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Exposing Russia’s Economic Fragility

A couple interesting pieces out there today on the Russian market jitters and what the falling price of oil is exposing. First, from CFR.org:

In fact, the 2008 crisis bears several similarities to the economic breakdown that unfolded almost exactly one decade prior. The first and most obvious is the rapidly plummeting price of oil, the commodity on which Russia’s economy floats. While oil prices currently remain well above the lows of a decade ago, current prices have lost significant ground since their July peak of over $147 a barrel, hitting a low in early September of just over $90 (CNN). This sharp volatility proved unnerving for Russia, which produces more oil than any country other than Saudi Arabia. Moscow also relies on exports of natural gas and other commodities, the prices of which have also plummeted from summer highs. Additionally, analysts say the short-term outlook for commodity prices is anything but certain. Major producers worry that failing financial institutions, which had speculated heavily in crude and pushed up prices, could now be forced to rapidly unwind those positions, potentially leading to further price declines. Anders Aslund, a fellow at the Peterson Institute for International Economics, wrote in the Moscow Times that this phenomenon could stretch beyond oil and lead to broader withdrawals of investments in Russian markets.

And from the Financial Times:

The fall in the oil price from a July high of $147 a barrel back to $100 has helped expose a fragility in heavily indebted Russian companies, banks and individuals leading to a sudden process of deleveraging and credit restrictions similar to that which has stalked US and European economies for the past year.

For the country, which steadily earned its tiger status on the back of a remarkable story of rising fortunes since its 1998 default and economic collapse, the past two months have come as quite a shock.It started when Vladimir Putin, the prime minister and former president, publicly threatened to “purge” one of Russia’s billionaire businessmen, owner of the New York-listed coal miner Mechel, for alleged price gouging. His comments wiped almost $60bn off the Russian stock market at the end of July and reminded investors around the world that power – as opposed to the rule of law – is a dominant force in the country. (…)The rise in inflation is more worrying as real wages have also risen 16 per cent in the past year – far faster than underlying productivity increases as demand has outstripped the capacity of the domestic economy to supply goods and services.Neil Shearing and Mark Williams of Capital Economics, a London-based consultancy, argue: “The problem facing the Russian authorities is that the spare capacity that made rapid growth possible in the early part of this decade has now largely been used up.” (…)The future for Russia is increasingly uncertain and getting ever bleaker. Before the summer, the outlook was bright, buoyed by ever-rising energy prices that gave little incentive for anyone to diversify the core of Russia’s economy from hydrocarbons, particularly as it was supplying the government with billions of dollars to exert its influence on its neighbours.It now appears risky to bet on a continuation of that. Falling energy prices and a loss of investor confidence require a decisive shift to a more sustainable, diversified and durable growth. The big test of the authorities is whether they are ready to flex muscles in a way that encourages foreign investors or again merely instills greater fear.