Russian Economy Compared To 1998 Financial Crises
30, July 2009
By Joel Craun
On July 29th, an oped titled in the Moscow Times "No Place in BRIC for Russia's Economic Mess" was published which raked the current leadership's handling of the economy under the coals. What the author failed to mention are the specifics of the economic recovery plan and the problems faced with the rouble that have been staved off. At the beginning of the global financial crises, the rouble faced major devaluation and Medvedev enacted billions in banque bailouts to shore up the banques and prevent another crises like 1998. In that year, there was major devaluation of the rouble caused by falling energy prices and the economy collapsed. FDI dried up and so did state loans. It was not until Putin came to power that economic recovery began.
President Medvedev and Prime Minister Putin have in the 2008 crises been able to avoid this collapse by shoring up the banques and stabalising the value of the rouble. This was the first necessary step which is not much different than what was done in the US. Other facets of the economic recovery plan include one of the major industries, arms manufacture. Trillions of roubles are being allotted to the state defence order to keep this sector operational while we see falling orders in foreign exports. This sector of the economy is still posting record highs and is saved thanks to it. Major recapitalisation of production has occurred in this sector using French and South Korean technologies which are going to make arms exports competitive once again.
The author complains about failed roads but fails to look at other methods of transport which are actually more important than roads to the Russian Federation. The rail stock in the Russian Federation has increased as well as the technological quality. Billions have been spent on modernising the infrastructure and domestic railcar production using European and US (GE) equipment. Russia actually has a head start in this regard to reduce CO2 emissions by not relying on tractor trailers for freight transport. This will serve the economy well in the long term.
While there have been price freezes on goods, they are mainly on fruits and vegetables which the author fails to mention. The policy is attempting to stave off massive inflation as we saw when Yeltsin took off price controls and opened the markets; do we really want to see that again? The overall effect of the freeze has only a marginal effect on the rest of the economy. The real hindrance to economic growth that the author fails to mention is the poor policy regarding SDB, or small disadvantaged business.
Russia falls far behind the West and even China in this regard due to poor financial support and a lack of enforcement for intellectual property rights. Small business is the life blood of any capitalistic economy and supporting that can save the Russian Federation. Conferences have been held addressing this very issue, but what remains to be seen is action.
Using Gazprom's decrease in export by 35% as an example serves little purpose since they are dependent on demand. Ukraine has been stealing gas from the lines that are supposed to go to the EU making transport unreliable. The South Stream pipeline is being built to help bypass this bankrupt country that cannot afford its gas bill. Gazprom has been reducing supply to increase price which is no surprise.
Corruption has always been Russia’s biggest obstacles and the Russian MOJ has been convicting far more cases of this. While the fact that 50% of business is owned by the state makes this a mixed centralised and capitalist economy, something had to be done to carry Russia through this financial crises. Obama has done the same by buying up major US companies and bailing out banques so why the cry of foul when Russia does it too?
The Russian government knows what it must do but they face huge hurdles in this current crises and can be expected to get back on track when it has ended. Now is not the time to be playing with an economy that is teetering as it was under the Yeltsin administration. We know how that experiment with no price control and open markets turned out, utter failure.
Joel Craun is a Military and Foreign Policy Analyst, alumni of the Citadel Graduate College and senior contributor to the Russian Military Forum, RussiaDefence.Englishboard.net
He has authored the working papers "Status of the Russian Navy's Cruisers" and "Russian relations with Syria-Israel".