Boom to bust and worse
Dec 16th 2008
The state of the economy in Russia looks worse with each passing day
ECONOMIC growth and political stability: those were the two proudest achievements of Vladimir Putin and his ex-KGB associates in the eight years since they gained control of Russia. Now the economy is looking wobbly—industrial output in November slumped by 8.7% compared with a year earlier, according to figures published on Tuesday December 16th—the big question is whether the regime’s political control will crack too.
The rouble—a rock-hard currency since the oil price started to rise—is losing value at an accelerating rate, down by 3% this week against a basket of currencies. It has lost around 15% of its value since the summer. Even so, Russia’s huge foreign-currency reserves are steadily shrinking as the authorities defend the rouble. They are down by more than a quarter, or around $160 billion, from their August peak of $600 billion.
Russia has been hit by a double blow. One is a collapse in the oil price. Urals crude is trading around $44 a barrel, whereas Russia’s budget had pencilled in an oil price of $70. The other is the credit crunch which means an end to cheap loans for an economy that had become used to a flood of petroroubles.
The stockmarket has fallen by some 70% since its peak in May. Lay-offs are mounting. Western credit ratings agencies are downgrading Russian banks; earlier this month Standard & Poor’s downgraded Russia’s sovereign debt for the first time in nearly a decade. Industrial production is plummeting: this week marked the steepest fall since the crisis of 1998. Oleg Vyugin, a former deputy finance minister, reckons that 2009 may see GDP shrinking by as much as 4%. (The Economist Intelligence Unit, more optimistically, has cut its growth forecast from 3.7% to 3%.)
Finding an economic-policy mix to deal with that is a daunting task. Russia’s main macroeconomic problem of the past two years—inflation—is far from vanquished: it was down only slightly to 13.8% in November. But a far bigger problem is maintaining growth in an economy that during the boom years borrowed recklessly and used the money for higher living standards rather than diversification.
The rouble's depreciation does cut Russia’s current-account deficit, by making imports pricier. It takes some of the strain off the budget. But it does not help much else. Russia’s underlying uncompetitiveness was disguised by the oil boom. Now it is exposed.
Nor do bail-outs seem to be working. A $200 billion programme is helping Kremlin-linked companies stay afloat (and also consolidating the authorities’ control of the economy). But much of the money that was meant to unblock the financial system is instead going offshore. Confidence is shrivelling.
A rise in the oil price might buy the Kremlin some time. President Dmitry Medvedev last week suggested that Russia might even join OPEC, the oil-producers’ cartel. It is unclear how that would square with the nominally private ownership of most of Russia’s oil industry, or Russia’s membership of the G8 club of rich industrialised countries. OPEC members themselves may be unconvinced by Russia’s new-found enthusiasm.
Public discontent is beginning to simmer. The problem is less the tiny self-proclaimed opposition, but spontaneous protests by citizens fed up with incompetent and arbitrary behaviour. A protest by drivers in the Russian far east brought a nervy response from official Kremlin media. The regime’s popularity rested on a combination of higher living standards and selective repression. The economic crisis has weakened the effect of the former. The latter is one of the few options left. The signs are ominous. Memorial, a group that champions the cause of truth about the Stalin era, has had its computers seized in a police raid. The Soldiers’ Mothers Committee, which campaigns against conscription, says law-enforcement officials have asked its staff to prove that their offices are not used for drug-dealing.
For now, the economic crisis is scarcely discussed in Russia’s mainstream media, which has come under steadily tighter control since Mr Putin came to power. That is not likely to persuade Russians that the authorities have everything under control.
Wednesday, December 17, 2008