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No, Obama, Russia’s economy isn’t in tatters

by

Bloomberg

Western politicians and pundits should be more careful with their predictions for the Russian economy: Reports of its demise may prove to be premature.

Bashing the Russian economy has lately become a popular pastime. In his state of the nation address last month, U.S. President Barack Obama said it was “in tatters.” And last week, Anders Aslund of the Peterson Institute for International Economics published an article predicting a 10 percent drop in gross domestic product this year — more or less in line with the apocalyptic predictions that prevailed when the oil price reached its nadir late last year and the ruble was in free fall.

Aslund’s forecast focuses on Russia’s shrinking currency reserves, some of which have been earmarked for supporting government spending in difficult times. At $364.6 billion, they are down 26 percent from a year ago and $21.6 billion from the beginning of this year. Aslund expects $166 billion to be spent on infrastructure investments and bailing out companies, and another $100 billion to exit via capital flight and other currency outflows. As a result, given foreign debts of almost $600 billion, “Russia’s reserve situation is approaching a critical limit,” he says.

What this argument ignores is that Russia’s foreign debts are declining along with its reserves — that’s what happens when the money is used to pay down state companies’ obligations.

Last year, for example, the combined foreign liabilities of the Russian government and companies dropped by $129.4 billion, compared with a $124.3 billion decline in foreign reserves.

Beyond that, a large portion of Russian companies’ remaining foreign debt is really part of a tax-evasion scheme: By lending themselves money from abroad, the companies transfer profits to lower-tax jurisdictions. Such loans can easily be extended if sanctions prevent the Russian side from paying.

The declining price of oil is also less of a threat than many have warned. True, the Russian government’s revenues from energy exports will fall in dollar terms. But because Russia’s central bank has allowed the ruble’s value against the dollar to decline, the ruble value of the revenues will be higher than they otherwise would be. As a result, Russia no longer needs $100 oil to balance its budget — and the effect of lower oil prices on the broader economy will be muted.

Economists at the respected Gaidar Institute, for example, expect the floating of the ruble to roughly halve the negative GDP impact of the decline in oil prices. They estimate that Russian GDP will shrink by a moderate 2.7 percent this year, even if Brent oil trades at $40 (it traded last week at $61). That’s just a bit more optimistic than the consensus among 39 economists polled by Bloomberg between Feb. 20 and Feb. 25: On average, they see a decline of 4 percent.

Economic sanctions, which most forecasts assume will continue this year, are having less impact that many in the West would like to believe. Sergei Tsukhlo of the Gaidar Institute estimates that the sanctions have affected only 6 percent of Russian enterprises. “Their effect remains quite insignificant despite all that’s being said about them,” he wrote, noting that trade disruptions with Ukraine have been more important.

Granted, there’s no avoiding a significant drop in Russians’ living standards because of accelerating inflation. The economics ministry in Moscow predicts real wages will fall by 9 percent this year — which, Aslund wrote, means that “for the first time after 15 years in power,” Russian President Vladimir Putin “will have to face a majority of the Russian people experiencing a sharply declining standard of living.”

So far, though, Russians have taken the initial shock of devaluation and accompanying inflation largely in stride.

The latest poll from the independent Levada Center, conducted between Feb. 20 and Feb. 23, actually shows an uptick in Putin’s approval rating — to 86 percent from 85 percent in January.

It’s time to bury the expectation that Russia’s economy will fall apart under pressure from falling oil prices and sanctions, and that Russians, angered by a drop in their living standards, will rise up and sweep Putin out of office.

Western powers face a tough choice: Settle for a lengthy siege and ratchet up the sanctions despite the progress in Ukraine, or start looking for ways to restart dialogue with Russia, a country that just won’t go away.

Based in Berlin, writer Leonid Bershidsky is a Bloomberg View contributor and the author of three novels and two nonfiction books. He was the founding editor of Russia’s top business daily, Vedomosti.

  • Incurablewound

    Putin owns barry!

    • adolph putler

      your anus is owned by rover

    • adolph putler

      mh17

    • adamsmo05

      Putin is a midget, he couldn’t own anybody.

  • Canberra_Alex

    Unfortunately, over the last 50 years US has forgotten how to deal with the countries that won’t do as they were told. Putin is right, US does not want allies, it just wants vassals… like Japan/Britain/Australia.

    • valakos

      the US likes whipping boys

      • adolph putler

        MH 17

    • adamsmo05

      how are they vassals? They actually determine their own affairs, unlike Russia’s puppets.

    • tempf451

      ya well listen to that sound ..its is the sound of the ruble falling

  • Bob

    Balanced report.

    • tempf451

      like a 3 leg table

  • nick kelly

    This guy is nuts. He quotes RUSSIAN statistics saying that real wages will fall by NINE percent. and then says that reports of the economy’s decline are exaggerated. Holy Keerist- what would qualify as a big deal for this guy??
    Can you even vaguely imagine a similar stat for the US, UK, France, or really anywhere in the developed world, that would not be considered a catastrophe? In fact I’m pretty sure this exceeds the velocity of the US downturn in the Depression.
    This guy is contradicted by major Russian sources including a former minister of finance ( alive at time of writing) who says the situation is dire.
    This ‘but the local economy is priced in roubles’ so everything is the same belies the fact that almost nothing Russians want to buy is made in Russia.
    Every day a company closes its doors because it can’t buy in dollars or euros and sell in roubles.
    Incredibly this also includes a large variety of oil and gas field equipment- the country is not self-sufficient in its only enterprise. The industry has huge bills coming due that are dollar and euro denominated, meaning they have doubled in four months.
    So who is right? The test of a theory is its power to predict. I, Nicholas Kelly predict currency controls as an increasingly desperate government clings to its last reserves of hard currency, a last resort.
    But isn’t that an embarrassing display of weakness? Well, yes but when you are weak, these things take on a new light. Let’s see..apart from mismanagement, what could explain the need for currency controls?
    A deus ex machina! Force Majeur! A state of economic war! The evil empire made me do it!
    We’ll see.

    • nick kelly

      Too funny- see today’s headline column in The Moscow Times ” Russian Economy was Doomed Before Ukraine”
      The author makes a bunch of recommendations that could be summed as ‘dump putin et al while you still can’

      • HymN

        ‘Moscow Times’ is a Finnish owned newspaper.
        80% of their articles are pretty much a copy and paste of CNN or FOX.

      • nick kelly

        Ya with the guys name being Anglo I didn’t think he was Russian. But in the end a thing is what it is. Your currency doesn’t fall by 50 % because Fox doesn’t like you, not do Russians move a hundred billion out because of CNN

  • adolph putler

    If any other g7 country was experiencing russian style inflation, loss of currency value, . capital flight it would be called tatters or worse. Russia is a mess. Kleptocracy, chronic mismanagement, depeendence on a single resource for revenue. The RT clowns posting have no answers.

  • adolph putler

    Any other top 10 economy that was dealing with wild inflation, rampant kleptocracy, chronic mismanagement, currency devaluation, capital flight, sanctions and nationalization of private industry would be called tatters or worse.

    Author is an RT joker.

    • HymN

      And you are an inbred troll.

      • adolph putler

        your post is a toxic discharge. go now cretin.

  • nick kelly

    In August 1998 the ruble was 6.19 to the dollar, so you are off by 700+ percent. The good news- you will soon get a chance to spend rubles that are worth 2 cents not 15 cents.

  • tempf451

    this is a joke story right?

  • A Dalengo

    Alright – I hope you guys writing anti-Russian comments are selling Russian equities. Since you mostly live on foodstamps, let’s hope more big players would dump the shares — I am buying, and I want them cheap.