It was ten years ago when Russia hit crisis. The IMF stepped in and came to its rescue – “shore up the rouble,” was the advice from the IMF, and “here is some money to help.” The snag was, the rouble really was overvalued, and could not be maintained; a fortune was lost trying to prop it up needlessly. As Joseph Stiglitz said in his book Globalization and its Discontents: “The surprise about the collapse was not the collapse itself, but the fact that it really did take some of the IMF officials by surprise. They had genuinely believed that their program would work.”
He went on: “Billions of dollars that it [the IMF] had loaned Russia was showing up in Cypriot and Swiss bank accounts just days after the loan was made.” Stiglitz, who was then chief economist at the World Bank said: “Some of us quipped that the IMF would have made life easier all around if it had simply sent the money directly into the Swiss and Cyprus bank accounts.”
Why bring that story up now? Well, ten years on, and this is what the FT reported last night: “Russia’s central bank intervened heavily to support the rouble on Thursday as analysts said $21bn of foreign capital might have been pulled out of the country as Moscow paid the price for its conflict with Georgia.”
Ten years ago, Russia was in crisis, as corruption dragged the economy to its knees and the IMF lent it money to fund a fool’s errand. Had Russia changed, could she be trusted? Well, ten years on, and once again she is being forced to throw money at saving the currency. The difference, this time, is that it is her money, and right now Russia has got lots of it – $582bn worth of reserves, says the FT.
Meanwhile, the IMF is now throwing its money at Georgia; it has provided a $750mn loan to help repair damage caused by the Russian action. Not a move that has made Russia very happy. Not that the IMF’s image in Russia could be much worse, anyway.
Still in that part of the world, panic has hit the Ukraine. Wednesday saw the collapse of its pro-Western government. The Ukrainian Prime Minister, Tymoshenko, voted with the pro-Russian opposition against President Yushchenko’s condemnation of the Russian action in South Ossetia, and to curtail the president’s powers. And with that the government coalition fell apart. You can understand why; both sides of the coalition were pro-West, but with a bear like that charging up your garden path, it is not difficult to imagine a certain whiff of panic creeping in.
As for the economy, Russia is threatening to impose trade sanctions against the Ukraine and protect Russian companies from cheap Ukrainian imports.
Capital Economics said: “While recent developments mean that Ukrainian assets now undoubtedly deserve a higher political risk premia, concerns about the economy itself are likely to build over the coming months… What’s more, a trade war with Russia is likely to lead to a further deterioration in Ukraine’s already weak external position. The current account deficit has ballooned to nearly 10% of GDP in recent quarters, as domestic demand has boomed. This effectively means that recent rises in the standard of living have only been achieved by borrowing heavily from abroad. However, the external financing environment is likely to deteriorate over the coming quarters as global liquidity levels drop.”
But before we leave Russia, here is some good news. It appears BP and TNK have shaken little fingers. BP has conceded that Robert Dudley, he who no longer has a visa to work in Russia, will step down. Three independent directors will be appointed, and BP has agreed to appoint a Russian-speaking new boss, who has “extensive experience” of Russian business. Igor Sechin, Deputy Prime Minister of the Russian Federation said: “We are pleased that this situation has been resolved and the shareholders have come to an agreement without the involvement of third parties, including the state.” He added: “This is a positive signal for the Russian market. We support the development of TNK-BP and believe that this company has excellent long-term prospects.”
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