Russia and the unfolding global recession
The great international bank bailout of 2008 may, and only may, head off the meltdown of the global financial system, but it isn’t likely to head off a recession which will hit most if not all of the world. How Russia works it way through that global recession will, in large part, determine not just its place in the world on the other side, but also the day to day lives of a population that, by and large, has only recently started to become accustomed to improving living standards and modest increases in their spending power and wealth.
But to look through various aspects of what is unfolding;
Here in the second week of October we’ve already seen the stock market crash, or part of it at least. But unlike much of the rest of the world most Russians don’t own shares, and aren’t particularly interested in them at a day to day level. The import of what is happening on financial markets is producing its most immediate effect with changes in currency exchange rates, where for the first time in a couple of years many average Russians are looking at the Dollar to Ruble rate and wondering if they might be better off putting some of their hard earned into Dollars after the Ruble has fallen from just above 23 to the dollar in August to more than 26 to the dollar in October.
With Oil and most commodities being savagely hit in the wake of the chaos on financial markets the short to medium case for the ruble looks less compelling than it has in ages. Adding to gloom is the prospect of oil now being below the level on which the National budget is formed. This means Russia is now looking at a possible budget deficit far earlier than was forecast – 2010 according to most estimates. Throw in the capital outflow resulting from global investors repatriating funds to deal with chaos on their home markets, and you can see the CBR has had to work overtime to keep the Ruble from depreciating more than it has.
The Ruble move into reverse gear, has one immediate impact, and that is to add to Russia’s chronically bad inflation outlook. Russia already has 11% inflation for the year and any significant weakening of the Ruble is likely to add to it. For this reason that we can expect the central bank of Russia to think long and hard before it allows much further weakening as Ruble appreciation has been its one effective tool. Interest rates aren’t real.
But with global turmoil moving into the wider economy, inflationary pressures from expenditure and competition for services and materials can be expected to lessen, despite Ruble depreciation. This gives the CBR and government the opportunity to bring the beast under control. Helping them in this task will be increased agricultural production figures, which have seen upward pressure on prices for many food items ease, an expected easing of consumer demand, and over the longer term, the infrastructure expenditure currently underway which will relieve the logistical bottlenecks which have exacerbated the problem.
The vast bulk of the Russian population isn’t particularly well paid, and doesn’t save much. They spend up on whatever is there to be spent upon, but with the upside that they usually don’t go too far into debt to do it. An additional bonus in comparison with many of their global counterparts is that they usually aren’t leveraged by large housing debts. With banks still viewed suspiciously by many Russians – a legacy of the banking collapses of the 1990s – taking out large loans still isn’t part of Russia’s social fabric, even if it has the downside of that same population not being particularly keen to put its money into banks. This provides some upside in the outlook, particularly so if the government can ensure that the downturn isn’t accompanied by a significant jump in unemployment.
That may seem a near impossible task, but it is helped by the fact that for most Russians a significant part of their annual salary comes in the form of bonuses – estimated as being as high as 25-30% in many cases. It means two things, first that many Russians can live off less than their total earnings would suggest, and second, that – painful as it may be – there is scope for trimming bonuses rather than laying off employees. If widespread layoffs can be avoided, while maintaining day to day expenditures, the impact of the downturn on general spending can be minimized.
That’s not to say that there won’t be major changes in expenditure. There will, and the consumer boom that has become a key part of Russian economic growth for the last 2 years will almost certainly ease back a gear or two. Earlier this week the Rosinter Group, while unveiling its first half figures, announced that it was already planning for changes in customer behaviour. It won’t be the only company. Retail outlets of all descriptions are likely to have similar changes in mind, and the conspicuous expenditure, which has made Russia such a fixture for luxury goods makers, will invariably be toned down.
The key to keeping retail expenditure up, whilst easing, is going to be employment. Already we are seeing plenty of indication that major players are trimming Capex, lowering outlooks, trimming expansion plans, and deferring projects. One of the major factors behind the governments drive to keep interbank and corporate lending going has been to ensure that major projects can still proceed and that expansion and development plans currently funded by international borrowings can be continued with domestic funding if need be.
If those companies can weather the downturn without shedding too many employees – maybe by reducing working hours, or slashing bonuses – then there is scope for Russia’s economy, and society, to weather the global recession.
Infrastructure spending – the key
Russia will face up to this global downturn with a large infrastructure development program already underway. Initially unveiled at the height of the boom to reduce the structural problems facing Russian business it will now become a potential godsend in terms of keeping corporate wheels turning and people in jobs. It may well be a considerable advantage to have such a program already in place, and it can be expected that governments elsewhere will soon be looking at measures to keep domestic consumption up as well, as well as having, at present, a budget surplus to help keep them going, as well as Russia’s reserves to call on in the worst case scenario.
The massive investments already unveiled in transport and logistics infrastructure will help to keep heavy industry – steelmakers and construction outfits in particular – generating turnover. Some of the massive gas and oil developments will see the energy majors, along with services companies and pipemakers get a look in at keeping the energy sector going. The refurbishment of the electricity sector is another source of both long term outcome gains and shorter term fiscal and employment boosts.
To go with this there is massive investment underway already in improving a lot of social infrastructure – particularly in health and education, as well as massive investment in housing stock. Some of this will certainly be trimmed back, but as long as the bulk of it continues then there is scope for it keeping the economic engine ticking over and keeping employment up, therefore keeping consumption up, while generating long term quality of life improvements for everyday Russians.
James Blake, RT