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government has withdrawn from its foreign reserves, there is an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.
