Russia's Economic Crisis: How Deep? How Wide? How Lethal?
About This Event

While economies all over the globe are facing tough times, Russia's symptoms appear to be particularly acute. The current financial crisis closed the Russian stock exchange on multiple occasions, and Russia's stock market plummeted to one-third of its value in June. The price of oil, Russia's prime export commodity and Listen to Audio

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the primary source of state revenue, is down almost two-thirds. Inflation hit nearly 12 percent in October and may reach as much as 15 percent for the year, as the ruble has declined by 14 percent against the dollar since July. Following the August conflict with Georgia, Russia saw the withdrawal of nearly $25 billion worth of foreign investment, and the World Bank estimates that the total net capital flight will reach $50 billion this year. The real estate "bubble" that made Moscow the world's most expensive city is beginning to burst. Foreign exchange reserves are down by almost 10 percent and continue to melt as the government tries to bail out major companies, inject liquidity in the banking system, and support the ruble. At an estimated 13 percent of the country's GDP, the bailout is the largest among the G8 members. Though the Kremlin continues to assure Russians that their economy is strong, the evidence points to a systemic crisis. As in 1998, people are beginning to change money into dollars, and whispers of "default" are growing louder in Moscow.

Are the fears of an economic calamity founded? What structural deficiencies are at the root of Russia's current predicament? Has Russia's recent growth and prosperity been too narrowly based--stemming not from modernization but from high commodity prices? How deep is the current crisis--and how severe might the political repercussions be in a country whose population has enjoyed an 8-10 percent income growth in the past nine years? At this AEI event, a group of leading experts on the Russian economy will discuss these and other questions.

1:45 p.m.
Anders Åslund, Peterson Institute
Padma Desai, Columbia University
Jonathan Schiffer, Moody’s Investors Service

Leon Aron, AEI

Event Summary

Russia's Troubles in Global Downturn

WASHINGTON, JANUARY 8, 2009--As the world faces a global financial crisis and falling oil prices, Russia's economic troubles are especially serious, leading economic experts at a December 9 AEI conference to debate whether Russia's economy can recover.

Anders Åslund of the Peterson Institute for International Economics identified ten reasons that Russia's economy is "likely to fall into a big hole":

  • Minimal domestic financial intermediation
  • State-owned corporations
  • The nationalistic energy project
  • Money siphoning
  • Lack of transparency
  • The high leveraging of Russian businessmen and their corporations
  • The Kremlin's denial of economic troubles
  • Moscow's refusal to cooperate with other countries in resolving the financial crisis
  • The pegged exchange rate
  • The fall in commodity prices

According to Åslund, Russia's current situation is the natural result of "Putinism." Vladimir Putin exploited the fruit of Boris Yeltsin's reforms in the 1990s and the high oil prices of the late 2000s to create the image of economic prosperity, but "it turns out that his house is a house of cards, and we are just waiting for it to fall." Russia needs credible change--which requires getting rid of Putin--but since that is unlikely, the only problem Åslund cited that can feasibly be improved is the exchange rate: Russia needs to float the ruble.

Padma Desai of Columbia University identified the symptoms of the Russian economic crisis:

  • Over-leveraged oligarchs
  • The plunging stock market
  • Capital flight
  • The declining ruble
  • Increased inflation (verging on 14 percent)
  • A negative real interest rate.

The first two have forced the Russian government to pour $200 billion into a bailout involving outright stock purchases and bank capitalization. Serious capital flight, especially after the Georgia war, has caused the ruble to decline and foreign reserves to fall from $600 billion to $435 billion by mid-November 2008. The sharp devaluation of the ruble has caused a spike in inflation, along with fears of bank runs, while the negative real interest rate will force policymakers to balance between managing inflation and pumping liquidity into the economy. "This is the crucial problem for the Russian Central Bank and for the Russian finance ministry," Desai concluded.

AEI's Nicholas Eberstadt spoke about the demographic and human capital catastrophe that Russia is currently facing. Russia has had excess mortality (that is, when deaths exceed births) since 1992, and the overall population has dropped by 7 million since then. Eberstadt found that Russia proves "that it is possible for an industrialized, urbanized, literate society during peacetime to suffer forty years of health stagnation and reversal in the modern era--because they've done it." Cardiovascular disease and external causes, such as suicides, accidents, and violent deaths, are the main causes of the lowered life expectancies and increased deaths in Russia. The majority of these deaths take place within the normal economically active age ranges. Eberstadt pointed out that this drastically reduces the human capital so necessary for Russia's economy. "It's kind of hard to expect an Irish level of productivity on a Bengali schedule of survival," he said.

Moody's Investors Service vice president Jonathan Schiffer presented a more optimistic outlook on Russia's economy. While agreeing with the panelists about the symptoms of the crisis, Schiffer pointed out that much of the Russian economy depends on oil prices. Although they are currently low (one-third of their price at the beginning of the summer), in a three- to five-year projection, oil prices can be expected to rise again. Russia has enough funds left in its reserves to get through a year or two of low prices. The government has a low external debt, little domestic debt, and, even when quasi-state debt is accounted for (including state corporations), it is still well below the reserves. Schiffer identified the fragility of currency and of trust in the banking system as serious concerns for the Russian government that will impact the economic situation. He concluded that "things are not hunky-dory in Russia at the moment . . . but just as it was not appropriate to be too happy about them a year ago, I don’t think we should go too far in the other direction" now.


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