Daring to Hope Russia Is Embracing Reality
by Anders Aslund, Peterson Institute for International Economics
Op-ed in the Moscow Times
March 25, 2009
© Moscow Times
Last summer and fall, the Russian government denied the economic crisis and refused to do anything about it. The budget revision and anticrisis plan presented on March 19, however, suggest that the government is now facing reality.
Until last November, the government's "anticrisis" policy could be summarized as the denial of falling oil prices, insistence on a fixed exchange rate, and renationalization. This policy took its clearest expression in the budget for 2009 that was adopted in November.
That budget made five extraordinary assumptions, all of which have now been radically revised. It presumed that gross domestic product would grow by 6 percent in 2009 (now revised to negative 2.2 percent), that the budget surplus would be 3.7 percent of GDP (now a deficit of 7.4 percent of GDP), an average oil price of $95 per barrel (revised to $41 per barrel), an exchange rate of 24.7 rubles per dollar (now 33 rubles), and inflation at 8.5 percent (now 13 percent). It has taken some time, but once again Russia's macroeconomic policy is based on realistic assumptions.
The central drama behind this revision has been the exchange rate policy. Until late November, the Kremlin insisted on fixing the exchange rate to a basket of dollars and euros. Then Russia started a very gradual devaluation that continued for two months. As a consequence, Russia's international reserves plummeted from $598 billion in early August to $386 billion at the end of January. Russia wasted $212 billion, or more than one-third, of its reserves for no good reason. In addition liquidity dried up as everybody exchanged rubles for foreign currency.
Presumably the devaluation was sufficient. The Central Bank has introduced a broad band for the exchange rate, which has held up without intervention. An advantage of the loss of reserves is that the Kremlin is facing a hard budget constraint. It can no longer throw money at problems, because money has become scarce.
A key reason why the exchange rate has stabilized in the last two months is that the oil price seems to have bottomed out at around $35 per barrel in January and has now recovered to more than $50 per barrel. Once again the very loose monetary policy of the US Federal Reserve is boosting commodity prices because the world fears inflation.
The Russian economy performs like an average economy in the world, neither better nor worse. Its peculiarity is its extreme dependence on oil and gas prices, which renders it more volatile. A realistic assumption is that Russia's exports may fall by as much as 45 percent, but even so the country would be able to maintain a current account and trade surplus.
It is still very uncertain how much Russia's GDP will change this year, but after a decline in January of 8.8 percent a fall is inevitable. JPMorgan, with my favorite forecaster Michael Marrese, says negative 3.5 percent, and January appears to have been a uniquely poor month. Given the devaluation of 36 percent already, this means that Russia's GDP in dollar terms—what really matters to exporters and foreign investors—will fall by at least one-third, from $1.67 trillion to $1.12 trillion, according to JPMorgan.
After nine years of budget surpluses, the Russian government could and should stimulate domestic demand, as it is doing. Considering a US budget deficit of 13 percent of GDP forecasted for this year, a deficit of 7.4 percent of GDP appears a reasonable stimulus, even if all budget deficits tend to become larger than expected these terrible days. Presumably two-thirds of the stabilization fund, which reached $137 billion at the end of last year, will be needed to finance this budget deficit, but this is what it was designed for.
A more remarkable change than the new budget realism is the apparent abandonment of nationalization policies. In the fall VEB was given $50 billion to bail out private Russian companies from foreign loans, presumably to the benefit of the state. But now that facility has been withdrawn after only $11 billion were used. Last summer Mechel and Uralkali seemed to have been selected by the Kremlin for Yukos-style expropriation, but they are still holding on, and the threat appears to have faded. Admittedly, the mobile phone shop chain Yevroset was taken over in corporate raiding, and its former owner had to flee the country.
Most promising have been statements by First Deputy Prime Minister Igor Shuvalov and Finance Minister Alexei Kudrin that the state will not bail out RusAl and that only truly strategic, primarily military, enterprises will be seized by the state if they fail to service foreign loans. Dare we hope that the nationalization wave is over for now? The risk persists as state financing is being channeled through state banks.
Still, the government has agreed to take on huge responsibility for the obsolete Soviet carmakers AvtoVAZ and GAZ. Suddenly Gazprom looks like a company in crisis, with a decline in its exports of no less than 42 percent during the first two and a half months of this year. Who wants to buy from a company that cuts deliveries for two weeks and charges exorbitant prices? It is unlikely that these and other state mastodons can be restructured without new privatization.
The seven anticrisis priorities that were presented on March 19 said less than the budget, but they also marked a renewed turn toward private enterprise. Most substantial was the renewed call for new deregulation of small enterprises. The broader issue is, of course, combating corruption, which President Dmitry Medvedev has made his signature issue but about which he has so far done nothing. The most effective means of fighting corruption is a free media, but security forces are chasing good foreign correspondents out of the country through crude harassment.
An even greater issue is to fight what Medvedev himself has labeled "legal nihilism." Right now, the prime example of Kremlin legal nihilism is the new trial of Mikhail Khodorkovsky. It looks like a conspiracy by the Vladimir Putin hardliners against Medvedev that the trial is to begin March 31, two days before Medvedev's first meeting with US President Barack Obama in London. Obama cannot possibly avoid raising the Khodorkovsky case.
Medvedev has now been president for one year. After one year as Soviet leader, Mikhail Gorbachev released Andrei Sakharov from his exile in Gorky, showing his commitment to greater freedom. Sakharov was the most famous political prisoner in the Soviet Union, exactly as Khodorkovsky is in Russia today.
In Russia symbolic gestures matter more than laws. It is time for Medvedev to reveal what he actually stands for.