Not waving, just drowning: Further bad news clouds the Russian economy Reviewed by Momizat on . [caption id="attachment_4198" align="alignnone" width="615"] The sight of the President submerging beneath the sea appeared almost too blatant a metaphor to be [caption id="attachment_4198" align="alignnone" width="615"] The sight of the President submerging beneath the sea appeared almost too blatant a metaphor to be Rating: 0

Not waving, just drowning: Further bad news clouds the Russian economy

The sight of the President submerging beneath the sea appeared almost too blatant a metaphor to be true of the recent turmoil affecting the Russian economy, which saw it decline precipitously by 4.4 percent in the second quarter of 2015.

The sight of the President submerging beneath the sea appeared almost too blatant a metaphor to be true of the recent turmoil affecting the Russian economy, which saw it decline precipitously by 4.4 percent in the second quarter of 2015.

President Putin`s photo opportunities, which have ranged from riding horseback bare chested, tranquilising wild beasts in the outback and even flying a paraglider with wild crane as escort, reached a symbolic new low  with the latest exploit filmed off the coast of Crimea.

The sight of the President submerging beneath the sea appeared almost too blatant a metaphor to be true of the recent turmoil affecting the Russian economy, which saw it decline precipitously by 4.4 percent in the second quarter of 2015.

So far, so bad. But the pictures of the submerging Putin following on from pictures of Russians bulldozing illicit food imports – famously derided in The Economist as the “bonfire of the vans of cheese” and news reports of police raiding supermarkets hunting for foreign food products, constitutes either remarkable confidence by the government in the stoic nature of the populace to endure or a cavalier disregard for one and all. This surely does not sit well with past history –  the outbreak of the October 1917 revolution, horrific famines in the 1920s and 30s as well as food queues in the 1980s, let alone with a recent World Bank report which has forecast a poverty rate in Russia of 14.2 percent in 2015 compared with 11 percent in 2014.

In a modern day economy, much as some of us may detest consumerism, consumption is vital to our existence and indeed economic growth. We buy what we produce whether it is goods or more likely services in this day and age – in Russia, services account for 60 percent of the GDP by composition. We export what we may have no demand for and we import what we desire but, for whatever reason, we cannot produce.

Consumption accounts for around 70 percent of our economic output i.e. GDP, as is the case in Russia. Thus when we don`t consume, our economy suffers.

Russia`s reaction to the introduction of western sanctions, largely following the downing of a civilian airliner MH-17, led to it placing an embargo on food imports from the EU. This led to a significant increase in food prices borne by Russians and was further compounded by a collapse in the Russian ruble both in the run up to Christmas last year –  and, despite a modest recovery, is continuing its slide – thus any import whether from China or Brazil has increased in cost if the ruble has depreciated in value.

If we stick with consumption: inflation has reduced the purchasing power of Russian wages by more than 8 percent in the second quarter, compared with the same period last year, according to figures published by Russia’s Central Bank at the end of July.

Across Russia, the crisis has prompted a collapse in consumption – retail sales fell by 9.4 percent in June. International airline travel has fallen almost a fifth since last year  – leading to a number of western airlines to sharply curtail their operations  –  and car sales are down 36 percent in the first half of this year. Even the production of train cars fell by a third, because fewer goods needed to be transported according to  Natalia Zubarevich, a researcher at the Higher School of Economics in Moscow.

In another measure of economic distress, household ruble debt in arrears is up 43 percent since last July, according to the Russian Central Bank.

Russian unemployment still has not reflected these traumas, in part because unemployment tends to lag such indicators but also because the Russian state pressurises firms to retain employees and also because, as governments the world over know, unemployment is less about being out of work than whether you meet the officially determined criteria  to  qualify for receiving benefits.

According to Russian state statistics agency Rosstat, in January the levels of unemployment across the country reached 4.2 mln people, or about 5.5 percent of the workforce. In June, the number of unemployed Russians was 4.1 mln, or about 5.4 percent of the workforce.  No unemployment, no problem.

But a poll conducted by state pollster VTsIOM last month showed Russians are seeing an increase in family members and friends losing their jobs. The poll surveyed 1,600 Russians living in 130 cities across 46 regions of Russia during the period of July 25 to 26, 2015.

A breakdown of VTsIOM’s polling data reveal that in July, nearly one in three Russians (31 percent) reported someone close to them losing their jobs, up from 24 percent in January. The number of respondents reporting no firings close to them dropped four percent from January to 64 percent in July.

But a falling ruble should not necessarily be all bad news from an economic perspective. A falling ruble should help exports by making them more competitive when compared with foreign competitors and stimulate domestic production since local producers should now be able to find domestic customers who previously bought foreign goods which are now expensive in rouble terms given the depreciation.

That is the theory anyway.

Auto exports, hitherto a showcase example of western investment in Russia, have gone into reverse with a 27 percent decline registered in the first half of 2015. Reduced oil and gas exports have been noted separately.

There are also no obvious signs that import substitution is actually stimulating domestic production with the exception of food, according to a recent report by the credit analysts, Moodys. Here some caution on this modest bit of good news appears in order.

The sharp decline in the rouble led to the Russian central bank having to raise interest rates to the vertiginous level  of 17 percent to protect the currency and has only recently decreased them to 11 percent. The currency is undergoing a further decline leaving the central bank in no man`s land since to reduce interest rates further might lead to a further sharp decline in the currency, triggering another bout of politically toxic inflation to further cut people`s living standards. While to increase the rate leaves the central bank looking as if it should never have reduced the rates in the first place: central bank credibility is viewed as integrally linked to the value of the currency, no matter if that opinion may be misplaced.

The high level of interest rates that existed  – and  even higher that may yet need to be reinstated if the ruble further declines  –  have already probably served their purpose – which is to take a “four by two” to the Russian economy at large. Russian agriculture may or may not, have risen to the occasion regarding import substitution but to continue: it will need access to cheap funds to invest in upgraded plant and equipment and to purchase fertilisers etc etc. Separate to that, it also needs the government to dramatically improve the nation`s infrastructure in respect of roads and communication links, as well as reinforce property rights – the latter viewed as optional in the Russian business environment subject to whim.

With an expensive war to finance in the Ukraine, as well as  bread and circus projects  – such as the 2018 World Cup –  its so called “pivot to the East” project to supply China with gas (already rumoured to be mired in trouble) and a myriad of other favoured political projects to fund, that would appear low down on the government`s set of priorities.

However, to return to the consumption issue of earlier: farms will produce what people consume. While an uptick in food production is good news, the fact is that there was a decline  in  sales  of  food  products  which reached  7.5 percent in February – March 2015, year on year. Combined with a forecast increase in people living in poverty, higher (if hidden) unemployment as well as high interest rates,  farm production, like the rest of domestic production, may be more constrained than appears in the wake of  a collapse in demand.

While important, agriculture does not constitute a significant share of Russia`s GDP – about 4 percent. The country needs to start generating some good news in other more vital components of the economy if it is to start to recover. That may need some more concrete measures than PR stunts involving bulldozers and submersibles.

Photo courtesy of www.kremlin.ru.

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