Analyst: The Methods Moscow has Chosen to Fight Economic Crisis Will Only Deepen It

2015/7/29 11:39:44

The Russian government’s decision to try to balance the budget on the backs of the population by cutting pensions and reducing social spending has had the effect of cutting consumer demand at precisely the time when such demand could play a positive role in getting the Russian economy out of its slump.

By Paul Goble* for “Windows on Eurasia”:

July 28 – Because Moscow cannot cut spending on oil and gas as that sector is too closely tied to Putin, cannot cut spending on defense because of the military buildup, and cannot attract outside investment because of sanctions, the Kremlin is putting all the burden on the population, reducing effective demand, and making the situation even worse.

Indeed, Aleksey Mikhaylov says this week, by cutting social spending and especially pensions, the regime is dousing the fire with gasoline and “only deepening the crisis because the main problem of the current crisis is the decline of consumer and investment demand. And [these measures] reduce consumer demand” (profile.ru/rossiya/item/98652-za-vse-zaplatit-narod).

As one would expect, Vladimir Putin and his government have sought to put the best face on things, arguing that the situation could have become far worse than it is. That may be so, but on the horizon are three external developments and a slew of internal ones that are certain to make the situation much worse and soon.

The resolution of the Iranian crisis has already sent oil prices down and the end of the embargo will send them down more. The Federal Reserve Bank of the US will begin to raise interest rates in September drawing more capital to America. And Greece will probably leave the euro zone, forcing a further devaluation of Russia’s hard currency holdings.

But these “’unexpected developments’” pale in comparison with the problems at home, the commentator suggests.  The government has been playing games with statistics to make things look less bad, like not including Crimea in terms of costs but including it in terms of income.

Moreover, the Russian government’s decision to try to balance the budget on the backs of the population by cutting pensions and reducing social spending has had the effect of cutting consumer demand at precisely the time when such demand could play a positive role in getting the Russian economy out of its slump.

Government spokesmen insist that the crisis is a cyclical one in which a rapid decline will be followed by a rapid recovery. To be sure, Mikhaylov says, there are some cyclical elements in the situation. But the explanation for the current situation is to be found elsewhere and not just in foreign sanctions.

Much of the reason for the current crisis lies with what are typically called “’structural problems,” a term traditionally used in a situation when regimes are trying to make the defense of property, competition and transparency more available. But “it is obvious that in recent years and especially in the last one, Russia has gone in exactly the opposite direction.”

“The slow growth of the economy and the high outflow of capital began under the impact of structural factors long before sanctions the decline of world prices for oil,” he points out. “The last two circumstances only accelerated and intensified processes that were already going on. And the Russian economy would have stopped even without them.”

Despite the crisis, he continues, “we continue to move along a course against a normal market economy, strengthening the state sector, monopolizing markets, ‘direct administration’ from the authorities, and the defenselessness of business before the force structures of the state. This will not allow the Russian economy to renew growth.”

In this situation, the Russian Central Bank has not been able to help the government deal with the crisis. “Just the reverse.” But “it has done this not out of ill will but out of extreme shakiness of the achieved financial stability it the Russian market. The RCB leadership understands the current financial stabilization is decisive: under quiet waters are swimming hungry sharks.”

This fall and winter are going to be “’hot’” for the bank: “inflation will grow and the ruble exchange rate will fall. And it is quite likely that this will happen with sharp peaks as in the fall and winter of last year,” Mikhaylov says. The Central Bank is “afraid of losing control over the situation,” and its next two meetings, on July 31 and in September, will require hard choices.

For too long, those in charge of economic policy have comforted themselves with “bedtime stories,” but now they recognize that “the situation is going beyond their control,” and they don’t know exactly what to do.

One thinks of Lenin’s observation about a revolutionary situation: “those on top cannot run things in the old way, and those below do not want to live that way in any event.”  Clearly, those on top in Moscow know they can’t behave as they have in the past; but so far, those below have not responded as one might expect.

But at some point, they will, Mikhaylov says.  “The Titanic of the Russian economy is colliding with the iceberg of popular dissatisfaction, the largest part of which is under water and not visible,” but no less dangerous for that.

NOTE: Illustration courtesy http://www.institutionalinvestor.com/ See related article at:

http://www.institutionalinvestor.com/ … -Crisis.html#.VbiOqvmqpBc

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*The commentary above is from Paul Goble’s “Windows on Eurasia” series and appears here with the author’s permission. Contact Goble at: paul.goble@gmail.com

 

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