrong. Russia suffered a far large contraction than any other major economy–more than twice as large as the supposed epicenter of the disaster, the US. The only major country that was even close was Japan.

    And if Europe implodes, yes, it will be Den’ Surka (thanks Mossy) for Russia.

    If you are really as concerned about Russia as you affect being, you should be very concerned about (a) the health of the world economy, because of Russia’s high beta status, and (b) the fact that Russian officialdom still doesn’t get it.

    Insofar as “more Russians all over the EU very soon.” I wouldn’t be surprised–because who wouldn’t want to leave Russia if given the opportunity?

    The ProfessorComment by The Professor — May 30, 2010 @ 2:26 pm

  10. Don’t look for a mass exodus of Russians to leave the Rodina if the EU relaxes visa restrictions. Oh there will be some to be sure but not a crippling depopulation. Russians aren’t as inclined to load up the truck and move to Beverly; they have established residences, jobs (such as they are), and resultant “blat” connections. To put it briefly, they know how to work the system in Russia and those skills translate poorly outside the Motherland.

    Humanities majors who blissfully cheated their way through their Russian universities find themselves not so much in demand za granitsu. Kids who came up through the vocational system (bus repair, electronics familiarization, etc.) find that the only things they are trained for are only in Russia. Where are they going to go?

    Take it easy mates. I’m not saying everything is roses in the West. Our education leaves much to be desired as well. Just trying to continue the conversation. My argument is that a person in America will pack up the kids and dog and move if there is a better job to be had a few states away. My perception of Russia (having lived there many many years) is that staying in one place forever is easier and more accepted than moving. Therefore I don’t anticipate more than the normal amount of disaffected youth leaving Russia if the economy takes a dive.

    Comment by Swaggler — May 30, 2010 @ 8:58 pm

  11. SWP, are you not the blogger who was screaming doom and gloom back in early 2009? You were predicting an all-out collapse, with skyrocketing unemployment and skyrocketing inflation and a completely bankrupt currency reserve. Yet here we are today, 8.2% unemployment, 6% inflation (down from about 15% when you made that claim), and over $450 billion in reserve funds and rising. If Russia were in the EU it would be one of if not the fastest recovering economies.

    Who are you to call anyone else a fool? You point to them making the same supposedly false claims, yet take a look in the mirror pal. You were wrong on everything. Let’s take a look at some of your past quotes here..(I’m not going to spend too much time on this but it should be easy to find a few).

    February 2009: “It’s not even an “in the long run we’re all dead” issue. Unless there is a rapid rebound in oil prices, the Russian economy won’t survive the short-medium term without a wrenching collapse.” – Hmm, laughably wrong on that one.

    The fact that Russian unemployment will likely rise by a greater amount than in the US peak-to-trough (the US coming off the trough far earlier than RF) is a legitimate metric of whether the world economic
    crisis will hit ordinary Russians harder than ordinary Americans.
    ” – Not only did US unemployment peak higher, it’s still significantly higher than Russian unemployment today. You’re a joke.

    March 2009: “I stand by my previous forecast that due to the very structure of its economy and institutions, Russia is hurting, and continue to hurt, worse than most others. “ – As long as you don’t count Europe, right SWP? Guess you forgot to mention that.

    Comment by LOL — June 7, 2010 @ 3:01 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress