["Putin's Russia is an extreme version of crony capitalism, indeed, a kleptocracy in which loyalists get to skim off vast sums for their personal use. It all looked sustainable as long as oil prices stayed high. But now the bubble has burst, and the very corruption that sustained the Putin regime has left Russia in dire straits."
Evidently, not all will agree. In fact, there will be too many to protest rather loudly. Nevertheless, it is difficult not to take Krugman into account when he offers his opinion, on a matter related to economics, to be more specific.] I/IV. http://mobile.nytimes.com/2014/12/19/opinion/paul-krugman-putins-bubble-bursts.html NY Times DECEMBER 19, 2014 Putin's Bubble Bursts Paul Krugman If you're the type who finds macho posturing impressive, Vladimir Putin is your kind of guy. Sure enough, many American conservatives seem to have an embarrassing crush on the swaggering strongman. "That is what you call a leader," enthused Rudy Giuliani, the former New York mayor, after Mr. Putin invaded Ukraine without debate or deliberation. But Mr. Putin never had the resources to back his swagger. Russia has an economy roughly the same size as Brazil's. And, as we're now seeing, it's highly vulnerable to financial crisis -- a vulnerability that has a lot to do with the nature of the Putin regime. For those who haven't been keeping track: The ruble has been sliding gradually since August, when Mr. Putin openly committed Russian troops to the conflict in Ukraine. A few weeks ago, however, the slide turned into a plunge. Extreme measures, including a huge rise in interest rates and pressure on private companies to stop holding dollars, have done no more than stabilize the ruble far below its previous level. And all indications are that the Russian economy is heading for a nasty recession. The proximate cause of Russia's difficulties is, of course, the global plunge in oil prices, which, in turn, reflects factors -- growing production from shale, weakening demand from China and other economies -- that have nothing to do with Mr. Putin. And this was bound to inflict serious damage on an economy that, as I said, doesn't have much besides oil that the rest of the world wants; the sanctions imposed on Russia over the Ukraine conflict have added to the damage. But Russia's difficulties are disproportionate to the size of the shock: While oil has indeed plunged, the ruble has plunged even more, and the damage to the Russian economy reaches far beyond the oil sector. Why? Actually, it's not a puzzle -- and this is, in fact, a movie currency-crisis aficionados like yours truly have seen many times before: Argentina 2002, Indonesia 1998, Mexico 1995, Chile 1982, the list goes on. The kind of crisis Russia now faces is what you get when bad things happen to an economy made vulnerable by large-scale borrowing from abroad -- specifically, large-scale borrowing by the private sector, with the debts denominated in foreign currency, not the currency of the debtor country. In that situation, an adverse shock like a fall in exports can start a vicious downward spiral. When the nation's currency falls, the balance sheets of local businesses -- which have assets in rubles (or pesos or rupiah) but debts in dollars or euros -- implode. This, in turn, inflicts severe damage on the domestic economy, undermining confidence and depressing the currency even more. And Russia fits the standard playbook. Except for one thing. Usually, the way a country ends up with a lot of foreign debt is by running trade deficits, using borrowed funds to pay for imports. But Russia hasn't run trade deficits. On the contrary, it has consistently run large trade surpluses, thanks to high oil prices. So why did it borrow so much money, and where did the money go? Well, you can answer the second question by walking around Mayfair in London, or (to a lesser extent) Manhattan's Upper East Side, especially in the evening, and observing the long rows of luxury residences with no lights on -- residences owned, as the line goes, by Chinese princelings, Middle Eastern sheikhs, and Russian oligarchs. Basically, Russia's elite has been accumulating assets outside the country -- luxury real estate is only the most visible example -- and the flip side of that accumulation has been rising debt at home. Where does the elite get that kind of money? The answer, of course, is that ***Putin's Russia is an extreme version of crony capitalism, indeed, a kleptocracy in which loyalists get to skim off vast sums for their personal use. It all looked sustainable as long as oil prices stayed high. But now the bubble has burst, and the very corruption that sustained the Putin regime has left Russia in dire straits.*** [Emphasis added.] How does it end? The standard response of a country in Russia's situation is an International Monetary Fund program that includes emergency loans and forbearance from creditors in return for reform. Obviously that's not going to happen here, and Russia will try to muddle through on its own, among other things with rules to prevent capital from fleeing the country -- a classic case of locking the barn door after the oligarch is gone. It's quite a comedown for Mr. Putin. And his swaggering strongman act helped set the stage for the disaster. A more open, accountable regime -- one that wouldn't have impressed Mr. Giuliani so much -- would have been less corrupt, would probably have run up less debt, and would have been better placed to ride out falling oil prices. Macho posturing, it turns out, makes for bad economies. II/IV. http://krugman.blogs.nytimes.com/2014/12/15/putin-on-the-fritz/ DEC 15 2:38 PM Dec 15 2:38 pm Putin on the Fritz It's impressive just how quickly and convincingly the wheels have been coming off the Russian economy. Obviously the plunge in oil prices is the big driver, but the ruble has actually fallen more than Brent -- oil is down 40 percent since the start of the year, but the ruble is down by half. What's going on? Well, it turns out that Putin managed to get himself into a confrontation with the West over Ukraine just as the bottom dropped out of his country's main export, so that a financing shock was added to the terms of trade shock. But it's also true that drastic effects of terms of trade shocks are a fairly common phenomenon in developing countries where the private sector has substantial foreign-currency debt: the initial effect of a drop in export prices is a fall in the currency, this creates balance sheet problems for private debtors whose debts suddenly grow in domestic value, this further weakens the economy and undermines confidence, and so on. The central bank may (or may not, as seems to be true in Russia right now) be able to limit the currency plunge by raising interest rates (now above 13 percent on Russian 10-years), but only at the cost of deepening the recession. Eichengreen et al (pdf), in a good discussion of all this in the Latin American context, give the example of Chile, which was hit very hard by falling copper prices at the end of the 1990s despite a much more favorable institutional setup than Russia right now -- and, of course, without having de facto invaded a neighboring country. I have no idea what this implies for either Russian politics or geopolitics. But talk of a new cold war, comparisons between Putin's Russia and the USSR, look a bit silly now, don't they? III/IV. http://krugman.blogs.nytimes.com/2014/12/16/the-ruble-and-the-textbooks/ DEC 16 10:27 AM Dec 16 10:27 am The Ruble and the Textbooks OK, this is a bit funny: This morning Tim Duy addresses the woes of the ruble, which is in free fall despite a big rate hike, and declares that it "appears really quite textbook". Meanwhile Matthew Yglesias says that what Russia is doing is "the textbook approach to handling a currency crisis", and speculates about why it isn't working. I'm with Duy here; not sure if it's actually in any textbook, but as I explained yesterday, for aficionados of emerging-market currency crises this is all quite familiar. (Side note: I invented currency crises -- not the thing itself, obviously, but the modern literature -- in 1979. Really. And business has been good ever since.) When you have big balance-sheet problems involving foreign-currency debt, an interest-rate hike that tries to discourage capital flight damages the economy, and hence those same balance sheets, from another direction, and it's common, even standard, for the effort to fail. Most notably, tight-money policies were really really unsuccessful during the Asian financial crisis of 1997-8, on which you can read my take here. Consider the chart, which shows the policy interest rate in Indonesia: during the 1998 crisis this rate was hiked to 70 percent, yet this wasn't sufficient to stop a plunge in the rupiah to a fifth of its former value. And Indonesia wasn't invading any of its neighbors, although it did have a failing authoritarian regime. So Russia isn't that unusual a story, except for the nukes. IV. http://krugman.blogs.nytimes.com/2014/12/18/notes-on-russian-debt/ DEC 18 2:29 PM Dec 18 2:29 pm Notes on Russian Debt I have to admit that the Russian crisis has me feeling young again -- it's back to all the old issues from the Asian debt crisis of 1997-1998, when bad things mainly happened to other countries and the discussion here was relatively technocratic; also, I was a lot younger (did I mention that?). And although it's very serious stuff -- I keep pulling myself up short when I want to use standard metaphors like an economic meltdown, because I suddenly remember that Putin has nukes -- I am getting some satisfaction in trying to puzzle out the underlying issues. Which brings me to the interesting question of Russian debt. Obviously plunging oil prices are bad for petroeconomies. But what is making the Russian experience so dire is the linkage oil->ruble->balance sheets, because of all the dollar- and euro-denominated debt. This, however, raises several questions. First, how did they get that debt? Here's the Russian current account balance over the past couple of decades: [Graph showing current account rising from zero in 1998 to $100b by 2008 and dropping since 2011 to under $40b in 2013.] It has been in consistent large surplus, with a cumulative surplus of more than $900 billion. Russia should not be a debtor country. It has managed this nonetheless, presumably because corporations and banks have borrowed abroad, and somehow that money has ended up invested in luxury London real estate and other things. It would be nice to have a good picture of how the flow of funds worked. That said, at first glance the debt level doesn't look too high. Here's the ratio to GDP: [Graph from Russian central bank showing external debt at 30-35% of GDP from 2004 to now.] The central bank helpfully points out that this is in a range the IMF considers low-risk, and there wasn't any visible upward trend. But watch out for that denominator. Debt to GDP was stable, but GDP was rising fast in dollar terms, not because of real growth, but because of real appreciation. Compare the actual rise in the ruble price of a dollar, which was modest until the past few weeks, with the rise that would have compensated for relative Russian inflation: [Graph showing Rubles per dollar fairly stable for "Actual" around 30 while "PPP" rises from 30 in 2004 to 45 now.] So I would argue that Russia was in fact going rapidly deeper into debt, but that this was masked by the growing overvaluation of the ruble thanks to high oil prices. Now comes the fall, and suddenly debt looks like a much bigger issue. And of course the ratio of debt to exports has also shot up. I'd add a further suspicion: that the reliance on oil exports worsens the problem because ruble depreciation can't bring about a big export response, at least in the short to medium run -- not enough of a non oil base, so even a large percentage increase doesn't do very much. Anyway, interesting stuff. At this point the approved move is either (a) go to the IMF or (b) invade the Malvinas. Somehow, (a) doesn't seem likely -- and Putin did (b) in advance. -- Peace Is Doable -- You received this message because you are subscribed to the Google Groups "Green Youth Movement" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. To post to this group, send an email to [email protected]. Visit this group at http://groups.google.com/group/greenyouth. For more options, visit https://groups.google.com/d/optout.
