Web guide to international relations, Russian economy, weakening ruble

Russia Joins the World Economic Slump

October 21, 2008 03:15 PM
by Anne Szustek
Despite the bullish outlook propagated by the Kremlin, a weakening ruble, tumbling stock market and sluggish oil prices reveal a downtrodden Russian economy.

The Great Bear’s Economy is Bearish

This spring, Russia seemed to be hitting its economic stride. High oil and gas prices kept government reserve funds—the third-largest in the world—flush with cash. The ruble was doing so well against the U.S. dollar that the Kremlin was considering making the local currency a regional reserve currency, putting it in a class closer to hard currencies such as the dollar and the euro.

According to the Associated Press, the Kremlin’s “official line” is that the “Russian economy remains healthy, vibrant and largely insulated from the impact of any global recession.”

Russia’s numbers, however, tell a different story. Since May, Russia’s stock markets have lost some 60 percent in value. On Oct. 15, the Kremlin suspended trading on the RTS and MICEX markets in light of massive losses. Russian national banking council member Pavel Medvedev was quoted by McClatchy newspapers as saying that, “Many banks lost their capital on the market. The government and the central bank were afraid of panic and … tried to find buyers.”

A day earlier, Russian market regulatory authorities instituted a rule that market trading be suspended for one hour if the technical indexes on the MICEX or RTS go up by more than 10 percent or drop by more than 5 percent. Should either market rise by more than 20 percent or fall by 10 percent, markets are to be closed until the end of the next day of trading.

Non-governmental market consultancy MSCI Barra created the MSCI Russia ADR/GDR Index to measure the performance of Russian stocks traded abroad on days that Moscow trading is halted.

The Kremlin has tapped into the country’s monetary reserves to dole out more than $200 billion to help sustain domestic stock markets and banks.

And the Russian ruble has lost some 10 to 12 percent in value against the dollar since Aug. 7, the first day of the country’s five-day war with Georgia. Anton Struchenevsky, an economist at Russian investment bank Troika Dialog, told the Associated Press on Monday that the country’s Central Bank has allocated $20 billion in less than two months to buy rubles in order to shore up the currency’s exchange rate. Despite the fact that Russia has more than half a trillion dollars in foreign exchange reserves, Struchenevsky told the Associated Press that the constant spending of these reserves “cannot last forever.”

Without the intervention of the Russian Central Bank to keep the ruble afloat, the currency could drop too quickly and spark alarm among the country’s consumers. “There is a nervous mood in the air, but if the ruble loses state support, there will be panic,” Nataliya Orlova, chief economist at Russia’s Alfa Bank, told the AP. “People would be withdrawing rubles from their deposits and converting them into dollars.”

Among the hardest-hit are Russia’s moguls who have colored gossip pages at home and financial pages abroad. The total wealth of the top 25 members of the Forbes Russia list has dropped nearly $240 billion over the past five months, prompting job losses and pay cuts among their employees and dropped projects.

Background: Oil prices and international sovereign debt

Russia isn’t the only country to suffer an economic slump from heavy reliance on oil wealth. Iran and Venezuela’s dreams of establishing themselves as regional powers with an open checkbook stand to take a hit. “As revenue went up, government spending went up and expectations of a continuing windfall led to greater and greater ambitions,” Daniel Yergin, chair of consulting firm Cambridge Energy Research Associates, told The New York Times. “Now they are finding how integrated they are into this globalized world.”

The fast drop in oil prices is also hitting the sovereign funds of the hydrocarbon-rich Persian Gulf states, such as the United Arab Emirates and Saudi Arabia. Plus real estate-heavy Dubai, one of the UAE’s constituent emirates, is suffering from a tightening credit market. Cash-strapped Pakistan hopes to get $2 billion in loans promised by Gulf states while at a forum in Abu Dhabi next month.

Oil price concerns notwithstanding, Russia is glowing with national pride in how fellow non-NATO European upstart Iceland is seeking a €4 billion (about $5.7 billion) loan from Russia to shore up its reserves and help bolster the Icelandic krona, which has dropped more than 46 percent versus the euro since July 2007.

The loan is not yet a done deal. The possibility that it could go through has leveraged Russia “an opportunity to further demonstrate that indeed there is a new world order, and it's not the one George H.W. Bush foresaw in 1990,” reports BusinessWeek, as well as a chance to up its standing on the diplomatic front after this summer’s Russia-Georgia military standoff.

Reference: Web guide to international relations

Related Topic: Iceland teeters on bankruptcy


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