The Russian Economy

Quotes from: "The end of the line" from The Economist November 22nd to 28th 2014

"For more than a decade oil income and consumer spending have delivered growth to Vladimir Putin's Russia. Not any more" top of page 21.

"When a company can be swallowed by a state at any time, more debt will make it less appetizing prey (for corporate raiders and others). This growing debt, Mt. Rogov notes, that instead of preparing itself for  crisis, Russia has prepared a crisis for itself.

This does not mean that Russia is anywhere close to a sovereign default like that of 1998. Then government debt was 50% of GDP and reserves just 5% of GDP. Today Russia is still running a current account surplus of about $50 Billion because it is importing less. Mr. Putin's restrictions on food imports, presented as tit-for-tat counter-sanctions, are more a way of preserving currency reserves and stimulating farms; Russia imports half it's food. Food production is now growing at between 6% and 10%, albeit from a very low base. Other imports, such as medicines are not so quickly replaced: as in Soviet days, petrodollars keep the shelves stocked.

The drop in oil prices in 2008-9 was met with a 40% increase in government spending. With reserves lower, and with the government needing to either keep those reserves available for bail-outs or to risk some big companies and banks going bust, that is not an option at this time. Instead the country faces a period of stagflation. Renewed growth will require new investment and, most crucially, reform. What Russia needs most is what Mr. Putin has done most to deny it: more competition." end quote from top right of page 22.

further down on page 22,
"While Russia has a nominally free-market economy, it is one highly skewed by the misallocation of capital and resources run by cronies.

The Kremlin distributes oil rent via state banks to firms and projects which it selects on the basis of their political importance and their Pro-Putin stance. Most of the contractors for the Sochi Olympics, which cost Russia a staggering $50 billion, were firms run by Mt. Putin's friends; most of the money took the form of credit from state banks. a number of these loans are unlikely to be paid back. Indeed, such loans are one of the reasons why the central bank has been forced to triple its provision of liquidity to the banks since the middle of last year." end quote from bottom right of page 22.