The statements made by political leaders as Obama and McCain imply that this is how the circle of experts and advisers surrounding them see the world. It is a serious problem when powerful policy makers base their decisions on sloppy or erroneous analysis, confusing what they want to believe with reality. I am not an expert on Russia at all, but the statements are so obviously detached from reality, that I decided at least to take a look at what more knowledgeable people on Russia are saying about it.
“The economy in tatters”
When Obama in 2015 described the Russian economy as “in tatters”, he attributed this to the sanctions following the annexation of Crimea. The Russian economy has effectively been through a recession in 2015-2016, but this is mainly due to the fall in oil prices. The recession is hardly a disaster: according to the World Bank the Russian GDP declined with 2.8% in 2015 and 0.2% in 2016 – the World Bank expected the growth to be 1.3% in 2017, but according to the latest data from the Russian Central Bank, it is more likely that it will be around 2%. The purported Swedish Russia expert Anders Aslund, predicted “an abrupt fall of 10 percent” for 2015. Well, he – as many others – was wrong.
As the main Russian export is oil and gas, the effect of the falling oil price was that the Russian currency, the ruble, came under pressure. At first, the Central Bank tried to maintain the value of the ruble, using its foreign exchange reserves to buy up rubles. This turned out to be a hopeless strategy, wasting precious foreign exchange reserves, so the Central Bank decided in November 2014 to bring forward the planned free float of the ruble. As a result, the ruble, which at that moment was no doubt overvalued, lost dramatically in value, dropping from 44 to 61 rubles to the US dollar. After wild swings, that is where it presently has settled, varying between 58 and 63 rubles to the USD. This devaluation has no doubt been beneficial for the Russian economy, as the domestic productive sectors are now much more competitive.
The cost was, as expected, increased inflation. The inflation surpassed at some moment 10%, but is now back below 4%, the Central Bank target for 2017 (it was 3.4% in August 2017). As an effect of the inflation, real incomes were eroded – according to the Russian statistical bureau, real incomes fell with around 10% from 2014 to 2016. The poverty rate increased from 11% in 2012 to 13.5% in 2016. Real wages are now increasing – in July they were up with 4.6% compared to the year before, and according to the World Bank the poverty rate is expected to fall to 13% this year and 12% in 2019. Inequality in Russia is rampant – Russia is, together with the US, among the most unequal developed countries in the world. According to a recent study by the French Economist Piketty and his colleagues, the Soviet Union was a very egalitarian country, but inequality soared after the collapse of the Soviet Union, reaching levels even higher than the US. Since around 2010 is has fallen a bit and is now at the same level as the US (the blue line in the figure below is Russia, the green is the US – the red is France).
“Russia will default on its debt”
As the sanctions put into place to punish Russia for the annexation of Crimea included cutting off the access of Russia to the international financial markets, there were in 2014-2015 many predictions that Russia would default on its foreign debt. This has always appeared to me as ridiculous, as Russia has had a very cautious economic policy during the oil price boom years, accumulating foreign reserves and keeping the public sector debt low. And of course, it has turned out not to be a major problem. This does not mean that the limited access to international capital markets doesn’t hurt – but debt default was never in the cards. Pure wishful thinking – or inept economic journalism. Or both. Strangely, even an otherwise clever analyst as Paul Krugman, while recognizing his limited knowledge on Russia, thought that it would slide into a debt crisis.
What I think the Russian Government could be criticized for, is the extremely conservative way of handling the crisis. A recession, even if it was relatively mild, was not necessary from an economic point of view, and it has had high costs for the poorer sections of the population. The impact of the fall in oil prices could have been countered by an expansive fiscal policy, as other oil- and natural resources-dependent countries as Australia, Canada and Norway have done. However, taking into account the tense international political situation, this cautious economic policy is at least understandable, as an increasing debt would have made the country increasingly vulnerable to outside pressure.
The predictions were dire: “Russia is burning through its dollar stockpile” was a common description of the situation. As it can be seen from the below figure, Russia’s reserves of foreign exchange have increased since the floating of the ruble, and was in mid 2017 around 420 billion USD. The total foreign debt is around 530 billion, of which most is private debt. The public debt is negligible: total public debt is less than 15% of GDP, and foreign public debt is around 4%. As a result of the conservative management of the crisis, Russia has continued to post surplus on its balance of payment, despite the halving of the oil price.
Se don’t expect Russia to fold in the near future. Sorry.
In a second article, we shall take a look at the longer term challenges for Russia. They are considerable.
To read the second article, click here: The dying bear.