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Preliminary Observations On The Financial Crisis In Russia

  • Victor Yasmann

Most Russians haven't been touched by the financial crisis -- yet.

Most Russians haven't been touched by the financial crisis -- yet.

Russia's leadership and the pro-Kremlin media never seem to tire of asserting that Russia is capable of passing through the current global financial crisis with fewer negative consequences than other countries will face.

And, in a sense, it is easier for Russians to face the crisis than for residents of Western countries if only because they are accustomed to "overcoming" difficulties, both from their years of Soviet life and their experiences of the post-Soviet period. So far the crisis has only struck the small "Westernized" portion of the population that is connected with the banking sector and the consumer economy. There is talk of cutbacks in construction and other sectors of the real economy, but for now this more of a threat than reality.

However, there are increasing signs that the main problems for Russia lie ahead and that the efforts of the country's leaders to present Russia as an island of calm and stability have failed. Here are a few preliminary conclusions regarding the results of this global crisis for Russia:

1) Western investors began fleeing the Russian markets even before the global crisis hit. It began with the Yukos affair and continued through the pressure on BP and Mechel, and gained momentum with the war with Georgia in August. When the crisis hit the front pages, the exodus of Western investors turned into a panicked retreat. The Russian market fell by 85 percent, more than any other developing-economy stock market. From May until October, the capitalization of Gazprom fell by two-thirds, from $350 billion to less than $100 billion. The country's enormous hard-currency reserves -- the pride of the Russian government -- fell by some $81 billion between August and October and continue to fall at a rate of some 3 percent a month. Finally, because of the collapse of prices for oil, natural gas, and other commodities that Russia exports, the country is losing about $10 billion per month. Experts say that if the price of oil falls below $50 a barrel, Russia could face some serious socioeconomic problems.

2) All things considered, Russia passed thorough the first stage of the financial crisis more easily than the United States or the countries of the European Union simply because its banking sector is much smaller and only a tiny portion of the population is dependent on it. According to polls, only some 32 percent of Russians have a bank account of any sort, while the rest keep their money at home or don't have any savings to speak of. And of those who do have bank accounts, only a tiny fraction -- the rich and the very rich -- of depositors have suffered from the market collapse. For the most part, we are talking about the oligarchs, the richest 25 of which have lost an estimated $230 billion. But it seems unlikely that the 54 percent of the population earning less than $360 a month will waste much sympathy on them.

The country's financial elite -- the 153,000 people who earn more than $1 million a year (according to Quans Research) -- have also suffered, as have the estimated 1.2 million people who might be called the "mass elite" -- major business figures, bureaucrats, and the like. These people invest in real estate and play the markets and, as a result, will begin feeling the pinch, but they do not represent more than 1 percent of the working population. Average Russians have felt nothing so far and won't until the crisis moves from the financial spheres into the real economy.

3) In order to shield the banking sector and problematic sectors of the real economy from collapse, the government of Prime Minister Vladimir Putin injected huge resources from the reserve and national welfare funds, as well as from budgetary surpluses. The Audit Chamber has calculated that the total amount of support for the national banking system and selected sectors of the real economy has reached nearly $240 billion, which is approximately 74 percent of the projected revenues for the 2008 federal budget. The lion's share of these resources have been poured into fund markets and the real estate sector, enabling private commercial banks and investment companies to cover their losses with state funds. Some observers have expressed the fear that, as a result, the anticrisis assistance will not reach the real economy or small businesses and will further stimulate corruption, considering the huge sums being distributed by state functionaries.

And the situation does appear rather suspicious even in comparison with the United States, where Congress was reluctant to pass the $700 billion anticrisis plan proposed by Treasury Secretary Henry Paulson until it included protections for the interests of taxpayers. In Russia, on the other hand, the government first makes decisions completely behind closed doors and then the Duma rubberstamps the figures in the trillions of rubles without unnecessary discussion, after which the money comes under the control of bureaucrats. Anything could happen. Economist Mikhail Khazin, who is well-known for his anti-American views, nonetheless offered an ironic comparison of the U.S. and Russian anticrisis programs: "I tried to imagine what it would be like if they came to us in the Duma with a plan like Paulson's. Most likely, in the end the sum would have been increased to $1 trillion, so that the 'extra' $300 billion could be split up among the deputies and ministers and everyone would be satisfied."

4) The main problems associated with the crisis for Russia lie ahead. Most importantly, there is the burden of foreign corporate debt, which amounts to more than $500 billion. This sum equals the country's entire hard-currency reserves. Before the year is out, Russian companies must pay back nearly $50 billion to Western creditors. The government has already turned this sum over to the banks, but next year a further $100 billion or more could be required. The government will also have to dip into its reserves as world energy prices continue to fall. And, finally, the Central Bank will need hard currency to support the ruble or to prevent a sharp decline in its value. Whether the government's resources are sufficient for all these tasks if the crisis drags on remains an open question.

5) Another problem that is entwined with the crisis -- although it has been carefully concealed -- is the import of foodstuffs. Russia imports about 46 percent of its food, and Moscow and St. Petersburg import more than 75 percent. In addition, about 80 percent of the most crucial medications are imported. If the crisis leads to a rise in global prices for foodstuffs and medicines, Russia will need to dip further into its hard-currency reserves. Such a development would almost certainly lead to cutbacks in existing social programs, to say nothing of President Dmitry Medvedev's ambitious projects to develop the economy and rearm the military. Although the Kremlin maintains these programs will be funded, this is likely just bravado.

Yegor Gaidar, a former acting prime minister and the director of the Institute of Economies in Transition, has said that although Russia is better prepared for a crisis than it has been in the past, it still needs to adopt austerity measures. He called on the government to cancel all unnecessarily ambitious projects, naming particularly a proposed $4 billion loan to Iceland and plans for the construction of new aircraft carriers.

Victor Yasmann is an analyst for RFE/RL's Russian Service. The views expressed in this commentary are the author's own and do not necessarily reflect those of RFE/RL
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