In this essay, I analyze three major areas of concern about the current Russian economy – the debt burden, balance of payments and future fiscal sustainability. Although on paper Russia is comfortably solvent, rolling over debt has been problematic for Russia Inc. because of the shutdown of its traditional financing mechanisms, cheap American credit and foreign direct investment, coinciding with an avalanche of collapsing commodities. The underdevelopment of its domestic financial system forced the government to respond in an improvisatory, but swift and effective, way. Although Russia’s capital account will go deep red, the current account should remain in the black, or will at worst take on a pinkish hue; as such, the balance of payments will remain manageable, given the country’s huge foreign currency reserves. The consolidated budget may run a small deficit due to dwindling oil revenues, a smaller tax base and increased spending, but it will be easily financed out of the state’s rainy day funds. Growth in GDP will be small or stagnant, but the social impact will be mitigated by an expanding safety net. After the crisis, Russia will emerge with a stronger, more self-sufficient domestic financial system – and just in time to enjoy a new oil bonanza.
The fast shrinkage of Russia’s foreign currency reserves, plummeting oil prices and the weakening ruble means that Russophobes1 of all stripes are having a field day. They prophecy the collapse of the currency, soaring inflation, and the disintegration of the ‘Putin system’ as populist unrest undermines it from below and silovik clans fighting over dwindling oil rents rend it apart from above. Relying as they do on unsubstantiated claims fitted to support a flawed narrative of Russia as a virulent kleptocracy governed by economic illiterates, their predictions are once again doomed to come to naught – much like prior auguries of fascist takeover or ethnic disintegration2 after the 1998 crisis. This article will reveal why.
In the new millennium, loose US monetary policy and perverse regulations channeled cheap credit into a massive housing bubble. This explains why the US ‘enjoyed’ a consumer boom, even though the Bush II period was historically unique in that median household incomes never exceeded the peak level attained prior to the last recession3 (the dotcom bust after 2000). The borrowing binge spread to Russia in 2005 and intensified up to 2007. Even as the government shed off its debt with the help of soaring oil revenues and squirreled away 600bn $ in foreign currency reserves, its private banks and national champions gorged themselves at Greenspan’s trough to finance domestic and foreign expansion. But all unsustainable things come to a point where they can not longer be sustained, and by 2007 that junkiest junk, the subprime loan market, began to come apart at its seams.
