Cast your mind back to the days of the boom, and recall Russia. Back then it was flexing its muscles, turning off gas pipes and kicking out British executives from Russian BP joint ventures. It was as if Vladimir Putin, by showing off his muscles, as is his wont, was symbolic of the new Russia.
Then the price of oil crashed, and crisis hit.
Latest estimates suggest the economy of the bear is set to contract by … well, wait for this one, it’s quite dramatic. Cue drum roll … is set to contract by 6.8 per cent this year, or so said the OECD recently. Contraction is likely next year, too.
But it seems this is the least of Russia’s problems. Yesterday an article in the FT suggested Russia could be about to experience a Japanese-style lost decade. The pink ‘un could be right.
Russia has got four main problems and one big advantage.
Problem number one is its banks. Official government estimates suggest bad debts could hit 12 per cent of all loans this year. But Capital Economics reckons this figure could hit no less than 20 per cent. All of a sudden, the idea that 3.23 per cent of all US loans are 30 days late seems trivial.
This means of course the Russian government will have to bail out its banks. The government has allocated $30bn, Capital Economics reckons $60bn will be required. Lower interest rates may help, but as we all know now, when banks are making losses they don’t like lending, and they don’t always pass on cuts in official interest rates. The government is seeing its fiscal deficit rise – not like in the UK, it is true, but then again the UK economy is based on somewhat more solid foundations.
Secondly, Russia is too reliant on oil. The jury is out on which way next for the black stuff. Over the last week or so it fell back from approaching $70 a barrel, to around $62. There really are three camps on this one. There are those who say the recent rise in oil was down to speculation, and point to the massive inventory of oil in tankers, literally floating around. Then there are those who say no, a resurgent China is pushing the price up. Their argument continues that investment in the oil industry has been too low, and current capacity is just too low. Then there’s the Thomas Malthus camp who simply say population pressures mean oil is set to rise again, and will remain high – permanently.
But whichever way you look at it, a country with the population of Russia needs to be more than a one trick pony – or would that be a one act bear – her reliance on oil and gas is simply too great.
Thirdly, there’s Russian demographics. A common theme of this column has been that the real underlying cause of Japan’s lost decade was the ageing population – which meant rising savings, no matter how low the rate of interest was. This in turn helped promote the carry trade in which money left Japan for markets abroad where interest rates were higher.
During the 1990s and this decade, Russia’s population has been falling by around 750,000 a year. In 2007, the UN estimated that unless something changes, Russia’s population will have fallen by around a third from peak by 2050.
Russia’s problem is not so much lack of babies, unlike in say Italy; rather, the death rate is too high.
Russia’s fourth problem is this: according to a recent report from the World Economic Forum, Russia is one of the world’s most closed trading countries. The Forum took into account ease of access to markets, border administration, transport and communications, and business environment, and Russia came out in 114th place out of 121 nations.
A related issue is that Russia still suffers from legacy issues from the old soviet era. There is another survey called the World Values Survey – and it asks, among other things: “Would you say most people can be trusted or that you can’t be too careful in dealing with people.” There does seem to be some kind of correlation between how much people are willing to trust each other, and economic performance. The Scandinavian countries, for example, always do well on trust.
Brazil usually comes bottom of these trust polls; Turkey and Peru do badly too. But as a general rule of thumb, countries that were formerly subjected to a kind of police rule – in which neighbours were encouraged to report other neighbours to the authorities – have low trust scores. According to Marek Kohn in his book, Trust, Polish immigrants in the UK, for example, are less inclined to trust fellow Poles than the Brits they have joined.
Other studies have showed that trust levels are low in southern Italy – there are several possible explanations for this, but a five letter word beginning with M and with an F in the middle is often cited as one reason. Russia of course suffers from similar problems.
Her strength lies in her enormous supply of natural resources – not just oil and gas. Russia is the world’s largest country. As the world’s population rises and pressures on natural resources increase with it, Russia’s enormous natural wealth will prove highly valuable.
But in order to exploit this wealth she needs a big workforce, and with her own population falling that means she needs more immigrants. But the closed nature of her economy, the poor levels of trust and high death rates are in danger of putting immigrants off.
© Investment & Business News 2013