Publication: Eurasia Daily Monitor Volume: 5 Issue: 17

The annual meeting of the World Economic Forum in Davos last week was an unusually somber affair. Anti-globalization protesters were conspicuous by their absence, but the schmoozing among the cosmopolitan business elite was overcast by the heavy turbulence on global stock markets caused by the foreboding of recession in the United States. The so-called emerging economies (Russia is included in this group despite its long history of industrialization) are expected to stay in the “positive territory” despite the pull of the “submerging” giant, but their performance is inevitably affected by the unfolding crisis in the world financial system, which was diagnosed as catastrophic by George Soros (, January 24).

One voice that boldly defied the prevalent pessimism was Finance Minister Alexei Kudrin, head of the Russian “delegation,” who described Russia as an “island of stability” (Vremya novostei, Kommersant, January 24). That wishful description was in stark contrast with the behavior of Russia’s stock market, which in that memorable week dropped deeper than most – some 23-25% (Vedomosti, January 25). It is true that the volume of this trade in Russia has always been quite low, so a fall of this magnitude has no direct macroeconomic impact. The stock market remains, nevertheless, an important indicator of expectations among major investors, so it is noteworthy that it has been sliding since the start of the year, while the 11.5% growth in 2007 was well below the 41% registered in Brazil, 48% in India, and the astounding 96.5% at the Shanghai stock exchange (Smart Money, January 21).

It is hard to embrace the mainstream belief that this data proves that the Russian stock market has acquired its own trajectory and is not merely reflecting the zigzags of the Dow Jones, but Russian experts’ insistence that economic fundamentals are perfectly sound is not without basis (Expert, January 25). Indeed, the 7.5-7.7% GDP increase, driven by the 20% growth of investment activity, are commendable achievements, and the oil prices hovering above the level of $90 per barrel promise huge volumes of export revenues. This tidal inflow of “petro-rubles” is responsible for not only a 40% growth in imports in 2007, but also for extra-generous state expenditures that have caused an inflation hike – and that is something that Kudrin should realize. Indeed, the 12% figure does not begin to convey the pain felt by the most numerous “under-middle-class” social group from the steep increase of food prices, and the 1.8% jump so far in January proves that the inflationary trend is growing more dynamic (Rossiiskaya gazeta, January 25).

As the failure of the much-trumpeted attempt at regulating prices has become apparent, Kudrin was appointed to head a special group in the government charged with keeping inflation inside the planned 7.5-8.5% corridor (Gazeta, January 24). That might appear to indicate further strengthening of his cabinet’s “weight” after being promoted to deputy prime minister last September and delegated to Davos, where last year Dmitry Medvedev presented his credentials as a possible presidential “successor” (Nezavisimaya gazeta, January 24; EDM, January 29, 2007). It might, however, also indicate that Kudrin has been chosen as a scapegoat for the galloping inflation. This run of prices is hardly in doubt, as the expenditures of the federal budget have just been increased by another 5% in order to fulfill President Vladimir Putin’s order to raise pensions and salaries in the state sector by 14% (, January 21).

Another problem that is growing like a malignant tumor in the Russian economic system is the accumulation of bad debts. Official diagnosis still maintains that Russian banks have no direct exposure to the “sub-prime” catastrophe in the U.S. financial market and thus remain perfectly healthy. What is conveniently ignored is the fast growing corporate borrowing abroad, especially by state-owned companies like Rosneft or Gazprom, which increased the total external debt from $311 billion to $431 billion last year (, January 23). Heavy losses suffered by major Western banks quite possibly would put a squeeze on further borrowing – and that might very quickly eliminate the positive current account balance and push it deep into the red. Anatoly Chubais, whose insightful opinion is valued by academic economists, warned in Davos that the massive outflow of capital could become one of Russia’s most serious problems in the coming years (, January 25).

Russia’s leadership, absorbed by the complicated intrigues around Putin’s descent from the summit of power, has no time for such warnings and seeks to build confidence by promising an everlasting spell of fair economic weather. Medvedev, who is being miraculously transformed by shameless propaganda into a statesman capable of performing the presidential role, has made few doubt-provoking promises on the campaign trail and asserting that Russia has a “very good chance” (Kommersant, January 23). The Kremlin has long forgotten about managing economic crises, and it is hard to believe that Putin, assuming the position of prime minister in a few months’ time, would reinvent himself as a hands-on problem-solver. Egor Gaidar, who knows intimately the mechanics of government, ventured an opinion that global economic shocks could hit Russia moderately hard, but belated and misguided bureaucratic responses could cause a real disaster (Nezavisimaya gazeta, January 23).

Bad governance Russian-style has another worrisome feature: the progressive commercialization of increasingly corrupt special services whose feuds disrupt the work of key state agencies. Kudrin’s praise of a Russian “island of stability” rang false not only because the stock exchange was in free-fall but also because his own deputy, Sergei Storchak, has remained behind bars since mid-November on very doubtful charges. Medvedev declared that the struggle against corruption would become a “national program” under his watch, but his clout over the greedy siloviki remains doubtful. Privatization of profits has advanced in the “mature Putinism” period to the state-of-the-art level, but Medvedev ‘s name might soon become associated with losses and mis-management.