Moscow News
www.mnweekly.ru
August 3, 2009
A different decoupling
What a difference a year makes
By Tim Wall
In July 2008, Russia was on the crest of a wave. Oil hit an all-time high of $147, economists were talking of the country decoupling from the global crisis and the Dmitry Medvedev-Vladimir Putin tandem was still enjoying a honeymoon period.
Then came a series of body blows: investors took fright over the treatment of Mechel and TNK-BP; a year ago this week, war broke out in South Ossetia; and by September the stock market was in free fall, hit by falling oil prices and a failing US economy.
Since then, the situation in the Caucasus has stabilised (to some extent) and Russian stocks have recovered - but the economy has not.
GDP shrank 10 per cent in the first half, while industrial output has withered and unemployment has skyrocketed. Full-year GDP is expected to fall by 7.5 per cent, and even the modest prediction of 1 per cent growth in 2010 is looking very optimistic.
Outlining next year's budget plans, Putin last week made the difficult situation very clear, stressing that ministries should prepare to make cuts.
He insisted, however, that total social spending would still rise by 10 per cent (more or less keeping pace with inflation), and promised that state borrowing would avert a collapse in demand, based on a budget deficit of 3.6 trillion roubles ($115 billion), or 7.5 per cent of GDP. That shortfall - higher than the 5 per cent Kremlin adviser Arkady Dvorkovich described as risky earlier this year - leaves the economy in a precarious position. By 2012, all the stabilisation fund money will be gone, leaving nothing for future generations. And the scary thing is that the budget plans are calculated on the basis of a modest U-shaped recovery, both in Russia and globally.
Above all, Russia is still utterly dependent on the oil price. The budget is based on oil averaging $54 in 2010 - much less than this, and it is difficult to see the government keeping its promises of "social justice" to pensioners and others, while investing in job creation and anti-crisis measures.
Apart from misery for the population, a further worsening of the economy could also spell a different kind of decoupling - from the political stability Russia has enjoyed under Putin.
That fear, of a new "time of troubles", will undoubtedly keep the country's leadership focused on getting the economy turned around.
But global economic winds - still the most volatile since the Great Depression - can easily throw the best-laid plans off course.
