Tags: russia | money | crisis

Russia Struggles With Its Own Financial Demons

Wednesday, 03 Dec 2008 05:15 PM

By Dave Eberhart

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Russia is not simply watching the global economic crisis from the comfortable sidelines – it is walking its own financial tightrope with other struggling countries in both the East and West.

The Russian stock market has dropped 70 percent in recent months, and employee layoffs among key manufacturers such as the KamAZ truck manufacturer and GAZ automaker have rocked the country, according to a new Radio Free Europe/Radio Liberty report.

Furthermore, unemployment in Russia has shot to a seven-month high of 4.6 million people, or 6.1 percent of the workforce, in October. Wage arrears rose to a one-year high of $146 million.

And Russian companies will cut as many as 200,000 jobs during the next two months, according to a Radio Free report recently quoting an official of the country’s Federal Labor and Employment Service.

The big villain: plummeting oil prices that fell from $150 a barrel at mid-summer to just above $50 now.

If there is any doubt that the economic health of Russia is tied inexorably to the price of oil, the past is prologue. When oil went from about $30 a barrel in late 1985 to about $10 by the middle of 1986, it was enough to help expedite the disintegration of the Union of Soviet Socialist Republics just five years later.

Steven Pifer, a senior fellow at the Brookings Institution in Washington, D.C., said, “As long as the oil and gas money is flowing, that gives the Russian government the wherewithal to keep living standards rising.”

Pifer, a former State Department official, said, “So when the oil and gas revenues decline, that does raise questions about what the government can do.”

Meanwhile, despite the glaring reality, the Russian leadership is looking in every other direction for a scapegoat. The state-controlled media paints the growing crisis as a byproduct of financial distress in the greedy United States, the meltdown in the subprime mortgage market.

Focus is consistently drawn off the dwindling petrodollars that have served Vladimir Putin by enabling his ruling elite to literally buy the loyalty of the country’s powerful bureaucracy, keep the masses at bay with a higher standard of living, and to treat both friends and enemies abroad however it pleased.

Is there cause to believe that Russia is trembling on the brink of political upheaval and fatal disruption?

No, but the status quo can’t sustain itself forever – despite Russia’s touted security blanket of $450 billion in foreign currency reserves.

Consider, however, that the nest egg is down by 25 percent from August, when the reserves stood at about $600 billion.

“Russia seems to have the rainy day fund and the currency reserves to be able to keep going. It’s not going to crash immediately, they’ve got some time there,” Pifer said.

But How Much Time?

“The potential damage that this fall in commodity prices could inflict is very great,” said David Satter, a senior fellow at the Hudson Institute and author of “Darkness at Dawn: The Rise of the Russian Criminal State.”

Troubling cracks in the political firmament are already apparent.

  • Boris Gryzlov, head of the ruling Unified Russia party’s Supreme Council, announced on Nov. 21 that the council was axing one quarter of its staffers. And 10 percent of those working as aides for Unified Russia lawmakers in the lower house of parliament will be shown the door, according to the Radio Free report.

  • Unified Russia is now slated to create a new Anti-crisis Commission to keep tabs on how state funds are being spent in Russia’s far-flung regions. “We must place the regional authorities under strict controls so they behave properly,” the daily Gazeta quoted Gryzlov as saying.

  • On the subject of regions, Moscow Mayor Yury Luzhkov called on Nov. 19 for the direct election of regional heads, a move that would allow them more independence. In short order, Luzhkov received a strong backlash from President Dmitry Medvedev and has dropped the subject.

  • A group of private oil companies in Tatarstan is petitioning the government to temporarily exempt them from paying export duties and production taxes until crude prices climb. They are threatening to cease production if their request is tabled.

    Meanwhile, Valerie Putin is angling to return to the presidency in time to be clearly at the helm of state when the Russian recession moves from a ripple to a wave. Both houses of parliament have passed legislation extending the presidential term from four years to six. Kremlin watchers see the amendment as designed to create an excuse for new presidential elections to allow Putin a chance to make his power move.

    Perhaps his biggest challenge: When there is less money to float the country’s infamous corruption, are those people who are benefiting from the corruption going to buckle under and accept diminished payments, or are they going to start fighting among themselves and upset the machinery of state?

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