Streetwise Professor

January 13, 2015

It’s Deja Vu All Over Again, or the Putin Hamster Wheel, Crisis Edition

Filed under: Commodities,Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 8:12 pm

I was glancing over some posts from the 2008-2009 crisis period, and was struck at the similarities between what happened in Russia then and what is happening now. The imploding ruble. Capital flight. Discussions of whether capital controls were necessary to stem the rout. The heavily stressed banking system. The government’s desperate attempts to support the the banking system and big firms. The attempts of Rosneft and Gazprom to use the crisis as an excuse to feed at the government trough. Putin’s crazed and frequently paranoid ramblings, and a broader national paranoia.

Russia scraped by last time, in part because oil prices rebounded starting in mid-2009, and because the world economy (notably China) also fought its way out of the crisis. The stimulus-driven Chinese rebound was especially important, because it supported commodity prices, which was vital for a commodity producer like Russia.

Will it scrape by this time? Well, there is a lot of ruin in a country, as Adam Smith informed us, so it’s always risky to predict a collapse. And Russia has rebounded from even worse situations (think 1998).

That said, things aren’t nearly so favorable for Russia this time around. First, there is the self-inflicted wound: the invasion of Ukraine and the sanctions that followed. This is harming the banking and extractive sectors in particular. The fundamentals are bad enough for these sectors: sanctions exacerbate the problems. Second, Russia can’t look to a return to rapid Chinese demand growth to save it this time. China’s slowdown (which is have broad based effects, including on Tesla which has seen Chinese sales on which it was counting decline substantially) is at the root of the current commodity downturn, and since it is likely that this growth slowdown will persist Russia can’t look for succor from that quarter. Third, as bad as Russia’s institutional environment and governance were in 2009, they are even worse now. The ossification of Putinism (and Putin himself!) and his deep fear of overthrow are leading to regress, rather than progress in the development of the rule of law, secure property rights, and civil society, and the reduction of corruption, cronyism and rent seeking. The horrible institutions and governance will be a drag on growth. Fourth, the fiscal situation is weaker. Reserves are relatively smaller now, and Putin’s electoral promises to raise social payments and his commitment to increase dramatically armaments expenditures represent a significant departure from the fiscal probity of the Kudrin years.

Russia emerged tenuously from the last crisis, and never regained the pre-crisis rate of growth. Its post-2009 growth performance was lackluster, given the fundamental environment and Russia’s stage of development. In my view, the conditions for a recovery are even less favorable this time. Some-and arguably the lion’s share-of the reasons for that are self-inflicted, or more accurately, inflicted by one Vladimir Vladimirovich Putin, whom the Russian populace has chosen to inflict on itself. Consequently, though Russia will hit bottom and rebound, I think it is likely that this rebound will be even weaker than the last one. The national equivalent of a dead cat bounce.

Not that the current situation is not without its moments of levity. Today, for instance, oligarch Mikhail Prokhorov announced he is putting the Brooklyn Nets up for sale. Prokhorov’s wealth has been running in reverse for the past several years, and in the current circumstances, the Nets are arguably his most salable asset. His Russian holdings, not so much.

In a way this is sad, because although Prokhorov is a jerk like most NBA owners, he is also somewhat amusing. In contrast, other owners are just jerks.

But back to the main show. When looking at Russia today, Yogi Berra comes to mind. It’s deja vu all over again. Only worse.

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  1. SWP- what is Putin’s next move? Without petro-dollars to grease the cronies, he faces loss of the elites, and the average citizen trying to feed their family. Could he plough the remaining cash reserves into the military? and wage a battle on islam/ukraine (or whomever- doesn’t matter) to generate nationalistic support with the citizens and build a new cadre of elites with supplied guns rather than money?

    I don’t see him actually increasing social spending to placate the citizens- maybe his words but not rubles. His 90% approval rating is created through fear, not adoration. Well-fed citizens offer Putin little in return compared to thinning his crony list to a smaller slice, or using the economic crisis to build a whole new cadre of loyalists, and kill off the disgruntled ones.

    Comment by scott — January 14, 2015 @ 5:04 am

  2. I can’t help but think that Putin is USING the exchange rate crisis (which was easily avoidable: pp11-16 of because i guess he knows Russians will respond in a manner which suits his purposes, and thus they will unite for the coming fight only in Austerity.

    In reality, he venally used the country’s official FX reserves as a captive buyer (a piggybank) for all the crony Russian oligarchs’ rubles (probably himself too), in effect back-stopping the exchange rate in the one-way flow out of russia! That Malaysia had earlier easily put a stop to the same “unwanted” capital flight phenomenon, must SURELY have been known by the KGB and their russian central bank head, Ludmila. And yet Putin allowed it to depreciate the ruble.

    My guess is that was ON PURPOSE. Now he has an excuse to throw whatever defaults and economic havoc he can muster, into Europe.

    Comment by Kiers — January 14, 2015 @ 9:09 am

  3. Putin’s next move is to hunker down and make sure the regime does not fall. It means hoarding cash and force to crush opposition movements in Russia. He likely intends to wait out the low prices and hope they recover in the next year or so.

    When Putin invaded Ukraine, he could count on strategic surprise and the price of oil being near $100 a barrel. He could afford adventures. Risk was low compared to the reward. In fact, if Putin was content with Crimea, he’d have almost no problems by now and perhaps even gotten Kyiv to recognize the annexation. It was only when ordinary Ukrainians started resisting the invaders that pushed Kyiv to respond in force that created a situation that forced the West to slowly wake out of its stupor.

    With oil so low, Putin does not have anywhere near the amount of leeway for adventures he did in early 2014. He also knows any major action may incite further reprisal from the current leader of the free world, Germany. Any money spent may not be recovered and leave him weaker.

    There is the possibility he may launch another major invasion of Ukraine in the spring, but more likely he intends to keep the pressure high enough to bother Kyiv, but not enough to provoke the West. His strategy there is to hope Ukraine remains dysfunctional enough that the state erodes even further so that the West abandons support of Kyiv and cuts him a deal.

    Essentially, I think Putin is in a Fabian mode now. He hopes to conserve his strength and avoid conflict while looking for opportunities, but mainly hoping the overall situation changes enough that Russia regains its relative strength.

    Comment by Chris — January 14, 2015 @ 12:47 pm

  4. @Scott-He has many fewer carrots, so he will use those he has left to benefit his closest pals: for the rest, a more liberal use of the knout.

    Today it was announced that there would be 10 percent across the board budget cuts (including social spending) . . . with the exception of defense.

    The dynamic could be interesting. Yes, Putin has fewer resources at hand. But the elite is more dependent on him (and the state) than ever because their businesses are imploding. They are in a weak bargaining position. So Putin may only have crumbs to hand out, but but the supplicants are starving, so crumbs can go a long way.

    The ProfessorComment by The Professor — January 14, 2015 @ 7:13 pm

  5. Well, they decided to go with plan “Go Full Retard” and announced that Gasprom will ‘reroute’ all gas deliveries via Turkey, so if EU wants Russian gas they better start building a pipe infrastructure to Greece. Brilliant.

    Comment by d — January 14, 2015 @ 9:20 pm

  6. SWP:

    Vlad BEGS to differ! ALL NBA owners?!?! Mark Cuban is the everyman who offers any hope to the hopeless on Shark Tank. All the others only fund based on numbers.

    Now that Donald Sterling is gone, Cuban is Vlad’s new favorite.

    VP VVP

    Comment by Vlad — January 16, 2015 @ 11:48 am

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