Russia’s Economic Rumor Mill

I can’t confirm all of these rumors as fact at this point, but well informed friends from Moscow have been calling me all morning with news that major announcements by Russia’s financial authorities will be made early this week in attempt to staunch what has been up until now an under-reported level of capital flight moving out of Russia. These announcements, my sources tell me, may involve restrictions on money movements and possible ruble intervention. The changes are said to mirror the fairly draconian measures which have already been implemented by Ukrainian financial authorities over the past week such as bans on withdrawals, controls over lending, and talk of bank nationalizations. We have known for some time that the use of the word “crisis” has become completely taboo in the state media. Despite reports we have published from Grigory Pasko about difficulties withdrawing cash from ATMs in Moscow, as well as other anecdotal evidence from Russians I work in with on Moscow that cash is frequently scarce at various bank machines, the official line has been to deny, deny, and deny. On Sept. 15, President Dmitry Medvedev confidently declared “Despite all the global economic problems there are today, the situation in our economy is on the whole completely stable. We definitely have no crisis or pre-crisis situation.”

The Associated Press reports that a pervasive sense of surreality has hit Russia, as the state television reports nothing about the economic crisis while supermarket shelves are starting to go empty, while the oligarchs fall, and in the wake of a 71% drop in the RTS index from May. The Central Bank has spent more than $4 billion in an attempt to prop up the ruble, while Medevedev is urging cabinet ministers to “restore trust” between creditors and debtors.Although relatively free from the trappings of the sub-prime mortgage crisis and the direct effects of the U.S. real estate bubble, significant and fundamental flaws in Russia’s economy have been exposed over the past week, especially with regard to heavily indebted groups, whose overly cheap credit in the boom years has led to tragic over-leveraging. Some analysts, however, are right to point out that although the money is quickly leaving Russia, it’s not as though it is landing somewhere else. Nevertheless we are witnessing many of the economic problems first predicted by Michael McFaul (Sen. Obama’s chief Russia adviser) and Kathryn Stoner-Weiss.Several banks in Russia (including Alfa Bank) have withdrawn all assurances from their market research memos published over the last five months … which is another way of saying that they have no idea what is going on the economy, and can’t be held liable for their previously published research.This is absolutely nothing to celebrate, even for those opposed to the policies of the current regime. Most analysts believe that it is only by dipping into the state’s significant stabilization fund can the Kremlin bailout a group of selected oligarchs and companies, making for a dramatically expanded role of the government in the economy and “a yawning gap for favoritism.”The crisis comes on the heels of a series of vast miscalculations by the state. Just last February 7, Medvedev appeared to be bragging over the country’s bottomless wealth, robust liquidity and easy credit. He told Reuters that in Russia, money is a snap: “Money today is not a problem at all: only click (your fingers) and there you are: two billion, three billion.“Another moment of ostentation from the boom days was Gazprom’s 15th birthday celebration, which brought 6,000 people into Red Square to party with Tina Turner, Deep Purple, and Alla Pugacheva.Russia’s leaders and its media would be well advised not to make another miscalculation by trying to deceive the public into believing there is no crisis occurring … it will make difficult policies even harder to implement when the public is not prepared. But many state officials continue to deny that any problems exist, which causes significant transparency issues.So far, the big lie is working. According to that AP report: In a poll carried out in late September by the Public Opinion Foundation, one-quarter of those questioned said they had heard nothing about the global financial crisis, while 57 percent said they were satisfied with the country’s economy — up from 53 percent in July.Don’t tell me that is not a worrying sign, which leads us to look toward the rumor mill to figure out what is happening.