November 12, 2008 | posted by Michael Baxter in Russia | comments (0) |

What a difference five letters make. Put ing at the end of a word instead of ed, and all of a sudden it’s like chalk and cheese.

Russia is a developing country. The UK is a developed country.

And that is why the rate of interest is rising in Russia, and falling like a stone in the UK.

Yesterday, Russia’s central bank elected to up interest rates from 11 to 12 per cent, and why? – to keep the rouble strong.

Meanwhile, in the UK, rates are surely set to fall a good deal further, and as for the pound, well, who wants a strong pound anyway?

On the face of it, inflation is the key. But drill down a bit further, and maybe there is more to it than that.

In Russia, inflation is in double digits. In the UK, it could turn negative within a year. So the case for rate increases and cuts in the two countries is clear, no more needs to be said.

Except this.

In Russia, devaluation is a bad word. It conjures up memories of 1998, the IMF and a time when the Russian stock market was worth less than Sainsbury’s.

In the UK, falls in sterling are seen as a good thing. Remember 1992, and ejection from the ERM? For that matter, the British government’s decision to exit the gold standard in 1931, prepared the way for economic recovery.

But it is not always like that. In 1967, a certain pipe-smoking prime minister told us the devaluation of sterling would not affect the pound in our pocket and purses – but he was wrong. A slippery slope was the result – and ended in an embarrassing IMF bail out of the UK economy a decade later.

In Russia, the tax hikes come with a downside. The economy is sinking, it needs tax cuts desperately. No doubt indigenous export industries would love to see a cheaper rouble. Russia is a one-trick pony – raw materials – especially oil and gas. And the price of them is falling faster than Vlad can draw his gun from his holster, even if he is being charged by a tiger. 

Economic growth in Russia, where there is so much spare capacity, under-utilized because the rouble is so expensive, will plummet as a result.

But in the UK, there are growing fears we could face a good old-fashioned sterling crisis.

At the moment, in this environment of fear, the UK is seen as quite safe. A good thing, too, because the government needs overseas money.

But if the combination of surging government spending and falling interest rates leaves overseas investors wondering whether the UK really is that safe, then we will see a flight of money, and that really will be a disaster of enormous proportions.

If the UK can’t pull in money from abroad, it may have to up rates.

This is the danger in the policy of cutting rates and increasing government borrowing at the same time.  It would be tragic indeed if the current labour government sees a repeat of what happened under the last one, and the IMF, for so long Gordon Brown’s biggest fans, have to come to our rescue.

Maybe we should join the euro quick, and lock sterling into the current exchange rate – not that the rest of the gang would want us.

September 18, 2008 | posted by Michael Baxter in Russia | comments (0) |

But if you think things are bad here, consider Russia. Russia’s rouble-denominated Micex index is now worth less than half the level seen in the middle of May. The dollar denominated RTS index has fallen by a similar amount.

Russia, it appears, is suffering from its own credit crunch. There are multiple causes.

First off, there are fears over oil – this time, though, the fear is that falling oil will hit the Russian economy hard.

Secondly, Russian inflation has been getting out of hand. Latest data had prices rising by 11.2 per cent.

But, above all, are fears over whether Russia can be trusted. The invasion of Georgia barely showed up on Western stock markets; in Russia, it promoted an airlift of money, as investors turned away as fast as they could.

There is a Russian point of view. BP and Shell may not have been treated well, but Russia may argue they got what they deserved. Russia felt Shell had acquired the rights to the Sakhalin-2 oil field on the cheap. She was not happy. When she accused the oil company of causing environmental damage, everyone knew this was not the real problem. But then, the Yeltsin regime really had made it too easy for Shell.

The way BP was treated, with its boss having his visa removed, was shabby. But in Russia there is huge resentment of the West, and Western companies making profits from Russia’s valuable resources.

But, whatever the reason, Russia has to toe the line. If she doesn’t, she gets punished by the markets.

The Russian stock exchange has been suspended for three days – such has been the carnage.

And that surely is the point. Russia is now so firmly integrated within the economic environment, her reliance on the West is just as important as Western reliance on her resources.

It was reported recently that Vladimir Putin is to teach Nicholas Sarkozy judo. It is a story that seems too bizarre to have been made up. Sarkozy warned Russia about her actions, now Putin can get him down the gym.

The truth is, though, capitalism has made the chances of a conflict between Russia and the West much, much slimmer. Some may be saying that recent events in the West mean Karl Marx is laughing in his grave, but the truth is capitalism is shaping the world. As long as the end result of capitalism is that we are better off, better off that is in the long-term, then conflict between the powers that benefit from it, that’s the US, Europe, Russia and China, will be avoided.

September 11, 2008 | posted by Michael Baxter in Russia | comments (0) |

Whatever your feelings are about Russia, whether you feel it was wronged by Western arrogance, or that it’s a power-hungry autocracy, one thing is for sure. The Russia–East clash is no longer about capitalism and communism. Russia is just as subject to the whims of capitalism as the rest of us, and now the talk is she is about to pay a high economic price for belligerence, be it real belligerence or imaginary.

Russia’s president, Dmitry Medvedev stepped into the brink of Russia’s own economic crisis. Its stock exchange is crashing, with its main index down by 49 per cent since May. Talk is Russia is experiencing the beginnings of its own credit crunch. But Dmitry says otherwise. “In the end these changes are not significant,” he said, and, “If the right decisions are made, the situation will straighten out.”

He added, “I believe this is in the power of the government.”

Well, Stalin and Co may have had real power, the Tsars before them may have had control over the economy, but in a capitalist economy markets are a law to themselves – and yesterday, after the Russian president made his bold statement, the main stock market index in the country fell another 4.4 per cent.

In the West the problem was this. House prices went up, so people borrowed against these rising house prices and repeated a self-perpetuating upward spiral – until it reached a level that wasn’t sustainable, and now we are seeing it all unravel.

In Russia, the trend was for its tycoons to use the rising value of their shares to raise more money.

But, according to today’s FT, Russian tycoons are facing margin calls, as the nation’s rich men are being forced to go liquid. It started with the catalogue of Russian moves that helped fuel growing distrust amongst Western investors. With the invasion of Georgia, the exodus of investors became a rout. The fall in shares led to the margin calls, and the margin calls are leading to further falls in share values. So, it’s a Credit Crunchsky.

Meanwhile, yesterday, Capital Economics downgraded its forecast for Russia’s economic growth next year, down from 8.5 per cent in Q1 of this year to 6 per cent in 2009.

Neil Shearing, Emerging Europe Economist said: “Recent rapid growth rates have only been made possible by the existence of spare capacity left over from years of recession in the 1990s. With capacity utilisation now returning to more normal levels, growth in excess of 7 per cent per annum looks [increasingly] unsustainable. A shortage of workers has pushed nominal wage growth to around 30 per cent year on year, meaning that unit labour costs are rising by over 10 per cent per annum. Consequently, while a sharp increase in food prices has been the main factor behind the rise in inflation to 15 per cent in August, non-food inflation is now running at 11 per cent.”

If the price of oil continues to fall, as has been predicted here, then one assumes Russia will face even deeper problems moving forward.

In 1992, Francis Fukuyama wrote a famous booked entitled The End of History. He argued that the era of ideological-based conflict was over. Since then, the underlying premiss of his book has come under criticism. He may or may not be right, but as of this moment, capitalism, from the hedge funds of Wall Street to the oligarchs of Moscow and the new capitalist republic of Beijing, rules supreme.

August 28, 2008 | posted by Michael Baxter in Russia | comments (0) |

As David Milliband said this morning on the Today programme, when the Soviet Union invaded Hungary in 1956 or Czechoslovakia in 1968, no one questioned how the Russian stock market might be affected. It seems unlikely Khrushchev gave two hoots about the stock price of companies in 1956, other than he may have been quite pleased to note any sell off in the West. In 1968 Leonid Brezhnev was probably equally indifferent on the fate of the global stock markets.

It is not like that today. The Russian stock market has fallen by 18 per cent since the beginning of the month. Investors are nervous. And no doubt Dmitry Medvedev really is bothered by it all.

Earlier this week the FT ran an article by the Russian president justifying Russia’s actions. Can you imagine Mr Brezhnev resorting to penning articles in the Western financial media?

Today, Russia is a part of the Capitalist World – and as long as that continues there will surely be no new Cold War.

Russia also has its fair share of problems. We are so used to reading about gloom and doom in the West, and Russia flexing its muscles over gas pipelines, that we could fall into the trap of believing the world needs Russia more than it needs the world. But this is wrong.

It is true that Russia has enjoyed stunning growth in recent years, but Capital Economics believes this is largely due to little more than the economy making up for all those years of recession from the 1998 crisis. The stock market collapse of that year, and the deep recession that followed, left Russia working grossly below capacity. In recent years it’s been clawing that back, but when all that spare capacity has been filled, and there is good reason to believe that time is close, then the Russian economic growth story may come to an end.

Russia is also over-reliant on the high price of oil and gas. The 1998 crash was exacerbated by the then low price of oil. It seems hard to believe the economy can carry on booming if oil does indeed fall back in price, as has been predicted here.

Then there is Russian inflation. Inflation recently hit 15 per cent, and while this is largely down to soaring commodity prices, in Russia, unlike the West, the inflationary spillover effects seem more serious. Wages rose by 28 per cent last year, for example.

Furthermore, while gas has been hitting the pipeline in massive volumes, manufacturing and industrial production have not been so impressive, with the sectors recently showing signs of a major slowdown.

Capital Economics recently said: “With the threat of a harder landing increasing, it seems that economic concerns could overtake political concerns over the course of 2009.”

And in many ways that is where our biggest hope resides – not in a Russian economic crisis – but in a Russia that is a part of the capitalist system – that booms because of that, and ultimately learns she can only do this if she plays by the rules.

August 19, 2008 | posted by Michael Baxter in Russia | comments (0) |

Russia is once again a mighty force. Or is it simply punching above its weight? Its massive size makes it almost inevitable that the country should boast huge natural resources – oil and gas aside, it also has the potential to be the world’s food basket. But Russia has weaknesses. For one thing, it suffers from a more serious demographic problem than most countries.

The Population Reference Bureau estimates that Russia’s population will fall from 129 to 110 million between 2008 and 2050. The fertility rate is 1.4 births per women; the UK, for example, has a fertility rate of 1.9.

But, it is ten years on from the Russian crisis of 1998. Back in 1998 the Russian rate of interest was 150 per cent, and nigh on ten years of recession followed. That is to say it took almost ten years for the economy to recover.

But today, Russia enjoys a stunning growth rate. It has become a major player again. Can this continue?

It seems much of Russia’s growth rate can be explained by vast overcapacity created during the Russian crisis. Since then, the economy has been catching up. But, there’s not much spare capacity left – very soon she may have to settle for similar growth rates as the rest of the developed world.

Inflation, is mounting – and is ever threatening to become a more serious problem. For example, wages are growing at 30 per cent per year. Russia remains too reliant on the price of oil and gas. If the price continues to fall, problems will mount.

Neil Shearing, emerging markets economist at Capital Economics says: “So while Russia has largely recovered from the 1998 crisis, it now faces a new set of policy challenges. Its notoriously outdated infrastructure must be updated in order to boost productive capacity. Mass immigration appears to be the only way to head off a demographic crunch that could see the population fall by almost 10m by 2020. At the same time, the authorities can no longer avoid the huge inequalities that have emerged over the past decade and public institutions remain underdeveloped. Finally, and perhaps most importantly, the economy is still highly dependent on oil and gas production. So while Russia’s recovery since 1998 has been impressive, the next decade is likely to prove just as challenging.”

Russia remains too relaint on the commodity price cycle. The crisis of 1998 had multiple causes – but cheap oil was surely a major factor. If oil falls back, then expect a similar slowdown in Russia. Russia needs to see consumer spending make up a higher proportion of GDP; only then will the economy be more balanced, and less reliant on the wings and arrows of commodity cycles.

August 12, 2008 | posted by Michael Baxter in Russia | comments (1) |

And with the developed economy across the world in crisis, the tanks move into Georgian territory. What light can economics shine upon this latest crisis?

So that was the last thing the world, let alone the people of Georgia and Russia, needed. A couple of weeks ago it was told here about the Kondratieff economic cycle – a cycle which is supposed to last around 54 years and sees four stages – spring, which sees inflationary growth; summer, which sees stagflation and is often accompanied by war; autumn, which sees deflationary growth; and winter, which sees deflation, economic depression, and often ends with war.

If you believe in this theory, then it appears World War II marked the end of the last cycle.

The man behind this theory, Professor Nickolai Kondratieff, a Russian, penned his ideas in the 1920s and 1930s, and was sentenced to death in Russia in 1938.

Now it is easy to ridicule the premise of his theory; if the economic cycle is 54 years long, then exactly when did the present cycle begin? But if you squint your eyes, then help yourself to a large pinch of salt, it kind of makes sense. Clearly the 1950s and early 1960s fall into a spring-like phase, the 1970s and early 1980s – summer, and the 1990s to, say, August 9 2007, autumn. Any similarities with the Kondratieff cycle could of course be a coincidence. But it is all a little spooky.

But that does not mean the current cycle has to repeat all the mistakes of the previous cycle. There is every reason to believe we can avoid the winter phase of the cycle altogether, and instead have a kind of early spring.

Ben Bernanke is a wise old owl, and with him at the helm there are good reasons to believe a 1930s type depression can be avoided. But what is this war that is supposed to punctuate each cycle, both at the middle and end?

It is easy to pinpoint what the two wars were in the past cycle, World Wars I and II. But what about this cycle – what was the mid-cycle war? Was it the Vietnam war, or maybe the Cold War?

Okay, forget about the Kondratieff cycle for a few moments – there may or may not be something in this theory. But consider the wars of that period in time which would happen to coincide with a 50-year period starting in 1900. The first war partially caused the second war. World War I ended, the treaty of Versailles heaped economic misery on Germany, the German people saw their pride suffer a deep wound, and we know what happened next. At the end of the Second World War we had learnt our lesson; the Marshall plan helped ensure no repeat of a major war in Europe.

When the Cold War ended there was no concerted attempt to make Russia pay for what it had done. But, even so, the economic misery in Russia and their wounded pride were enormous. At the time there was a joke that it was so bad that things were better under Stalin. So, somehow, through a miracle of science, Russia was able to get Joseph Stalin back and ask him to take control. He said: “Okay, I will do it, but this time, no more Mr Nice Guy.”

The big snag with Russia, though, was what happened next. By 1998, Russia was yesterday’s power, a has been. Even the movie business had reduced Russia to gangland, with cuddly Robbie Coltrane – Hagrid of the Harry Potter films, the most menacing Russian villain they could come up with for James Bond.

But in 1998 Russia really did suffer a huge blow. The economic crisis of that year, which saw the Russian stock market fall such that its total value was barely greater than the valuation of Sainsbury’s, sent the economy back to crisis. Yet more economic misery was the result, pride even more damaged.

This was the time for some kind of modern-day Marshall plan; instead, the IMF enforced an unnecessary austerity programme on Russia that just made things a lot, lot worse. If you wish to know more about the treatment of Russia by the IMF during that period, consult the writings of former chief economist at the World Bank, and winner of the Nobel Memorial Prize for economics, Joseph Stiglitz.

The IMF action of that time was, in a way, akin to the treaty of Versailles.

And the writing had been on the wall for some time. The treatment of Mikhail Khodorkovsky, the way Russia turned the gas pipe to Ukraine on and off, the treatment of Shell and, more recently, BP; be in no doubt, this is a country with big ideas and, more to the point, the government that enacts these ideas has the popular support of its people.

And yet, today, the world needs Russia. It needs its oil and gas, and more to the point, the country has the potential to become the world’s food basket.

And all of a sudden, in contrast to his vice President, George Dubya seems the paragon of diplomacy. “I’ve expressed my grave concern about the disproportionate response of Russia, and that we strongly condemn the bombing outside of South Ossetia,” he said.

By contrast, Dick Cheney said: “Russian aggression must not go unanswered, and that its continuation would have serious consequences for its relations with the United States.”

The trouble is, of course, the US is hardly qualified to condemn one country for invading another without UN approval. So, all of a sudden, hope lies with the diplomats of France – the very people that those same US politicians vilified during the invasion of Iraq.

The Russian regime and its people clearly want the country to regain its status as a global superpower. Whether that means it wants to regain control of the former Soviet Union, or merely exert more influence, can not yet be told. And where this will then lead to is yet uncertain.

But, moving forward, the Russian economy is vulnerable. Right now is its moment of supreme economic influence. If the prices of oil and gas fall, as we have predicted, this will be bad news for Russia. Combine this with Russian inflation that seems to be heading out of control, and all of a sudden it seems the economic prognosis for Russia in the medium term is not so good.

There are parallels with Russia today and Germany before Hitler came to power. But that does not mean the situation has to escalate.

The key to Russia is showing her she can trust the West. The IMF indicated the precise opposite of this in 1998. Economic sanctions will do no good. But when the Russian economic boom goes into reverse – which it will do, then will be the time to repair relations, with support.

February 4, 2008 | posted by Michael Baxter in Russia | comments (0) |

It’s a funny thing, but if you read the Western media you could be forgiven for believing Russia is to return to its bad old ways. Vladimir Putin is seen as little more than a former KGB man stuck in the rhetoric of the cold war era, and his decision to appoint Dmitry Medvedev as his successor, while Putin himself stays on as Prime Minister, is seen by many as an example of just how poor the Russian President’s democratic pretensions are.

But those views are apparently not shared by business and the markets.

In fact, The Russian stock market did something of a wobble in the weeks before Putin announced his big idea. Once Dmitry Medvedev had been confirmed as his choice for President, and once Putin announced his intention to stay on as PM, markets soared.

The truth is, that while Putin may be seen as something of an impaler to democracy, when it comes to being pro free markets, he is seen as the quite opposite of Vlad the Impaler – more like Vlad the Hailer of markets.

As for Medvedev, well, he is seen as even more of a market man.

Recently, the IMF revealed its latest set of projections for global growth – and while it was predicting growth of just 1.5 per cent for the US next year, it was projecting growth in the Commonwealth of Independent States (CIS – that’s the former Soviet Union) of 7 per cent.

As for Russia, recently the World Bank predicted growth of 6.5 per cent this year and 6 per cent growth in 2009.

Turning to the markets, the Russian State is seen as keen to develop them. It is now mandatory for Russian companies launching an international IPO to list at least a third of the shares on a domestic exchange. At the same time, it’s become a lot easier for a firm to IPO in Russia, with the levels of bureaucracy cut right back. It is also thought that the Russian Government wants to see Russia itself become the financial centre of the CIS region – and it is introducing measures to make it easier for firms based in neighbouring countries to list in Russia.

But then, last week, Dmitry Medvedev, opened a can of worms when he called for Russian firms to copy Chinese business, and buy up western businesses.

“This will allow us to re-tool Russian enterprises with technology, boost their production culture and grant them the opportunity to diversify investments and win new markets,” said the Russian President-in-waiting.

As for growing suspicions aimed at Russia, he said, “This is not a reason for hysteria. We should quietly and measuredly forward our interests and convince people that investments from Russia are effective, transparent and necessary for the countries involved.”

In fact, Russia is currently sitting on a $157bn Oil Stabilisation Fund. It seems a lot, but actually, look a little deeper and the amount of money involved is not so great.

Under new rules set by the State, 10 per cent of Russia’s GDP must be invested into AAA-rated sovereign bonds and, as things currently stand, that leaves just $32 billion available for more-risky corporate investments.

The question, though, is will this grow? Well, most estimates out there seem to suggest investment by sovereign funds is set to balloon But, much depends on the future movements of the price of oil. If oil stays up there in the $90-plus region, then sovereign fund investment will indeed expand. But if oil falls back, then it will be a different story.

Capital Economics, for example, looked at this and said, “Growth of sovereign wealth funds is likely to taper off sharply over coming years as commodity prices moderate, and the global imbalances which have driven up Asian surpluses unwind. While that will still leave many of them as major players, they will not change the rules of the game. As the events of the last few weeks have shown, Sovereign Wealth Funds should be welcomed as a source of capital for ailing Western banks rather than feared as a source of nationalist investment.”

But, for Russia, its ability to invest abroad may only be a short-term phenomenon.

Russia knows there is no guarantee that oil will stay high in price. So by investing now, diversifying its interests, it knows that if things take a turn for the worse, it has at least built up these valuable overseas assets.

That’s what you are supposed to do of course. Save when times are good, Alas, it’s where the US and UK have been going horribly wrong. We have experienced years of remarkable growth, and yet debt levels are at an all-time high.

Maybe the real lesson from Russia, is to learn prudence.

Sovereign Wealth Funds might be providing essential funding to western business, but in the long term, it means dividends will be flooding out of the UK and US. That’s what happens when you spend, spend and spend.