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Tuesday, December 23, 2008




Global Crisis Spreading

Last updated: January 23, 2009

December 23, 2008


Russian economy is deteriorating fast taking by surprise even Russoskeptics. The industrial production and services went into free fall with the rest of economic indicators hardly fairing any better. Russia stemmed the initial onslaught of the global crisis by tapping into its huge forex reserves but succumbed later to a combination of massive capital outflows as investors were fleeing the country and relentless decline of the price of oil. All around Russia, its East European neighbors are already either on the floor or under with Eastern Europe emerging as a region most devastated by the economic tsunami.

The crisis in Russia is rapidly deflating a local bubble inflated in recent years by billions of petroroubles. Years of a runaway imports driven consumption, grotesque structural imbalances of an increasingly lopsided economy, are all fast getting undone. The World Bank called on Russia to abandon its policy of supporting the rouble in view of the speed with which Russian government is burning through its rainy day funds and forex reserves. All in all the huge amount of forex at the disposal of the government is down by almost 1/3 from the peak of almost 600 billion dollars as Russia is occasionally spending close to 10 billion dollars a week in what starts looking an increasingly hopeless battle to save the rouble. A collapse of the rouble is bound to rock Russian society sustained by an economy that over recent years has been steadily falling into a pattern of exporting lots of oil and gas, manufacturing little and importing almost everything else. Actually oil production was stagnating in recent years as well and is expected to start shrinking next year.

Russian economy in run-off to crisis


Source: Russia Economy Watch

By the middle of the next year the massive supply cuts initiated by OPEC should kick in and this is the main reason to remain optimistic about Russia. If OPEC fails to stabilize the price of oil, Russia may find itself losing control over the situation. Without some sort of recovery of the energy market, an economy that moved from a 7% economic growth into full recession in a matter of months may find the next year an impossible one. A prolonged and violent contraction of Russian economy, if not stopped, may send to the bottom what's left of the economies of the Baltic region, Ukraine and others still hanging on thanks to uninterrupted bailouts by the IMF.

Through Russia the global crisis is spreading fast into Central Asia and the region of Caucuses where some countries owe up to a half of their GDP to remittances sent home by their nationals from Russia. There are signs that the flow of remittances is already shrinking and many migrant workers are returning home. Apparently the crisis is exacerbating ethnic tensions in big cities with attacks on foreigners growing both in number and cruelty.

On the bright side three Russian naval ships have arrived in Cuba a few days ago. This is the first visit of this kind since the fall of the Soviet Union. Russian warships also took part a month ago in joint exercises with Venezuela's navy. Cuban state media reported that Russian crews would spend a week in Cuba for meetings and cultural exchanges.


December 28, 2008

This is what they call total meltdown.


Source: Ukraine's Economy Tunnels South In Search Of Australia


January 23, 2009

Russia's forex reserves plunged below $400 billion after the Central Bank has spent in a matter of week about $30 billion in an attempt to hold back the ruble's relentless decline. Shortly afterward the CB announced a one time 10% devaluation by expanding the currency corridor and leaving to the speculators to do the rest of the work. Some analysts say the economy has contracted last month by more than 1% on a y-o-y basis, so Russia is now in a full-blown recession. For an economy that was growing at the rate of 7% just a few quarters ago, this pace of decline is nothing short of amazing. One can be only wondering how much GDP the economy is going to shed in this quarter. Out of the $500 billion worth short term debt owed by Russian companies, more than $100 billion are about to mature, which means that at this rate the bulk of Russia's once staggering $600 billion strong forex reserves will be wiped out by the end of the year.

A one time sharp devaluation at the beginning of the year was actually expected by many. There were speculations about such possibility. However, the huge amount of dollars the CB spent last week, suggests that this is not it. Apparently the ruble came under such intense pressure that the CB decided to take a break. It will take a while for the currency to get to the next barrier of 41 rubles against a mixed basket of dollars and euros, while the CB will be busy licking its wounds. If its next showdown with the forex markets goes no better, the CB may well give up on the whole thing completely and float the ruble.

On the streets of East Europe, from Bulgaria to the Baltic region, social protests were raging on this week. Russia's economy is still trailing the rest of the region in terms of the severity of economic downturn, mainly thanks to the massive forex reserves. However, the only question one can be asking now is when Russia is going to finally catch up with her neighbors. I would bet on something like another six months. Watching Russia's economy being decimated by the global crisis makes one cringe at the idea of a multipolar economic world where the four BRIC countries (Brazil, Russia, India, China) will offset the collapse of the global economy by expanding their internal demand.

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