Russia is enduring a 'textbook' emerging market crisis. Only the economically illiterate or the stupid would either gloat or find fantastical reasons for it. Unfortunately, we are learning that many media figures and analysts fit both categories.
First a hands up. One person imagined a panic in Sochi yesterday and he wasn’t Russian. It was me. The experience was also a useful example of how counterproductive Twitter can be. Reading a hyperactive feed, I supposed that fear was stalking the streets as the ruble tumbled relentlessly.
#Russia ruble now beats #Ukraine hryvnia as world's worst performing currency in 2014. There's a certain irony in that.
— Steven Pifer (@steven_pifer) December 16, 2014
There’s one ATM machine – to my knowledge – that disperses Euros and Dollars in downtown Sochi not far from the famous beach party zone. Following the Twitter information overload, I anticipated either a lengthy queue or that the machine would be out of order. Cash dispensers have a nasty habit of refusing to work when you need them most. However, this one was operative.
Outside, there was no line, just a young couple eating ice creams (it was 17 degrees Celsius) and a couple of empty parked cars. Inside the branch, there were 4 staff and 2 customers. No panic, not even a mild tremble.
Nevertheless, at a currency exchange closer to the sea, the man running the show told me he was out of Euros and Dollars. “One guy came down with a huge amount of money this morning and cleaned me out.” He offered me some British Sterling instead, I demurred: “He didn’t want pounds either. Why does nobody ever want pounds?”
This wintry day just got a bit warmer, watching ruble fall against backdrop of crackling fire. http://t.co/cKmcvZ9EZwpic.twitter.com/rxutxxCDTC
— Christopher Miller (@ChristopherJM) December 11, 2014
The reason for the relative calm is that Russians don't feel a tangible crisis, not yet anyway. Despite months of tumult, prices haven’t risen substantially and the shops are fully stocked. Of course, this situation could change if the decline accelerates. Russians are also, more than other Europeans, conditioned to economic shocks. There have been at least 3 panics in the past 25 years, the most recent in 2008.
Russia's ruble as rubble. pic.twitter.com/CORowBYu1p
— Christopher Miller (@ChristopherJM) December 15, 2014
Scratch away the misinformed cant, wishful thinking and scaremongering and it’s clear that Russia is in the midst of an emerging market crisis. Russia is not a mature economy. Less than a quarter century since the demise of communism, it's a late comer to the capitalist scene. Business practices are at least a generation behind the likes of Germany and experienced economists are thin on the ground.
Additionally, many 'new' Russians don't have the same attitude to responsible saving that their parents did, another side-effect of decades of frequent instability.
Topical Russian joke: "you should keep your money in roubles, because no one will look for it in a bag full of roubles".
— Oliver Bullough (@OliverBullough) December 16, 2014
Since 1999, under President’s Putin and Medvedev, Russian living standards have mushroomed. During this period, Russians attained a level of affluence and prosperity unprecedented in the country’s chequered history. Citizens have become accustomed to a standard of living their grandparents could only have dreamed about. Of course, this feeling of wealth is now in peril and conditions are almost certain to precipitate.
On Twitter, many were rejoicing in this fact. Some of them are the very same moralistic types who pretend they both care for and want to help Russian people. Their current schadenfreude exposes their true motives. Times of need generally expose false friends.
Incredible. Road to recession RT @RT_com Russia raises key interest rate to 17% to curb the inflation risks http://t.co/1cv7GY9ghV
— Michael McFaul (@McFaul) December 16, 2014
The Washington Post led the charge. This is the same Washington that serves as the capital of a country which 6 years ago imploded and took the rest of the world down with it.
The Ruble is falling because the oil price is plummeting. Markets feel there is a miscorrelation between assets and liabilities. The energy price decline means less dollars to support the liabilities, so the Ruble is squeezed as principals try to secure greenbacks. Additionally, Russia’s pre-existing culture of capital flight exacerbates the slide. Linking these is really not rocket science.
The Central Bank in Moscow feels forced to hike interest rates and spend foreign exchange reserves in an attempt to arrest the currency downturn. Neither policy has been successful so far. If nothing changes in this regard, the economy will hurtle into free-fall. This is the tragic reality. Ordinary Russians will suffer the most, the rich won’t be skipping dinners or other essentials. If you don’t believe me, check out Paul Krugman, the Nobel Laureate, who concurs.
Why Russia is fucked in three charts. pic.twitter.com/tPWsENZr5D
— Ben Judah (@b_judah) December 16, 2014
The pain that, quite obviously, awaits decent hard-working people should be enough reason not to crow. However, the gloaters might be in for in a rather more personal shock down the line. Anybody who believes this crisis will remain ensconced in a Moscow bubble is seriously deluded. In a globalised world, what initially appears like a local problem can quickly become a much wider contagion.
Pre-crisis, Russia’s economy was somewhere around 4% of global GDP and whole sectors, particularly in Europe, are reliant on exports to it. Furthermore, the fiscal health of central Asian states is worryingly beholden to their giant neighbor. If Moscow is catching a cold, Yerevan and Astana are in danger of pneumonia.
Struggling nations like Ukraine, Moldova and Georgia depend on the Russian labor market as a pressure valve for their unemployed and remittances are vital. In the more prosperous part of Europe, some German auto manufacturers, Italian clothing designers and French retailers, to name just a few, are sustained by Russia. China won't be getting off scot free either.
As economist Dr Constantin Gurdgiev of Trinity College, Dublin puts it, "Russian imports of goods and services are likely to contract by between 12 and 15 percent in 2015, with much of this effect being driven by a decline in capital goods and consumer goods imported traditionally from Europe. In addition, financial exposures to Russia run high in Austria, Italy, France and the UK. While the European banks have seen some strengthening of their balance sheets in recent months, another adverse shock to their assets is not something they would like to contemplate.”
"If Russia opts for capital controls and/or imposes a holiday on repayment of larger debt tranches coming due in early 2015, the European financial system will receive another shock as much of Russian banks and corporate funding was underwritten in Europe," Dr Gurdgiev warns.
It's a Tom Petty kind of day for the ruble. https://t.co/E3twtqCZas
— Paul Sonne (@PaulSonne) December 15, 2014
Russia’s Central Bank may now be forced to introduce capital controls. This will, at least partially, prevent companies and households from a further Ruble sell-off. However, such a measure would also cause the economy to contract further.
With sanctions still enforced by western nations, who have a hold on global finance not proportional to their size, many other corrective avenues are unavailable to the Kremlin.
Russia’s economic malaise is not funny. Nor is it any reason to celebrate, even for the country’s biggest detractors. The phrase “be careful what you wish for” comes to mind. There is nothing cheerful about current events and very few, if any, countries will be immune from the effects.
Nor is Russia alone in feeling the brunt of the oil-price collapse. Venezuela is convulsed by disorder and suffers shortages of even basic goods. The Middle East is choc-a-bloc with countries that need high crude values to protect their economies. Further volatility in that region opens up a Pandora’s Box.
In simple economic terms, everyone around the world would benefit from Russia, and other oil-rich nations, stepping off the financial precipice as soon as possible. Even the gloaters who despise Russia's current government enough to wish ill-will on ordinary folk they auspiciously care about. These guys don't care for anything or anyone in Russia. They only care for their own narrow ends.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.