Streetwise Professor

February 16, 2009

This is a Story About Something Russian that IS Crashing to Earth

Filed under: Economics,Military,Politics,Russia — The Professor @ 6:14 pm

Over the weekend numerous Texans reported a mysterious fireball in the sky.  Initial reports suggested that it was debris from a falling Russian satellite that had collided with an Iridium telcom satellite.  Subsequent investigation showed that the streaking object was in fact a meteor, and not Son of Sputnik falling to earth.

There is no uncertainty, however, about today’s news reports of the plummeting Russian manufacturing sector.  Bloomberg reports that Russian manufacturing suffered an “unprecedented” drop,  hard on the heels of a dismal December; an event that the government had promised would not be repeated.  Wrong:

Russian  industrial production  slumped more than economists expected in January as demand eroded for cars, trucks and construction materials.

Output shrank an annual 16 percent after falling 10.3 percent in December, the Moscow-based  Federal Statistics Servicesaid today. That was the biggest contraction since the service moved to a new methodology in 2003. The median estimate in a Bloomberg survey of 12 economists was for a 12 percent decline. In the month, production dropped 19.9 percent.

. . . .

Manufacturing fell an annual 24.1 percent in January, compared with a 13.2 percent drop in December. Tire production plummeted 83.1 percent as car and truck output fell 79.7 percent and 76.4 percent, respectively. Output of cement fell 44.3 percent as builders struggled to find funds to complete projects.

AvtoVAZ, Russia’s biggest carmaker, idled its production line for a month on Dec. 29, while KamAZ, the nation’s biggest truck producer, resumed output on Feb. 12 after halting production in December.

“The car plants, the train car factories are at a standstill. The pipe makers are working part time, construction has stopped,” said  Alexander Mastruev, the personnel chief of OAO Magnitogorsk Iron & Steel, Russia’s third-largest steelmaker. Magnitogorsk had the biggest output cut in the fourth quarter among the country’s top six steel companies.

‘Don’t Believe This’

“To hope that we’ll return tomorrow or the day after to the volumes we had before, of course we don’t believe this will happen,” Mastruev said in an interview shown on state channel  Vesti-24 today.

Mining and quarrying contracted an annual 3.6 percent in January as iron ore output fell an annual 39.7 percent.

The contraction of industry contributed to joblessness surging by about half a million people in December, boosting the unemployment rate to 7.7 percent.

The WSJ added: “Industrial production fell 10% in December from a year earlier — a rate alarming enough to prompt assurances from the Kremlin that the numbers wouldn’t get worse in the coming months. Many officials even talked about Russia’s overall economy recovering somewhat by the end of 2009″ (emphasis mine).  I guess that assurance is no longer operative.

To put things in contrast, a 12.7 percent (annualized) drop in Japanese GDP–about half as much as the decline in Russian manufacturing output–drew gasps of shock from the world economic/financial community.  Now, manufacturing is more volatile than GDP, but nonetheless, a 24 percent annualized drop in any major sector is an economic disaster.  

Why is this happening?  Well, part of it is the world economic recession/depression, which is hitting manufacturers everywhere very hard.  But Russia certainly exacerbated this problem dramatically through its currency policy.  As I’ve written for months, keeping the currency artificially high would hammer Russian manufacturers.  Here’s the proof.  The currency chickens have truly come home to roost.  

Given the predictable effects of its currency policy, you wonder why the government would give assurances that happier days would arrive in January after a disastrous December.  Putin et al were trusting to luck, and counting on short memories if luck didn’t come through, I guess.

In response to the news, the ruble fell substantially relative to the both the dollar and the euro today, giving up a good chunk of the gains it clawed back last week.  The ruble was down about 1.7 percent relative to the dollar today, and about .5 percent relative to the euro.

Persisting in a defense of the currency will be a double whammy.  It will continue to throttle manufacturing by making domestic output uncompetitive.  Also, the current method of choice to support the currency–higher ruble interest rates–will also make credit for domestic firms more expensive.  As a result, the February bloodbath may not be as bad as January’s, but this month will almost surely show continued contraction of Russian manufacturing.  

And, obviously, this will not hit just billionaires and oligarchs.  Of course, their fortunes are imploding, and their numbers contracting  (pardon me while I wipe away a tear), but this manufacturing holocaust will hit ordinary Russians very, very hard.  Moreover, this, and the broader economic turmoil, is forcing an additional 15 percent cut in the RF budget in order to keep the deficit within 8 percent of GDP.  

This illustrates the severe constraints facing Russian policymakers.  If the budget blows out, the currency will collapse.  To prevent that, the government is cutting spending, and given the magnitude of the cuts, they will likely fall widely, and impact social and income support programs.

Which raises a question.  How will expenditures on the Russian Empire of Dreams fare?  The signals are conflicting.  On the one hand, as recently as last Wednesday Putin said that the planned increase in purchases of military hardware would not decline despite the rising budgetary pressures and existential economic crisis.  On the other, there are reports that defense expenditures will be cut by the same 15 percent as the overall budget.  So which is it?  Is Putin just lying?  Or is there disarray in the government?  Who knows?  And that’s as disturbing as anything, and another illustration of the maddening opacity of Russian governance, especially in the Age of the Dyarchy.  

And remember that just last week saw Russia make sweeping financial commitments to Belarus and the ‘Stans, all in an effort to keep out the Americans and advance imperial dreams.  

Interesting commentary on priorities, dontcha think?

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1 Comment »

  1. Putin will allegedly spend on missiles and submarines it seems which is good news for their near abroad menaced neighbors who might have to deal with their ragtag military in the future:

    “Thus the defense budget is being cut by 15 percent. There may be further cuts. There was no announcement of what programs would get cut. But based on past decisions, the nuclear weapons programs (land and sea ballistic missiles and submarines that carry them) will probably not suffer, and the ground forces will likely take most of the cuts.”

    http://www.strategypage.com/htmw/htlead/articles/20090215.aspx

    The Russian Empire ever being reconstituted is like Chavez’s bluster and only that. There’s no money to fund it. In the bread and circuses thrown to the Russian masses eventually it’s the bread part of the equation that matters. I’m not saying that the Kremlin crime syndicate will be French Revolution style destroyed and democracy will ever replace feudalism in Russia just that this crowd of crime bosses might change.

    There is no viable opposition in Russia, it’s underfunded, poorly organized, has no mass appeal nor charismatic leader, no access to the airwaves, it doesn’t exist.

    Comment by penny — February 16, 2009 @ 8:50 pm

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