Tuesday, January 12, 2010

Outlook on Russia

Russia survived the crises of 2008-09; how it is set to cope with the next set of challenges on the horizon? I address that in a post for Tatiana Serafin's Global Market and Ideas blog. The Kremlin is not out of the woods yet.

"In 2010, Russia is picking up the pieces after the train wrecks that derailed its express return to great power status—the near-collapse of its stock market, the aftereffects of the Georgia war, and the global financial crisis. The good news—for the Kremlin—is that despite major falls in the prices for energy and raw materials from their 2008 highs, the system set up by Vladimir Putin survived. It did not come crashing down as some had predicted."

Yes, I recall many commentators, pundits, and analysts at RFE/RL/VoA/Washington Post/etc. discussing that prospect with glee a year or so ago. I was stunned that so many were hoping for millions of Russians to once again be rendered destitute, in the hopes that they could then watch the Russian people turn on Putin and all his works, and open Russia once again to being looted by the Western financial system. Our Punditocracy really are a vicious lot, and they richly deserve the frustration and disappointment they must now feel.

"Unrest was contained and companies teetering on the verge of bankruptcy got bailouts that prevented their Russian owners (or the state) from losing control to Western banks. "

And it was done very well, IMO.

"The bad news: the rainy-day stabilization fund is set to run out of money by the end of the year, and the fund supporting an ambitious array of national projects will see the till run dry
by 2012."

True, at Kudrin's very conservative estimate of world oil prices of less than $60/bbl for 2010. It is significantly higher than that, and has been for several months. Unless the global economy tanks again, which I certainly don't rule out, Russia's 2010 budget deficit will be far smaller than Kudrin projected, so Russia's reserve funds will very likely hold up nicely.

"So Russia is running against the clock. It needs to rebuild its budget reserves to pay salaries and pensions so that much of the middle class which depends on the state for its employment stays supportive of the regime. It must get its new ambitious energy projects into place—especially the Nordstream and South Stream pipelines that promise a direct avenue to Russia’s most important European customers—before alternatives that would erode Russia’s advantages can be solidified (e.g. a Nabucco pipeline that takes in energy from Central Asia and Iraqi Kurdistan)."

Is that all the Kremlin has to worry about?? No sweat then. Nabucco has neither gas nor financing, and no real prospect of getting either.

"It must work to solidify its growing sphere of influence in the Eurasian space before Europe recovers from its expansion fatigue and resumes the eastward march of the Euro-Atlantic world. Most importantly, it must keep maintain the “Putin bargain” in place: giving the Kremlin effective control over the political process in return for prosperity and opportunity. With a weak banking sector and major infrastructure challenges posing two key threats to that bargain, and without record-high energy prices bringing in “excess” income—this will be a hard challenge to meet."

Record high energy prices not really required. Oil north of $60/bbl. will do nicely.

The risk is that the global economy tanks again, and even then, Russia maintained a current account surplus through the very worst of 2008-2009 and Russia still has 450 gigabucks stashed away in Euro and Dollar securities.
Nicholas Gvosdev,

What makes you assume that 'Europe will recover from its expansion fatigue'?
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