Russia Economic Crisis III: On the Importance of Self-Sufficiency in Liquids

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.

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Russia Economy Crisis I: How Red will Russia Get?

Recently the World Bank’s November issue of the biannual Russian Economic Report came out. At the time I was busy with other things, amongst others planning the move from Blogger to self-hosted WordPress; as such, I did not give it the comprehensive treatment that it deserved at the time. Of course, reading about these things today is much more important than at any time since 1998 (or 1987, or even 1929)…and if I devoted an entire post to the last November issue, surely this new compendium of graphs galore and pecuniary palaver deserves some special attention?

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Congratulations, America!

But will Obama really bring change?

As I predicted he would, Obama has won overwhelmingly. As I argued, this was the best possible outcome for America – Obama understands the importance of investing heavily in renewable energy and new infrastructure, and would withdraw from the financially ruinous Iraq adventure. Just by his election, he has bolstered America’s battered image around the world.

The margin of his victory also gives him latitude to decisively sway the course of American policy, domestically and internationally – although in practice this latitude is greatly constrained by financial and institutional realities.

But do not expect change on all fronts. His two main Russia advisors are Russophobes – McFaul, champion of the Russian “authoritarianism” dogma, and Brzezinski, high priest of the Promethean Project to weaken, encircle and break up Russia. A tough Russia policy will deflect conservative attention from his domestic ambitions.

So it’s important to look at things realistically – do not expect too much change from Obama on Russia. Though it’s OK to hope otherwise. 🙂

Some Thoughts on the Financial Crisis

What with all the noise about the ongoing credit crunch, all around financial apocalypse and burgeoning signs that it is beginning to spill over into Main Street like a torrent of water from a collapsing dam, I thought it’s about time we take a look at this “sucker” (to use Bush’s blunt term) and it’s likely effect on Russia.

The MSM highlights the problems of Russian banks in attaining credit, which has lead to a drastic slowdown in construction, much harder access to credit and the near collapse of Russia’s major stock market, the RTS. Moscow house prices fell by around 25% from their peak, to my personal consternation.

Nonetheless, despite the torrent of sad tidings, I remain bullish on the Russian economy. Its strong fundamentals and relatively low level of integration into the world financial system mean that it will weather the storm much better than either the insolvent financial systems of the Anglo-Saxon sphere or the many catastrophically over-leveraged, deficit-wracked economies of East-Central Europe.

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Russia’s Soft WMD

Watching the US presidential candidate debate this Friday has only further confirmed my belief an American would have to be either a moron or a traitor to vote for him.

What he would do as President:

1) Stay on in Iraq

And leave Russia (and every other competitor) a free hand. Even the success of the Iraqi campaign depends on the continued quiescence of the Sunni tribes that were bribed into becoming America’s friends. If relations further deteriorate, it would not be unimaginable to envisage Russia selling Iran S-300’s, which in turn could escalate anti-US attrition in Iraq from under that umbrella.

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Why Obama Will Almost Certainly Win

Read these two posts by Krugman at Conscience of a Liberal, here and here.

1. A looming recession, after seven years of stagnation in the US median wage, means that the likelihood of positive income growth this year is very small. Even assuming it’s 0% would mean that the incumbent party’s nominee, McCain, can be expected to lose by an 8% margin in the straight line fit below. To break even income needs to grow by around 2%, which looks more unlikely with every new financial breaking story.

More likely, it will be around 0% or worse and McCain would be facing a landslide defeat, as in 1980.

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The People Speak: Poll #1 Results, US Presidential Candidates

These are the results of our first poll (running from January 11 to March 19).

I am pleased to see that the number of people thinking it’s brilliant decisively outnumber those who think it should be deleted. (So I’ll remain on the blogosphere.) Otherwise, don’t bother with digressions, aesthetics or more features, but concentrate more on regular news and editorials. Well, I’ll try. I’m not really the kind of person who loves pumping out stuff at constant intervals, but I’ll have a go at making updates more frequent (and posts smaller). As for Core Articles – well, we have a juicy one coming up tomorrow – Top 10 Russophobe Myths, as well as a finished News 19 March.

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