Russian Economy on the Brink?

Vladivostock, Russia, 8 June 2009. Russia, basically, is broke. Unlike the United States, which is also broke, Russia doesn’t hold a reserve currency and can’t keep itself going with other people’s money very long. Premium league football, tennis stars and the mafia will only take you so far as well. Either the price of oil goes up soon, or simmering social issues could explode into civil unrest.[br]

Vladivostock, Russia, 8 June 2009. Russia, basically, is broke. Unlike the United States, which is also broke, Russia doesn’t hold a reserve currency and can’t keep itself going with other people’s money very long. Premium league football, tennis stars and the mafia will only take you so far as well. Either the price of oil goes up soon, or simmering social issues could explode into civil unrest.[br]

Russia, of course, is not the only country to rely on the price of oil for its economic wellbeing. The Arab Gulf states both rely on oil, and save and invest their earnings to guard against price drops and even the eventual exhaustion of their oil reserves. Like Venezuela, however, Russia stands accused of having squandered its petro-wealth.

The Kremlin has not invested in improving its infrastructure, capabilities or companies. There seems to have been a lot of grandstanding, military investment and either deals for the oligarchs or down-right corruption.

The generally held belief has been that Russians are prepared to accept less political freedom as long as the center is strong. The truth is probably a bit more nuanced. Vladimir Putin is trusted as a strong patriot – he is certainly trusted more than local officials, who are the symbol of the corrosive effects of corruption on daily life. Most Russians would like to see Putin come to their neck of the woods and sort things out.[br]

Putin did just that on Thursday 4 June 2009, going to Pikalyovo, a small town close to St Petersburg, and publicly scolding a pro-government oligarch, Oleg Deripaska. This in itself is pretty unheard of, but the scale of the rebuke raised even more eyebrows. He threw a pen at him, told him he was greedy and unprofessional, and forced him to sign the contract to get his BaselCement factory, the only major employer in the town, up and running again. He also pledged over $1.5m to meet unpaid wages.

Many Russians love him for this type of behaviour – many, but not all. 500 people demonstrated in Pikalyovo, chanting ‘Work work!’, as their simply aren’t any more jobs left. There are hundreds of such towns dotted across Russia, designed by Soviet Union central planners around single factories or large employers. If the employer shuts down, the town is crippled. They are called mono towns, and there are over 500 of them.

The Pikalyovo demonstrations might have been embarrassing, coming as they did during the St Petersburg Economic Forum, but the most volatile situation is in Russia’s Far East. This is the world’s biggest country, stretching nine time zones, two continents and 3,800 miles. To say East Russia isn’t joining in the Putin love-fest is an understatement. There is talk of open civil war. East vs West.

It all kicked off when Putin imposed a new law to raise import duties on foreign cars. It was designed to protect the Russian car industry. “They’re crap”, the East retorts, and they have a point. Russian cars haven’t improved much since Brezhnev’s time. Everyone in the East drives Japanese imports.

Demonstrations have been growing in scale in Vladivostock and Khabarovsk, both not far from the Chinese border. They have got so intense that the Kremlin sent riot control police by plane from Moscow, not entirely sure of local authorities abilities – or possibly their loyalty.

With GDP expected to drop this year by 9.5 per cent and unemployment growing, there is a real risk of protests spreading through mono towns and de-stabilising the whole country. There must be more than one oligarch praying fervently for oil prices to rise.

Bjorn Borgisky, EconomyWatch.com