Rus­sia sta­bi­lizes the ru­ble, but econ­omy still stag­gers

The gov­ern­ment and the coun­try’s oli­garchs pay a steep price to shore up the cur­rency.

Los Angeles Times - - THE WORLD - By Carol J. Wil­liams carol. wil­liams@ latimes. com Twit­ter: @ cjwilliamslat

MOSCOW — Rus­sia’s ru­ble has been on a roller­coaster ride, post­ing the sec­ond- big­gest drop in value of world cur­ren­cies in 2014, then bounc­ing back this year with the high­est rise against the dol­lar, euro, pound and yen.

The ru­ble’s dizzy­ing come­back, though, is due nei­ther to an eco­nomic boom nor to sus­tain­able in­ter­ven­tion by the Rus­sian Cen­tral Bank. And it came at a steep price.

Steady­ing the ru­ble at about 50 to the dol­lar has drained the coun­try’s hard­cur­rency trove of $ 150 bil­lion, more than a quar­ter of the re­serves on hand at the end of 2013. Those cash in­fu­sions have done lit­tle to cheer Rus­sian con­sumers or busi­nesses: Inf la­tion re­mains at more than 16% and the Euro­pean Bank for Re­con­struc­tion and De­vel­op­ment pre­dicts that the over­all econ­omy will shrink by 4.5% this year.

And sta­bi­liz­ing the ru­ble was achieved only af­ter Pres­i­dent Vladimir Putin shook down Rus­sia’s oli­garchs for what he con­sid­ered their fair share to­ward ar­rest­ing the cur­rency’s tum­ble, a tac­tic un­avail­able to the stew­ards of a freemar­ket democ­racy.

“There is no strat­egy and no vi­sion. It’s all ‘ live for to­day,’ ” said economist Sergei Guriev, a for­mer rec­tor of Moscow’s New Eco­nomic School liv­ing in self- im­posed ex­ile in Paris.

Rus­sia’s dis­ap­pear­ing mid­dle class and the work­ing poor are pay­ing the price for the Krem­lin’s eco­nomic fid­dling, Guriev said. He points to an av­er­age 10% drop in real in­come last year, a jump in mort­gage de­faults and ris­ing food and util­ity prices.

A $ 500- bil­lion, decade­long mil­i­tary mod­ern­iza­tion pro­gram au­gurs even grim­mer years to come.

Car sales in Rus­sia dropped 42% in April from the same month last year, the Assn. of Euro­pean Busi­nesses re­ported last month. The share of Rus­sians who can af­ford no more than the ab­so­lute ne­ces­si­ties has soared to 20%, the high­est since polling on the sub­ject be­gan a decade ago, the Nielsen re­search f irm re­ported last month.

Even dur­ing the 2009 re­ces­sion, the re­port notes, only 7% of re­spon­dents said they could af­ford noth­ing more than food and shel­ter.

“But peo­ple know not to blame Putin. They know it is all the fault of Obama and the Ukrainian fas­cists that they have to suf­fer eco­nom­i­cally to con­front these evil peo­ple,” Guriev said, mock­ing the pre­vail­ing public at­ti­tude molded by a lav­ishly funded pro­pa­ganda cam- paign on state- run TV.

“In Rus­sia we say that there’s the tele­vi­sion and there’s the fridge,” said the economist, who un­til last year was part of the Krem­lin’s f inan­cial in­ner cir­cle. “Peo­ple be­lieve what they see on tele­vi­sion, but when they don’t see any­thing in the fridge they stop be­liev­ing. If the gov­ern­ment doesn’t have the cash it needs and sees that its pro­pa­ganda is no longer con­vinc­ing, it may em­bark on a new mil­i­tary ad­ven­ture to make peo­ple be­lieve again.”

The econ­omy was tick­ing along with healthy growth in most re­cent years un­til Rus­sian troops seized Ukraine’s Crimea re­gion in 2014. The United States and the Euro­pean Union im­posed sanc­tions on Moscow for its vi­o­la­tion of in­ter­na­tional law and its neigh­bor’s sovereignty.

Those mea­sures, which cut off in­ter­na­tional lend­ing and black­listed dozens of Krem­lin king­pins, have co­in­cided with the de­cline of world oil prices to half their value of a year ago. And in spite of re­peated pledges by Putin to di­ver­sify the econ­omy since he f irst took of­fice in 2000, Rus­sia re­mained de­pen­dent on oil and gas sales for more than half of its in­come when the latest f inan­cial cri­sis hit.

The gov­ern­ment in April re­vised its 2016 bud­get to take into con­sid­er­a­tion the de­cline in ex­pected energy rev­enue, which orig­i­nally had been cal­cu­lated at $ 100 a bar­rel for oil. The deficit spend­ing now en­vi­sioned for next year will eat up an ad­di­tional $ 200 bil­lion from the hard- cur­rency re­serves, and more if the mil­i­tary mod­ern­iza­tion pro­ject con­tin­ues to be ex­empt from the bud­get cuts forced on al­most ev­ery other eco­nomic sec­tor.

Putin has mi­cro­man­aged the f inan­cial cri­sis in much the same away as he has guided the coun­try’s geopo­lit­i­cal strat­egy. He sum­moned his na­tion’s cap­tains of in­dus­try to the Krem­lin for an emer­gency ses­sion Dec. 16, when the ru­ble was trad­ing at 80 to the dol­lar. Ac­cord­ing to the RBK busi­ness jour­nal, he told them that the ru­ble’s col­lapse threat­ened their wel­fare as well as that of the coun­try and that they had an obli­ga­tion to repa­tri­ate the money they had stashed in for­eign banks.

There was no of­fi­cial edict is­sued, and the jour­nal ob­served that the Krem­lin has lim­ited means of con­trol­ling how oli­garchs or or­di­nary cit­i­zens han­dle their fi­nances.

Putin did de­clare a “cap­i­tal amnesty” af­ter the De­cem­ber meet­ing, and the State Duma, the lower house of the par­lia­ment, has been strug­gling since then to draft leg­is­la­tion aimed at as­sur­ing off­shore de­pos­i­tors that repa­tri­at­ing their cap­i­tal won’t lead to in­ves­ti­ga­tions of whether they came by it legally. A history of na­tion­al­iza­tions, cor­rup­tion and as­set seizures has un­der­mined faith in the se­cu­rity of Rus­sia- based wealth, ex­plain­ing the f light of more than $ 150 bil­lion in cap­i­tal last year alone.

But lost on none of the oli­garchs was the un­spo­ken threat of reprisals if they failed to do their part to halt the ru­ble’s free- fall. Mem­o­ries were still fresh of the Septem­ber house ar­rest of oil mag­nate Vladimir Yev­tushenkov and seizure of his as­sets, not to men­tion the 10 years that for­mer bil­lion­aire Mikhail Khodor­kovsky spent in prison for chal­leng­ing Putin’s po­lit­i­cal dom­i­na­tion.

The bil­lion­aire own­ers of Lukoil, Sev­er­stal, No­rilsk Nickel and three dozen other ma­jor en­ter­prises had con­verted enough of their hard- cur­rency hold­ings by late Fe­bru­ary to boost the ru­ble’s value to about 60 to the dol­lar. Igor Sechin, head of the oil mo­nop­oly Ros­neft, told the Tass news agency that he had sold $ 93 bil­lion for rubles in 2014.

The win­ter run on the ru­ble was trig­gered by the con­verg­ing ef­fects of sanc­tions and the nadir in oil prices that flirted with $ 45 a bar­rel in De­cem­ber. Oil has lately traded for about $ 60 a bar­rel.

Putin has brushed off sanc­tions as lit­tle more than an ir­ri­tant and banned Euro­pean food im­ports in re­tal­i­a­tion. He has or­dered ma­jor im­porters to buy Rus­sian­made goods to re­place the com­po­nents they used to get from Western man­u­fac­tur­ers, though do­mes­tic pro­duc­tion can’t ramp up to meet the new de­mand when the scant credit avail­able from Rus­sian banks comes with dou­ble- digit in­ter­est rates.

As na­tional cof­fers emp­tied late last year, Putin or­dered 10% across- the- board cuts in gov­ern­ment- funded ser­vices for re­gions and mu­nic­i­pal­i­ties, with only pen­sions and the am­bi­tious de­fense over­haul spared the bud­get ax.

Gov­ern­ment econ­o­mists have re­vealed lit­tle about the brain­storm­ing that goes on be­hind the Krem­lin’s closed doors or their own can­did views on Putin’s han­dling of the cri­sis. But aca­demics and in­de­pen­dent econ­o­mists will­ing to com­ment from their lofty re­move see lit­tle to sug­gest that the cur­rent prob­lems will be short- lived.

“There is noth­ing good” in the mid- or long- term forecast, con­cluded Alexan­der Save­lyev, a se­nior scholar at the Rus­sian Academy of Sciences’ In­sti­tute of World Econ­omy and In­ter­na­tional Re­la­tions. “And the ma­jor­ity of ex­perts ex­pect fur­ther de­cline.”

I van Sekretarev As­so­ci­ated Press

RUS­SIA has delved deeply into its hard- cur­rency trove, us­ing up $ 150 bil­lion to put an end to its cur­rency’s roller- coaster ride. Even so, inf la­tion still tops 16% and the econ­omy is ex­pected to shrink by 4.5% this year.

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