Streetwise Professor

November 14, 2014

Russians May Want to Consider Starting to Panic

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 1:00 pm

At the outset of the Financial Crisis in September, 2008, Putin touted that Russia would be an “island of stability.” We know how that worked out. Russia experienced the most severe decline of any G-20 economy in large part due to a steep fall in the price of oil.

Today Putin said that Russia was preparing for a “catastrophic” fall in the oil price, but no worries!, everything is under control:

President Vladimir Putin said Russia’s economy, battered by sanctions and a collapsing currency, faces a potential “catastrophic” slump in oil prices.

Such a scenario is “entirely possible, and we admit it,” Putin told the state-run Tass news service before attending this weekend’s Group of 20 summit in Brisbane, Australia, according to a transcript e-mailed by the Kremlin today. Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events, he said.

. . . .

With $421 billion in international reserves, Russia has a “big enough” buffer to meet all social commitments and maintain budgetary and economy stability, Putin said. The value of the stockpile last week extended its slide to the longest since 2008 as the monetary authority attempted to smooth the ruble’s decline.

“A country like ours finds the situation easier to cope with,” Putin said. “Why? Because we are producers of oil and gas and we handle our gold and currency reserves and government reserves sparingly.”

Read that again: “A country like ours finds the situation easier to cope with. Why? Because we are producers of oil and gas.” The prices of which are highly sensitive to global economic conditions. And how does being a producer of oil and gas make a catastrophic decline in the price of oil “easier to cope with”? Really. I’d like to know.

As for being a producer of oil and gas, this is true. And that’s the problem: Russia is not a producer of much else. A nicely illustrative factoid: Apple’s market cap exceeds that of the entire Russian stock market (which is dominated by natural resource firms, of course).

Putin mentions meeting social commitments. What about military spending? What about the cost of foreign adventures? Which do you think is going to get whacked first if oil prices decline further, or even stay at current levels?

Given Putin’s track record as a prognosticator of economic crisis, and Russia’s economic resilience, and his interesting theoretical perspectives, his calming words should make Russians think about panicking. Like now.

 

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14 Comments »

  1. Is all this talk about the supposed missed opportunity to diversify the Russian economy really justified? Russia has cheap oil and gas and therefore its resources are best employed producing oil and gas. Russia doesn’t have the necessary institutions to be competitive in any other field, so it has no choice but to keep digging up oil and gas even if prices keep falling.

    Comment by aaa — November 14, 2014 @ 2:30 pm

  2. @aaa-Comparative advantage says that it will remain an important hydrocarbon and minerals producer. Nothing wrong with that. But the growth of other sectors has been impeded by perverse government, a deformed legal system, lack of property rights, etc. The economy would be more diversified if it had better institutions, like you suggest.

    The ProfessorComment by The Professor — November 14, 2014 @ 2:36 pm

  3. Also, if Russia had a more diversified economy, then in times like this they could do a better job of import substitution, and those reserves would stretch further.

    On a related topic, Venezuela lost 30% of its Dollar income this year:

    http://www.bloomberg.com/news/2014-11-14/venezuela-dollar-income-falls-30-on-lower-oil-prices.html

    Comment by jon livesey — November 14, 2014 @ 3:08 pm

  4. Comparative Advantage has weakened hugely (http://www.chicagofed.org/digital_assets/publications/working_papers/2014/wp2014_12.pdf), there is no reason for Russia not to have other sectors that can balance out oil and gas but for their own incompetence and the heritage of Soviets’ elites fundamental economic illiteracy.

    Comment by d — November 14, 2014 @ 5:37 pm

  5. I’d be very skeptical about that $400bn figure as well. Would you trust the current crop of Russian politicians to carefully husband such a stockpile and remain truthful about its value?

    Comment by Tim Newman — November 15, 2014 @ 3:27 am

  6. Not to worry, the new China deal will save the day: http://www.bloombergview.com/articles/2014-11-14/new-chinarussia-gas-pact-is-no-big-deal

    “The new deal, in contrast, is not binding and lacks agreement on key elements, most notably price. ” Oops, they did it again.

    Comment by Ivan — November 15, 2014 @ 9:15 am

  7. Speaking of did it again:

    “A tug boat called Fotiy Krylov and supply tanker Boris Butoma round out the second half of the Russian ships.”

    http://www.dailymail.co.uk/news/article-2833179/US-kept-close-watch-Russian-navy-fleet-heading-Australian-waters-believed-acting-orders-spy-leaders-G20-summit.html

    Comment by Ivan — November 15, 2014 @ 11:12 am

  8. @Ivan. I was going to write posts on both subjects (the vapor contracts w/China and the tugboat). Hardy perennials.

    The ProfessorComment by The Professor — November 15, 2014 @ 12:01 pm

  9. @Tim. Definitely reason to be skeptical. Especially from a country that said that it could not provide documents re its World Cup bid because everything had been on leased computers that it returned to the owner who had conveniently destroyed them. If that doesn’t scream “Trust us!” nothing does.

    The ProfessorComment by The Professor — November 15, 2014 @ 12:02 pm

  10. Re China and the tugboat: reminds me of a joke where the same group of people would be sent on a long business trip by train together year after year, so at some point they would just tell the joke number and laugh, as all the jokes were known and enumerated. Seems we are reaching that point where it’s enough to tell: “Russia did #1” or “Russia did #2 big time”.

    Comment by Ivan — November 15, 2014 @ 1:09 pm

  11. They did #3 as well: http://www.buzzfeed.com/maxseddon/russian-tv-airs-clearly-fake-image-to-claim-ukraine-shot-dow

    Comment by Ivan — November 15, 2014 @ 2:41 pm

  12. @Tim: Anything is possible in Russia but it’s rather unlikely that the forex reserves have been surreptitiously squandered considering the high degree of transparency at the CB and the decent management teams both at the CB (especially the current Nabiullina-Yudaeva duo) and at the MinFin, which has a claim on $165 bn out of the $420-something bn currency reserves.

    I’m more concerned about Putin’s potentially playing what I’d call the Republican oil card. Paradoxically perhaps, since the GOP is seen as the party of oil, whether integrated or independent, Putin could see this as an opportunity. If the oil & gas sanctions are further tightened, the Big 4 service companies and Exxon (and BP, as American as British in terms of ownership) will probably lose all their Russian business. Russia’s onshore output will start declining: a lose-lose outcome. If the sanctions are lifted, the service cos could profit from Russia’s shale oil boom (if by no means guaranteed, given the difference in geology between Bakken and Bazhenov), and Putin could offer more carrots (licenses) to Exxon in exchange for its support. It’s a win-win and potentially a way to co-opt at least Exxon and Halliburton. Besides, Putin’s people probably find it easier to talk with certain types of authoritarian-minded Republicans.

    Comment by Alex K. — November 16, 2014 @ 3:58 am

  13. Timothy Snyder on “applied post-modernism”: http://www.youtube.com/watch?v=eKFObB6_naw

    Comment by Ivan — November 16, 2014 @ 12:27 pm

  14. Ivan – I have also heard it called a “war on information” by the Rasha (as opposed to an information war)

    Snyder’s talk is absolutely excellent.

    Bloodimir Vladolf Ratface Putler Khuylo does not care about the Russian people.

    He cares only about himself and his gang of thugs.

    So he is able to declare, on a delusional basis, that Rasha is already a victor, and that the collapse of the Russian economy is a great victory.

    Or – borrowing from stalin – that the collapse of the Rashan economy is a “foreign CIA plot.”

    The guy is just a moronic macho dupe.

    Comment by elmer — November 16, 2014 @ 1:46 pm

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