Russia hit by crisis but why perhaps less than many others

1
Russia hit by crisis but why (perhaps) less
than many others?

• Pekka Sutela
• 28.4.2009
• www.bof.fi/bofit

2
Growth forecasts for 2009 darker and darker
3
Recent movers of the world economy

• Globalisation
• Up to two billion people entered global exchange
• Major change in division of labour
• Trade growth roughly twice as high as production
  growth
• Development of information and communication
  techs
• Distances of diminishing importance
• Metropolies of increasing role
• Financial markets integration
• Growth in movement of capital, integration of
  national financial markets
• Promoted trade growth and internationalisation of
  business

4
A paradox of globalisation?

• Given such trends, nations should thrive through
• Large and deep financial markets
• Financial integration, and
• Participation in international production chains
• But do we really see that? Countries with worst
  GDP forecasts for 2009 include Asian tigers and
  European deeply integrated economies, while
  resource dependent economies seem to fare
  relatively well

5
IMF April 2009 forecasts for certain countries
6
An intervening factor indebtedness

• Globalisation and financial market integration
  also created problems
• Large surpluses in several counries? Lower
  interest rates
• Financing deficits (too) easy ? Growing
  indebtedness
• Low interest rates boosted search for new
  revenues
• New financial instruments
• New modes of operation
• New customer groups (subprime-mortgages)
• Faulty deficits, underestimated risks
• Due to low inflation monetary policy remained
  slack
• Growth in global liquidity

7
Delevereging

• Banks
• Companies
• Households
• ?Less consumption, investment and capital
  mobility
• A self-supporting vicious circle financial
  crisis ? real economyy crisis ? financial crisis
• Central banks and governments try to stop the
  circle

8
Globalisation under risk?

• Financial markets turning inwards
• Foreign investors returning home
• Domestic saving channelled into domestic markets
• Support channelled to domestic banks
• Weaker financial intermediation
• ? Problems with investment finance ? Lower
  investment ? Fewer new technologies introduced ?
  Lower productivity growth
• Protectionism on the rise
• Supporting domestic production, hindering imports
• ? Lesson of the 1930s

9
Lessons from distant times

• Why did Enlightenment and then the Industrial
  Revolution take place in Western Europe?
• One explanation a combination of common economic
  and cultural rules with political competition
  creates a virtuous circle
• But under the threat of a vicious circle, what is
  the outcome of common economic rules and
  nationally-based political responsibilities?

10
Should we expect first deflation, then high
inflation?

• In the short run, weak aggregate demand may imply
  lower price level, leading to (a) vicious circle,
  as demand is postponed, (b) declining asset and
  thus security values, (3) impossibility of
  standard monetary policy
• Over a longer period high inflation threatens due
  to (a) liquidity pumped into the economies, (b)
  monetisation of deficits, (3) temptation of
  inflating debt stocks nominated in domestic
  currency

11
Global conclusions

• After the crisis, a period of lower global growth
• Worsening public finances
• Permanent exclusion of employees
• Shift in the relative position of surplus and
  deficit countries

12
How the crisis entered Russia?

• Financial crisis Drying of foreign financing
  (note the duality of Russias financial system),
  turning of capital flow
• Declining export prices (oil 2007 75 USD, 2008
  95 USD, 2009 55 USD (?)). Major impact on public
  finance
• Collapse of some export volumes

13
RTS stock index and price of Urals-oil
Lähde RTS ja Bloomberg
14
Bank size and income level
15
Was Russia prepared?

• Underlying goals of the Putin regime sovereignty
  and stability
• Paying back debt, accumulating reserve funds also
  served crisis management
• On the other hand, the well-known structural
  weaknesses
• The sudden stop was exceptionally hard
• On the other hand, expected shrinkage of the
  economy about average

16
Russian currency reserves after 2000, bln USD
Lähde CBR
17
Economic policy reaction

• Awakening to reality in late 2008 currently
  continuous emphasis on severity of situation
• Liquidity support and demand managing basically
  similar to other countries
• Special feature step-wise devaluation of
  currency. Failed to fail, so far!
• Special feature how to treat failed oligarchs?
• Problem original belief in V-style depression,
  and policies measured accordingly

18
EUR exchange rates in some oil exporting countries
Lähde EKP
19
Forecasts for Russia also turning worse (MER)
and this is the more optimistical scenario
20
How Russia compares with other CIS-countries (IMF)
21
How Russia compares with other energy producers
(IMF)
22
Further risks

• Using reserves social purposes or investment
• High and possibly worsening inflation
• Bad loans and other financial problems
• Lower incomes increased unemployment potential
  for social unrest?