Waiting For The Sun

     The Russian economy could actually weather the current recession better than most economies of the West, according to Chloe Arnold of Radio Free Europe.

     Arnold’s argument is that the assets at risk in these economic times – investments, mortgages, savings – are ones that most Russians don’t have: Only 20% of Russian families have savings accounts, and mortgages are no more than 1.5% of GDP. This means that most Russians have the ironically good fortune of having little to lose. “It’s a more simple economy, in a sense, and it’s an advantage in the current situation. It means we can recover more easily, and faster,” says Yevgeny Gavrilenkov, chief economist with Moscow’s Troika Dialog investment group, as quoted by Arnold in the story.

Oleg Deripaska, Russia‘s richest man, sees a third asset: Russians’ minimal reliance on credit. Few Russians own cars or homes. Of those that do, only about 26% of their automobiles and 18% of their homes were bought on credit. This means that mass credit defaults, which have been dragging the U.S. economy down since last fall, have not been seen in Russia, nor will be. That’s why with Russians can be confident that through “hard work,” they will forge a way to better times.





            Russian entrepreneur Oleg Deripaska thumbs his nose at the current economic situation.


By his estimates, those better times might be no more than three years away – the point, he says, when oil will be selling at $180 per barrel (it’s now $41) and aluminum selling at $4,000 per metric ton (it’s now $1,500):


“Will the urbanization end in China and India? The only thing that can prevent this is if the nature of demand of the middle and upper working class will change globally. If they decide, for example, that they will not drive a car, but will ride a bicycle instead, even at the far North.”


Until that demand picks up again, he said, Russia should just keep doing what it’s doing. That, so far, has been to donwgrade consumption and make do with the less that the bear market is providing:

·         Building new plants with lower costs

·         cutting industrial production in accordance with reduced demand

·         placing moratoriums in some cities on new housing projects until buyers have purchased all current housing; andconsolidating banks 


“We have to get rid of all excess, cut losses … We will not live poorly, but modestly,” said Deripaska. 


The response by Russia’s Central Bank to the ruble, whose value has slipped over the last three months due to falling oil prices, exemplifies this. The currency – now standing at 36 to every one U.S. dollar – had been edging downwards the past three months to 41 per dollar, a point that the bank had said would require major emergency intervention. The bank held off on major interventions until then, opting only to reduce the amount of rubles it lent to banking systems, hike up interest-rate increases, and exercise patience until the ruble stabilizes and banks regain some confidence in their nation’s currency.

     “They have to adjust the balance of payments to the oil price,” said Yevgeny Gavrilenkov, chief economist for Troika Dialog.

     This approach runs counter to those of the United States and other nations around the world, who are trying to jumpstart productivity by pumping stimulus packages into their economies. Economies tend to prosper, after all, when there is more buying and selling and not when there is less. Think American productivity before World War Two and after for a case study in this point.  


     Deripaska and his fellow Russians, by contrast, are cutting buying and selling. Theirs is a more fatalistic approach of weathering the storm until the sunshine, i.e., resumed demand around the world for Russia’s fossil fuels and precious metals, comes back in full force. This isn’t totally illogical on their part. They are right; oil, aluminum, and other goods will surely go back into demand at some point.


     But when will the resumption occur? The answer: when commerce resumes at full speed. And when will commerce resume at full speed? The answer: after a first push sets the economic motor running again. That push can come from within the Russian economy, or from outside it.


     U.S. and European leaders clearly are busying themselves with doing their own pushing to get their countries’ motors going. Russian leaders are hopeful that they will catch a ride sooner or later, if they are patient enough.


     Patience is a virtue, after all. I only hope, for their sakes and ours, that their abiding virtue gets its reward.



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