Surveys, News, Events

Russia's Weakness is a Sign of a Global Economic Slowdown



By Mark Adomanis

Russia’s currency has recently been under assault and the ruble has plunged in value against the dollar by 12% over the past month, the sharpest drop since January 2009 when the Russian economy was in free-fall and the world financial system was almost totally paralyzed. Some have interpreted the distinct souring of Russia’s economic prospects as “the market’s” belated realization that Vladimir Putin is a brutal and ineffective despot*, while others no doubt view it as a justified comeuppance for a country that has actually weathered the past few years much better than almost all of its Eastern European brethren.**

So far, the sharp ruble sell-off has had few practical effects: inflation has thankfully not spiked and there has been a general, if quite odd, sense of calm among Russians themselves. There haven’t been any bank runs nor has there been any noticeable souring of consumer confidence. Yet. Investors and government officials, though, are very badly spooked, and they have every right to be: if oil stays at its current level for the rest of 2012, much less continues to decline in price, Russia will run a sizable budget deficit and its economic growth will sharply decelerate and perhaps even turn negative. And if the oil price doesn’t kick back up over $100, the Russian central bank will be compelled to spend large amounts of money defending the ruble and preventing a rapid de-valuation. Basically you will see a reprise of what happened in 2008-09, though I would expect the Russian authorities, still shell-shocked by how rapidly the bottom fell out of their economy last time around, to act more pro-actively and decisively.


However, while Russia’s economy is undoubtedly weakening, it seems clear to me that the country’s economic difficulties are not a narrow reflection of the sins of Putinism. Rather, Russia’s economic problems are a broader reflection not only of a distinct slowdown among the usually-robust BRICs but of a much broader and more worrying global slowdown and a “flight to quality” by investors so desperate for security that they are willing to lend the German and American governments money at negative real interest rates (treasuries last week hit their lowest level ever and bunds also flirted with all-time lows).

In unsettled economic conditions such as those prevailing today what is surprising is not that Russia’s currency has weakened, but that it took so long for it to start doing so. In case you weren’t paying attention, the other BRICs have also fared extremely poorly over the past several weeks and months. As the remarkably young and prolific Evan Soltas noted a few weeks back, since the beginning of March Brazil’s stock market has declined by 25 percent, and its currency, the Real, has shed 17 percent of its value against the U.S. dollar. The Indian rupee, meanwhile, has performed even worse, recently hitting an all-time low and cumulatively falling by more than 25% since last August. The Yuan has also rapidly weakened against the US dollar over the past month, a telling sign since it is systematically undervalued by the Chinese authorities (this month’s fall was the Yuan’s biggest decline since 2005).

The ruble’s fall against the dollar has clearly been more rapid over the past month or so, but the rupee, the ruble, and the real have actually ended up in pretty similar places. Don’t just take my word for it, look at how the three currencies have performed against the dollar over the past year:

Now it would be truly shocking if, all of a sudden, “the market” realized simultaneously that China, Russia, India, and Brazil were all untrustworthy and unreliable, particularly since these countries are so diverse in their economic and political structures (the market would have to be a real dullard to confuse Brazilian with Russian political structures or Indian with Chinese economic ones). Indeed until quite recently Russia was actually performing relatively better than any of the other BRICs, and its Q1 growth significantly surprised on the upside.

I would argue that Russia’s dimming economic prospects are obviously not due to the country’s own unique flaws, since these flaws didn’t do anything to prevent growth throughout 2010, 2011, and the first past of 2012, but to rapidly worsening global prospects and the increasing likelihood of a messy Eurozone collapse. Just like in 2008-09, the Russian economy is entering the crisis both later and more rapidly than most others. This might not be a particularly unique insight, but I’m consistently surprised by the extent to which any economic problems Russia experiences are immediately laid at the feet of Putin personally (indeed, in a strange way this reinforces Putin’s fraudulent claim to be running the country on his own). Russia is more integrated into the global economy than at any time for the past 100 years, and so when the Eurozone, Russia’s largest trading partner and one of the major centers of global economic gravity, gets into a protracted funk it’s not exactly shocking that it will eventually suffer a slowdown.


Indeed while many Western commentators are chuckling at Putin’s misfortune, Russia’s sudden economic weakness ought to scare the daylights out of all of us since the country is essentially one continent-sized lagging indicator of the world economy. If Russia is in fact slipping away from growth and towards contraction, it’s a sure sign that the economic problems we thought were “contained” are in fact spreading like wildfire. In short, if Russia is really lapsing into recession, we’re doomed.

* The argument that “the market” is only now realizing the true identity of Vladimir Putin is the most damning indictment of its analytic powers that I can imagine and Marx’s indictment pales in comparison. If “the market” can only realize that Putin is an autocrat after 12 very high-profile years at the helm of the world’s largest country, we should all just embrace central planning because “the market” is basically clueless. Now it’s actually long been clear that “the market” doesn’t give a whit about a country’s level of democracy, so I’m actually not in any rush to re-launch Gosplan, but, logically speaking, if “the market” took over a decade to recognize Putin as an autocrat then it’s basically useless.

** I’m still amazed over the extent to which Russia has outperformed new EU members over the past 2-3 years. This is a truly damning indictment of the “serious” and “respected” Western institutions since Russian growth has hardly been earth-shattering ( indeed it has been distinctly mediocre)


Source: Forbes

Post-Crisis World Institute