Russia - A Wounded Economy

Russia - A wounded economy
November 22, 2014
VLADIMIR PUTIN is not short of problems,

many of his own creation. There is the carnage
in eastern Ukraine, where he is continuing to stir
things up. There are his fraught relations with
the West, with even Germany turning against
him now. There is an Islamist insurgency on his
borders and at home there is grumbling among
the growing numbers who doubt the wisdom of
his Ukraine policy. But one problem could yet
eclipse all these: Russia’s wounded economy
could fall into a crisis (see article). (VLADIMIR
PUTIN không thiếu vấn đề, nhiều vấn đề do ông
tự tạo ra. Có một cuộc tàn sát ở miền đông
Ukraine, nơi ông đang tiếp tục khuấy động mọi
thứ. Có những mối quan hệ căng thẳng của ông
với phương Tây, thậm chí cả Đức hiện đang
quay lưng lại với ông. Có một cuộc nổi dậy Hồi
giáo ở biên giới và quốc gia đang có những lời
phàn nàn trong số ngày càng tăng những người
nghi ngờ sự khôn ngoan trong chính sách
Ukraine của ông. Nhưng một vấn đề có thể làm
lu mờ tất cả những điều này: nền kinh tế đang bị
tổn thương của Nga có thể rơi vào khủng hoảng
)
Some of Russia’s ailments are well known. Its
oil-fired economy surged upward on rising
energy prices; now that oil has tumbled, from an
average of almost $110 a barrel in the first half
of the year to below $80, Russia is hurting.
More than two-thirds of exports come from
energy. The rouble has fallen by 23% in three
months. Western sanctions have also caused
pain, as bankers have applied the restrictions not
just to Mr Putin’s cronies, but to a much longer
tally of Russian businesses. More generally,
years of kleptocracy have had a corrosive effect
on the place. Much of the country’s wealth has
been divided among Mr Putin’s friends.
Everybody expects continued stagnation, but the
conventional wisdom is that Mr Putin is strong
enough to withstand this. The falling rouble has
made some export industries like farming more
competitive. These exports combined with Mr
Putin’s import-blocking counter-sanctions mean
Russia still has a small trade surplus. It has a
stash of foreign-exchange reserves, some $370
billion according to the central bank’s figures.
Add in the resilience of the Russian people, who
are also inclined to blame deprivation on
foreigners, and the view from Moscow is that
Mr Putin has time to manoeuvre. People talk
loosely about two years or so.
In fact, a crisis could happen a lot sooner.
Russia’s defences are weaker than they first
appear and they could be tested by any one of a
succession of possibilities—another dip in the
oil price, a bungled debt rescheduling by
Russian firms, further Western sanctions. When
economies are on an unsustainable course,
international finance often acts as a fast-forward
button, pushing countries over the edge more
quickly than politicians or investors expect.
Putin a good man down
The immediate worry is the oil price. Mr Putin
is confident it will recover. But supply seems set
to increase, with OPEC keen to defend its
market share. American government agencies
predict oil prices could average $83 a barrel in
2015, well below the $90 level Russia needs to
avoid recession (and to keep its budget in
balance). If global demand weakens—Japan has
slipped into recession since the latest round of
forecasts—the oil price could fall further. That
would immediately prompt investors to reassess
Russia’s prospects.
Then there are the debt repayments. Russia’s
firms have over $500 billion in external debt
outstanding, with $130 billion of it payable
before the end of 2015, at a time when few
Western banks want to increase their exposure
to Russia. Even firms that earn dollar revenues
may struggle to pay their debts. Rosneft, an oil
giant, recently asked the Kremlin to lend it $44
billion. Mr Putin has so far resisted, but he
cannot let a company that is 70% state-owned
and employs 160,000 people fail. There is a
lengthening queue of troubled Russian firms.
Non-performing loans were rising even before
interest rates were raised to 9.5% to defend the
rouble. Meanwhile Russian banks are reliant on
the central bank to replace deposits that their
customers are understandably spiriting into
dollars.
Directly or indirectly, many of these bills will
end up with the Kremlin, which is why its
reserves will be vital. They are evaporating:
down $100 billion in the past year, following
failed attempts to defend the rouble. And the
book-keeping is dodgy. Of the reported $370
billion reserve pile, more than $170 billion sits
in the country’s two wealth funds. Some of their
assets are iffy, including various stakes in
Russia’s state-owned banks and debt issued by
Ukraine that Mr Putin’s own aggression is fast
rendering worthless. One of the funds is
earmarked for pensions. In reality, Russia’s
government has perhaps $270 billion of hard
cash that is accessible and usable without
massive cuts elsewhere—less than its external
obligations due over the next two years (see
article).
All this spells trouble for Russia, but Mr Putin’s
marauding foreign policy could accelerate
things. This after all is a man who has invaded
other countries and lied about it. A deeper foray
into Ukraine would lead to stronger sanctions by
Western countries. Some of them, such as
barring Russia’s banks from the SWIFT
international payments system (see article),
could halt Russian trade altogether. A partial
block on oil exports would fell the economy, as
it did Iran’s. And the more trouble he faces, the
more likely Mr Putin is to play the nationalist
card—and that means more foreign forays, and
yet more sanctions.
From Russia to Rio, without much love
Russia’s biggest recent economic crisis, in 1998,
led to a government default. This time a string
of bank failures, corporate defaults and a deep
recession look likelier. Even so the pain from
these could spread abroad quickly, both to
countries that rely on Russian trade (exports to
Russia account for fully 5% of GDP in the
Baltics and Belarus) and through financial ripple
effects. Banks in both Austria and Sweden are
exposed. And if firms in one badly run
commodity-driven country start to default on
their dollar debts, then investors will worry
about others—such as Brazil.
If Russia’s economy looks likely to collapse,
there will be inevitable calls in the West for
sanctions to be cut back. This week Mr Putin
pointed out that 300,000 German jobs depend
on trade with his country. But Angela Merkel
rightly stood firm. Actions, Mr Putin must
finally learn, have consequences. Invade another
country, and the world will act against you. And
the same goes for the economy, too. Had Mr
Putin spent more of his time strengthening
Russia’s economy than enriching his friends, he
would not find himself so vulnerable now.
This article appeared in the Leaders section of
the print edition under the headline "A wounded
economy"
https://outline.com/KRZvhh

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Russia - A wounded economy

November 22, 2014

VLADIMIR PUTIN is not short of problems,

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