November 20, 2008 | posted by Michael Baxter in Eurozone, Russia |

And from waltzing markets, to interest rates doing a tango, and ballroom government spending, it is now time to foxtrot further to the east.

Well, in one case, not very far to the east, more down a bit – towards Spain, where the latest set of GDP data was revealed yesterday.

But from there we need to look a lot further to the east, to the land of the bear, and the incredibly-shrinking Russian reserves.

Spanish GDP contracted in the third quarter. It fell by minus 0.2 per cent, from a 0.1 per cent rise in the previous quarter. To put this in context, in the final quarter of last year it expanded by 0.6 per cent.

Household spending fell by 1 per cent, investment by 1.9 per cent and imports contracted by 0.8 per cent.

The only real surprise is this. The crisis in Spain has been on the cards for a very long time. Certainly there have been articles here for 18 months or longer warning as much. Yet until very recently, forecasters were talking about a slowdown, the most pessimistic said growth would still be positive.

It just goes to show, forecasting is only any good when things don’t change much. Sure, forecasters can predict a slowdown, an easing in pace, but economic models just can’t begin to predict anything unusual. In other words, they are most unreliable in the areas where we need them the most.

As for Russia, that island of stability – as the country’s prime minister recently described it – money is leaving its foreign reserves faster than you can say Vladimir Vladimirovich Putin.

Russia is stuck between a rock and a hard place.

On one hand, a strong ruble is seen as vital for maintaining confidence in the Russian economy – hence Vlad’s comment about an island of stability.

But, in 1998 it made the mistake of trying to prop up the ruble and throwing foreign exchange at the problem until it was bankrupt.

Capital Economics has taken a look and concluded as follows: “If oil prices remain at $50pb and capital continues to flow out of the country apace, the ruble may need to fall by 50 per cent in order to balance Russia’s external position.”

And yet, says Capital Economics: “… despite the precipitous slide in the oil price, there is not yet a consensus amongst policymakers in favour of letting the currency fall at all.”

Russia’s problem really comes down to what economists call the Dutch disease, so named after oil exports pushed the Dutch guilder so high that other domestic export businesses in Holland suffered. Russia’s ruble is too strong for its indigenous manufacturers to be able to compete on the world stage. Its long-term stability requires a much cheaper currency.