The American Spectator

The Western industrialized world is not the only one going through a cold shower of financial reality, After years of Putin’s economic legerdemain, the laws of real world economics have caught up with Russia as well.

As noted earlier, the Russians’ problems began in May as foreign investors worried about the increasingly autocratic nature of Russian governmental intervention in business affairs. The breakdown of oil and gas industry negotiations with major foreign investors preceded the muscular display of Russian military power in Georgia in August and the subsequent further flight of foreign capital.

Putin and Medvedev are torn between their authoritarian instincts politically and what they can do in practical economic terms. The problem they face is that Russia’s annual budget is balanced primarily on the revenue from oil and gas exports. It takes an international oil price of some $70 per barrel to underpin the Russian budget. Short of that figure, Moscow faces a budgetary running account deficit and is forced draw on its reserves.

The difficulty is that Russia is currently having to use its foreign exchange funds of $560 billion to shore up its devastated credit market. The magnitude of this credit crunch can be seen in the principal index, RTS, which is currently down 71% for the last six months. At this point, in addition to the amounts the government has withdrawn from its foreign reserves, there is an outflow of some $14 billion weekly from private accounts being shifted abroad as individual depositors seek to protect themselves.

The major shareholders in Russian industries, the infamous Kremlin-approved oligarchs, had pledged their shares as loan collateral with Western and Western-related banks in Russia in order to extend and diversify their holdings. As share value plummeted, the loans were left unsecured.

Naturally every major Russian investor has turned to the government for help. Moscow’s injection of nearly $200 billion of its reserve capital to cover this exposure is proportionately larger than the American $700 billion rescue. U.S. GDP is between 6.5 and 10.5 times larger than Russia’s, depending on calculating at purchasing power or official exchange rate, respectively. In any case, even using the lower figure, Congress would have had to approve an amount in excess of $1.3 trillion to equal the Russian bailout.

The Russian leaders and their senior bureaucrats are able to pick and choose among the financial supplicants to be favored in these difficult times. Loyalty for now and the future is thus insured. Effectively this is a form of double loyalty vetting, as the upper enfranchised class that became the major level oligarchs had been chosen in the first instance for its proven support of the Putin machine.

The result once again will be another redistribution of ownership whereby the favored oligarchs increase their holdings with the aid of the Putin/Medvedev bureaucratic elite and network of siloviki. Nothing suspicious there, nothing at all!

At the same time a charm offensive has been launched that includes President Medvedev having an informal chat via video podcast from his private office with a target audience of Russia’s 17 million daily Internet viewers. Putin reportedly is setting up his own website. In the meantime, the Russian public must satisfy itself with more hunting photos, a TV judo demonstration by their champion, and the heart-warming event of Vlad-the-animal-lover receiving a gift Siberian tiger. All this is the good work of his new Belgian public affairs consultants, G. Plus Europe.

This is all standard operating procedure for a government with considerable trouble on its hands, and clearly not limited to Russia. No amount of clever public relations, however, can overcome the fact that the second and third tier banks are being left out of the government’s efforts at liquidity support. These smaller institutions face serious dangers of substantial outflows as local depositors head to the more favored two large state banks.

The foreign reserve accumulation rate has slowed to a trickle as the price of oil diminishes. On top of that, another $150 billion in foreign debt comes due in about a year. The major defense outlays that were heralded in the beginning of 2008 to be paid for by the wealth created by high oil and gas prices now have to be rethought. The energy export revenue must first be allocated to keeping Russia’s banking and business sector in a relative state of stability to avoid broad economic depression.

Whether they like it or not, the tandem of Putin and Medvedev need to stop playing to the camera and get on with equitably managing a seriously vulnerable Russian economy.