From The Economist - Nov 22nd 2014 Russia A wounded economy It is closer to crisis than the West or Vladimir Putin realise Nov 22nd 2014 VLADIMIR PUTIN is not short of problems, many of his own creation. There is the carnage in eastern Ukraine, where he is continuing to stir things up. There are his fraught relations with the West, with even Germany turning against him now. There is an Islamist insurgency on his borders and at home there is grumbling among the growing numbers who doubt the wisdom of his Ukraine policy. But one problem could yet eclipse all these: Russia’s wounded economy could fall into a crisis (see article). Some of Russia’s ailments are well known. Its oil-fired economy surged upward on rising energy prices; now that oil has tumbled, from an average of almost $110 a barrel in the first half of the year to below $80, Russia is hurting. More than two-thirds of exports come from energy. The rouble has fallen by 23% in three months. Western sanctions have also caused pain, as bankers have applied the restrictions not just to Mr Putin’s cronies, but to a much longer tally of Russian businesses. More generally, years of kleptocracy have had a corrosive effect on the place. Much of the country’s wealth has been divided among Mr Putin’s friends. Everybody expects continued stagnation, but the conventional wisdom is that Mr Putin is strong enough to withstand this. The falling rouble has made some export industries like farming more competitive. These exports combined with Mr Putin’s import-blocking counter-sanctions mean Russia still has a small trade surplus. It has a stash of foreign-exchange reserves, some $370 billion according to the central bank’s figures. Add in the resilience of the Russian people, who are also inclined to blame deprivation on foreigners, and the view from Moscow is that Mr Putin has time to manoeuvre. People talk loosely about two years or so. In fact, a crisis could happen a lot sooner. Russia’s defences are weaker than they first appear and they could be tested by any one of a succession of possibilities—another dip in the oil price, a bungled debt rescheduling by Russian firms, further Western sanctions. When economies are on an unsustainable course, international finance often acts as a fast-forward button, pushing countries over the edge more quickly than politicians or investors expect. Putin a good man down The immediate worry is the oil price. Mr Putin is confident it will recover. But supply seems set to increase, with OPEC keen to defend its market share. American government agencies predict oil prices could average $83 a barrel in 2015, well below the $90 level Russia needs to avoid recession (and to keep its budget in balance). If global demand weakens—Japan has slipped into recession since the latest round of forecasts—the oil price could fall further. That would immediately prompt investors to reassess Russia’s prospects. Then there are the debt repayments. Russia’s firms have over $500 billion in external debt outstanding, with $130 billion of it payable before the end of 2015, at a time when few Western banks want to increase their exposure to Russia. Even firms that earn dollar revenues may struggle to pay their debts. Rosneft, an oil giant, recently asked the Kremlin to lend it $44 billion. Mr Putin has so far resisted, but he cannot let a company that is 70% state-owned and employs 160,000 people fail. There is a lengthening queue of troubled Russian firms. Non-performing loans were rising even before interest rates were raised to 9.5% to defend the rouble. Meanwhile Russian banks are reliant on the central bank to replace deposits that their customers are understandably spiriting into dollars. Directly or indirectly, many of these bills will end up with the Kremlin, which is why its reserves will be vital. They are evaporating: down $100 billion in the past year, following failed attempts to defend the rouble. And the book-keeping is dodgy. Of the reported $370 billion reserve pile, more than $170 billion sits in the country’s two wealth funds. Some of their assets are iffy, including various stakes in Russia’s state-owned banks and debt issued by Ukraine that Mr Putin’s own aggression is fast rendering worthless. One of the funds is earmarked for pensions. In reality, Russia’s government has perhaps $270 billion of hard cash that is accessible and usable without massive cuts elsewhere—less than its external obligations due over the next two years (see article). All this spells trouble for Russia, but Mr Putin’s marauding foreign policy could accelerate things. This after all is a man who has invaded other countries and lied about it. A deeper foray into Ukraine would lead to stronger sanctions by Western countries. Some of them, such as barring Russia’s banks from the SWIFT international payments system (see article), could halt Russian trade altogether. A partial block on oil exports would fell the economy, as it did Iran’s. And the more trouble he faces, the more likely Mr Putin is to play the nationalist card—and that means more foreign forays, and yet more sanctions. From Russia to Rio, without much love Russia’s biggest recent economic crisis, in 1998, led to a government default. This time a string of bank failures, corporate defaults and a deep recession look likelier. Even so the pain from these could spread abroad quickly, both to countries that rely on Russian trade (exports to Russia account for fully 5% of GDP in the Baltics and Belarus) and through financial ripple effects. Banks in both Austria and Sweden are exposed. And if firms in one badly run commodity-driven country start to default on their dollar debts, then investors will worry about others—such as Brazil. If Russia’s economy looks likely to collapse, there will be inevitable calls in the West for sanctions to be cut back. This week Mr Putin pointed out that 300,000 German jobs depend on trade with his country. But Angela Merkel rightly stood firm. Actions, Mr Putin must finally learn, have consequences. Invade another country, and the world will act against you. And the same goes for the economy, too. Had Mr Putin spent more of his time strengthening Russia’s economy than enriching his friends, he would not find himself so vulnerable now. From the print edition: Leaders ----------------------------- From The Economist - Nov 19th 2014 Germany and Russia Merkel toughens up Frustrated with Putin, Germany and its chancellor may be tiring of Ostpolitik ANGELA Merkel (pictured) is a disciplined and cautious public speaker. So when she makes statements that seem fired by passion and resolve, it is good to take note. And if those statements prompt her foreign minister, Frank-Walter Steinmeier, to urge a softer tone, something big probably happened. That is what happened in Sydney, Australia, on November 17th, when Mrs Merkel talked at the Lowy Institute for International Policy. Her main subject was the aggression of Russia’s Vladimir Putin in Ukraine. At the G20 summit, Mrs Merkel had just met Mr Putin for hours in what appears to have been another frustrating exchange. Mrs Merkel reiterated her assurances, mainly directed at the pacifists in her German home audience, that there can be no military solution to the conflict. (Germany’s allies in the Baltics and Poland are less sure about that.) But, she added, that does not mean that the West cannot respond resolutely in other ways, above all economically. In particular, Mrs Merkel stated more clearly than ever her fears that the conflict could spread and become a “wider conflagration”. It is not just about Ukraine, she elaborated, but “about Moldova, about Georgia. If this continues, we must wonder: Do we have to ask [Putin] when it comes to Serbia, ask when it’s about the western Balkans? We cannot reconcile this with our values.” Mr Putin’s aggression and cynical double-talk do indeed challenge Germany’s most basic assumptions. Postwar, post-reunification, postmodern Germany has learned to live by rules and norms. Among the highest such rules is the sanctity of modern borders. (One of the first things that Helmut Kohl, a former chancellor, did after the Berlin Wall fell 25 years ago was to reassure Poland that Germany would forever recognise the Oder-Neisse border. This, among other gestures, made reunification possible.) Mr Putin, by contrast, “tramples on international law,” Mrs Merkel said. Such clarity frightens many Germans, including many of the centre-left Social Democrats (SPD) who govern in coalition with Mrs Merkel’s Christian Democrats. Since the first SPD chancellor, Willy Brandt, in the early 1970s, they have subscribed to Ostpolitik—a policy of openness toward (and indefatigable dialogue with) the east, including the Soviet Union and now Russia. They credit this approach for bringing down the Iron Curtain, while Americans credit the toughness of Ronald Reagan. Several leading Social Democrats reacted nervously to Mrs Merkel’s statements in Australia. Matthias Platzeck, a former governor of Brandenburg, urged the West to stay on its “course of partnership” with Russia. (One may wonder how he defines partnership.) Sigmar Gabriel, the SPD’s boss, backed him, saying that “the West must continue to talk to Putin” (which Mrs Merkel would hardly disagree with). And Mr Steinmeier, her foreign minister, called for prudence in the choice of words. Rather abruptly, he was this week invited to the Kremlin for a meeting with Mr Putin. Mr Putin was a KGB agent in Dresden when the Berlin Wall fell, and speaks fluent German. He is well aware of the rift in German sympathies and philosophies. On November 16th, German public television aired an exclusive interview with him in which he mixed charm, half-truths and fabrication to try to seduce the German public. He has understood that Germany may be the key country in the Western alliances, both NATO and the European Union, and Mrs Merkel the key leader. She, like Germany’s president, Joachim Gauck, is from what used to be East Germany. She speaks Russian and is said to know Mr Putin better than any other Western leader does. Until now, Mr Gauck, who has a largely ceremonial office, has been the one talking tough about Mr Putin. If Mrs Merkel now adopts more of that tone, Mr Putin will find it harder to drive a wedge between Germanys aversion to conflict and its commitment to rules and norms. Even Germanys willingness to talk ultimately has its limits. -------------------------------------------------------
Posted on: Tue, 25 Nov 2014 10:10:42 +0000
Trending Topics
Recently Viewed Topics
© 2015