Economic Mournings

[I/O]

Putin says in September that the US is weak and irrelevant.  In October later he blames the USA for controlling Russia's economy.  He wants it both ways..

Yes, I thought that was one of his more notable backflips. Didn't seem to catch much media attention on the international stage (A little but not much) which is somewhat suggestive of Russia's REAL relevance in the global economic village. Something which DOESN'T sit well with Putin.

I'm not sure his people are buying what he's selling anymore.

Oh yes they are. Russians will blame their government at every turn for any issue and in the next breath quote Putin's (Or his henchmen) words as gospel. The nationalistic sentiments which run so deep in Russian culture have been very well nurtured by Putin. He is a past master at managing that aspect of things.

The point of Russia suffering seriously due to the drop in oil prices may well have some validity, however to imply it is becoming unprofitable is akin to amnesia. Oil was profitable at $16/B not so long ago. Cost structures and salaries in Russia haven't changed 4 fold in that time, but even at $62/B, oil has. The section of Russian society (Small and often elite) who benefits from the oil price boom may have their wings clipped a little but I doubt you'll see them sitting in the streets with beggars cups any time soon. As for the rest of Russian society................what crisis? Where? Who sets the price of the Dollar/Ruble/Euro/Peso anyway?.......will be the extent of the understanding and questioning of most (Not all but most).

As to the MOB scene, I see 10 years from now a lot of Russian girls looking south east rather than west. The emerging wealthy, educated Chinese boys, of which it is predicted 30 million of them won't be able to find a wife at home (Result of the bias within the 1 child policy families) over the next 10 to 20 years may well be competing very seriously for the RU punteress.

I/O

[ambach123]

When I was in Kiev six weeks ago, I saw a lot of cars, construction everywhere, a sense of prosperity and of course high prices. Restaurants were full, foreigners everywhere.

Little did I know that all of this was a house of cards. None of these people paid for any of this. They borrowed from the banks who lent them the money that foreigners had invested in there.

These foreigners have pulled out their money from Ukraine.

I think sooner or later and probably very soon, Ukraine would be a bankrupt country; what happened in late nineties would look like a picnic.

IMF, where Ukraine has gone to for help, has most of word coming to them; I doubt if they would or can help.

It is stunning how in a few weeks a seemingly prosperous country can go bankrupt; even though that prosperity was a mirage.

In a matter of weeks the Ukrainian currency will be devalued to one half of what it was a few weeks ago.

[Gator]

From the BBC yesterday, describing the economic turmoil throughout the world.

RUSSIA:

Background: Russia is a country of massive natural resources. High commodity prices and an expanding banking sector have helped it develop into a fast-growing economy and to accumulate large foreign reserves. It has expanded by an average of 7% a year since the financial crisis of 1998.

Data: Gross national income per capita: $7,560 (World Bank, 2007)

Latest: The upper house of parliament, the Federation Council, passed a law on 13 October giving the state-run Bank for Development and Foreign Economic Activities (Vnesheconombank) 1.3 trillion roubles ($50bn) to pay off or service Russian banks' foreign loans. It came after President Dmitry Medvedev announced 950bn roubles ($36.4bn) of long-term help for banks at an emergency Kremlin meeting on 7 October.

The Russian economy is not widely diversified.  Its government is more autocratic than democratic.  Reminds me of South American countries.  Fortelling a future of repeated busts and booms?  Argentina, one of the wealthiest countries in the world 80 years ago (even wealthier than the US), plans to expropriate private pensions (and pay them back in 10 years).  What if the US did that to our 401k plans?!

OTOH, Russia could come through this global economic crises better off than before, relative to other countries (akin to those in cash rather than equities at the start of the downturn).   It depends upon how smart they are. 

I hear from my wife and her RW friends that it is difficult to withdraw anything other than small amounts of money from banks.  Understandable if every Russian is thinking "under the mattress."  Russia has adequate cash reserves so this is probably more of a "panic speed bump" policy rather than a cash shortage.   

[Misha]

When I was in Kiev six weeks ago, I saw a lot of cars, construction everywhere, a sense of prosperity and of course high prices. Restaurants were full, foreigners everywhere.

It is stunning how in a few weeks a seemingly prosperous country can go bankrupt; even though that prosperity was a mirage.

In a matter of weeks the Ukrainian currency will be devalued to one half of what it was a few weeks ago.

The important word is "seemingly" in your description of Ukraine as a seemingly prosperous country. I expect that what you now say about Ukraine, will soon apply to Russia. Barring a miraculous recovery of oil prices, Russia will be going through some very difficult times starting in a couple of months. There are still cranes in Moscow, but from what I have read, all new projects have been put on  hold. There are also reports or increasing numbers of lay-offs in various regions of Russia and online Russian newspapers are discussing the dangers of a devaluation of the ruble in the coming year.

[Misha]

Russia has adequate cash reserves so this is probably more of a "panic speed bump" policy rather than a cash shortage.   

Depends how you define "adequate." Russia's reserves have already dropped by some $80 billion and the central bank is now spending some $75 billion per month and it has committed tens of billions to banks and elsewhere. Gazeta.ru estimates that the reserves will run out but February 2009. Also, with the prices of commodities falling (not only oil but other important commodities such as nickel), Russia will be importing more than it exports. This will also contribute to the draining of the Russian dollar and euro reserves.

[Gator]

Also, with the prices of commodities falling (not only oil but other important commodities such as nickel), Russia will be importing more than it exports.

Probably not because the Russian economy will also slow, so they will not be importing as much.  Plus, who would give them credit to buy imports. 

Reminds me of when I visited the USSR in 1987.  My friend, the Netherlands Agricultural Attache, was trying to sell butter and cheese to the Soviets.  The Soviets would buy plenty in exchange for cement, not hard currency.  It would never return to such bartering, yet a new world is coming.  Hopefully a better world.

[Misha]

Probably not because the Russian economy will also slow, so they will not be importing as much.  Plus, who would give them credit to buy imports. 

Well, that is where ruble devaluation comes in. Right now, things are coasting as Russia's foreign currency reserves are being spent. When there will be no reserves left, then the ruble will fall. The only question now is how far and how many rubles will be needed to buy a dollar: 40? 60? 90?

Once the ruble has been devalued, imports will then fall because people won't be able to afford to buy them. This will be hard for people living in Russian cities as more of their food is imported.

[Mishenka]

I had posted a report recently that said at the current Kremlin spending rate Russia's cash reserves will be fully depleted in less than 3 months. Watch the Ruble fall, as Putin took his stash of USD to buy rubles and boost the value, however, that didn't help as he wished and it fell another 3 rubles to the dollar at 27-1. 

If you look at some recent prices you will be shocked at how high they are. I tried to book a flight on Aeroflot from LAX to Tashkent and it is $4600 USD. 7 day advance.  Other flights with multiple carriers were $2600- 3000 but took 3 days to arrive. On the other hand I found flights from NYC to Moscow for 689. I guess if one is creative and doesn't mind taking 2 or 3 days to get there you can find deals from LAX to NYC at 400 and then NYc to Moscow for 600 and SVO to Tashkent at 400, plus taxes under 2 grand to fly, saving 2600. Ugh! its bad enough this is a 27 hour flight on the best conditions, 48- 72 hours would wipe me out. so, what is a guy to do, His woman wants to see him and she is stuck in Tashkent where a visitor visa for her is close to impossible, Im stuck with a visa and cant afford a flight before the holidays. The only answer I could give her is wait for better times, but, it doesnt look like better times will come soon.

Mishenka

[Makkin]

Gator,

  Is too late for Russia to make amends to a one horse pony of economic structure as they are late to the dance.

  They may be able to form a more diversified economy but that takes years and when the snow is melting on them as it is now they will not soon recover like in a fairy tale.

  Western Europe is 10X's more stable than Russia and they are not a one horse pony economically so what makes ya think Russia can flop up and produce diversification just because they need to? No way they can pop up an economic plan that fast as all the world econimies are far from doing that and they are better prepared to do so.

Makkin

[Ronnie]

I wrote yesterday that the current crisis will resolve itself when home prices in America stop falling.  Many have attributed the crisis to the subprime loan market.  Turns out, according to one analysis, subprime is not really the culprit.  See link to article below.  Even folks with the best credit who may have stretched their budget to buy the home their in, are finding their incomes stagnant so they took out second mortgages to relieve the strain.

Now, with the prices falling (a natural phenomenon of the marketplace) and wages falling or stagnant (a natural result of flawed trade and immigration policies) those folks are finding they must "punt" (forgive the American football term (and the overuse of parenthetical phrases)).

Right now, My wife and I feel like there is an angel on our shoulder.  We sold our home in 2005 and have not repurchased.  She sold her apartment in Dnipropetrovsk in 2007.  Now we are just waiting as the home we want to buy becomes cheaper and cheaper by the day.

http://voiceofsandiego.org/articles/2007/07/18/toscano/902subprime062807.txt

[Mishenka]

Ronnie, where are you living?  House prices in Solana Beach where I live haven't dropped at all. They are out of reach for most of us. where prices a few short miles away have dropped 30%.  I've lived here all my life and watched home prices go from $6,000 what my parents paid for a home in Del Mar in the mid 50's, to 5 to 6 million today, what you will pay to live in the sand on the beach here. Average junk fixer 3 bedroom homes selling between 1.2 and 1.4 million are out of reach for average people living and working here regardless of how many jobs they have, and may are working 2 jobs.  As a teenager I bought my first home, a condo in Encinitas for 54,000 and sold it 6 months later for 72,000, now the same place is 550,000. After this condo was sold, moved to Del Mar is the same size condo for 92,000 back then, now are selling in the high 600's low700's and they are basic,  nothing special at all. I better save the dirt I wash from my feet, seems like land here is more costly than gold.  You are very fortunate to sell before the drop in value, no sense in buying again for the next year or so. From all I hear, and hope they are wrong, prices won't hit bottom till this time next year and maybe 18 months. Renting is much cheaper now and you pay no maintenance costs. 

[ambach123]

Consider the following scenario:

The banks are shut down, and so is the stock market.  The foreigners have withdrawn all of the money out of the country. The country  has defaulted on its loan. The local currency has no value, there is no legitimate channel to convert it into dollars.

People are buying from the stores and hoarding, with whatever money they have. There are no jobs anywhere, the economy is almost shut down.

The country is bankrupt.

This is Iceland of today, and Ukraine of tomorrow.

Consider this, Iceland used to be one of the richest countries in the world.

[Mishenka]

Consider the following scenario:

The banks are shut down, and so is the stock market.  The foreigners have withdrawn all of the money out of the country. The country  has defaulted on its loan. The local currency has no value, there is no legitimate channel to convert it into dollars.

People are buying from the stores and hoarding, with whatever money they have. There are no jobs anywhere, the economy is almost shut down.

The country is bankrupt.

This is Iceland of today, and Ukraine of tomorrow.

Consider this, Iceland used to be one of the richest countries in the world.

Iceland–a $30B economy with $120B of foreign debt and growing - Is there a way out?
Mishenka

[Makkin]

 Iceland proved many things about greed and banking practices but I think they will find a way out of this but it will cost them dearly.

 I suppose you could re-locate 100,000 or so people to Europe proper as the failure continues but the other 200,000+ will be in for something like a property of Russia if thats possible???

 When the selling starts from the bottom at the local level you will see a mass exodus to various parts of the world.

Makkin

[Gator]

...so what makes ya think Russia can flop up and produce diversification just because they need to?

Did not say that; hopefully did not imply such.  My opinion is that Russia is more like South American economies of the 70s-90s rather than Western economies of the 21st century.

Nevertheless, Russia is now a creditor nation rather than a debtor.  This should be an advantage.  How will Russia take advantage of this situation during this turmoil?  If smart, Russia could improve relative to other nations.  Then again, their government is corrupt and autocratic.  So I would not bet on them; i. e., I am not buying rubles.

[Andrew James]

I would have thought Russian leader(s) would have been well placed to enact Keynesian style policies, boosting domestic demand by investing their considerable reserves in much needed infrastructure projects?

[OlgaH]

Galina tells me  "It is not wise to count your chickens before they hatch". 
Mishka

Mishenka,

I absolutely agree with Galina  and you should also listen to her  and not count or discount "chickens" more over if the "chickens" are not yours 

Britain's Business Secretary Peter Mandelson arrives in Moscow on Sunday to discuss measures to fight the global financial crisis and broader trade with Russia, the U.K.

"The four day visit ... is designed to underline the importance of economic links between the two countries as well as being an opportunity for dialogue about the international response to the global financial crisis, the Department said.

"We are the largest investors in Russia and so U.K. business has a significant stake in the Russian economy and significant interests in its success," Lord Mandelson said.
http://en.rian.ru/world/20081026/117953929.html

[Andrew James]

Your post could just as well apply to my aforemention comments OlgaH. The thing is, talk about having more talks, while stock markets plunge daily, strikes me a form of stalling tactics - reactive rather than proactive - which betrays a lack of any guiding philosophy in the wake of the free market's demise.

[Misha]

I would have thought Russian leader(s) would have been well placed to enact Keynesian style policies, boosting domestic demand by investing their considerable reserves in much needed infrastructure projects.

Well, keep in mind that Russia is a very corrupt state. Novaya Gazeta had a fascinating article examining how billions of dollars worth of GAZPROM stock, for example, simply disappeared from the books before the crisis. Keynesian economics are distorted in a corrupt state.

[Andrew James]

This one Misha?: http://en.novayagazeta.ru/data/2008/65/00.html

Article in the same publication also rather relevant to these discussions:

OUR MARKET IS DEAD Former Russian PM Mikhail Kasyanov
"The financial and economic crisis, affecting not only Russia but the entire world, is going to be deeper with us comparing it to the developed countries of Europe and America. The Russian citizens do not know that, as the authority has imposed a ban on using on the central television the words 'crisis' and 'collapse'. Citizens do not realize that after half a year their lifestyle will change dramatically.."

[OlgaH]

Your post could just as well apply to my aforemention comments OlgaH. The thing is, talk about having more talks, while the stock markets plunge daily, strikes me as a form of stalling tactics.

Andrew,

my point is:

while I can see and read such article and news as "Business remains robust between Germany and Russia", while I can read such words as "U.K. business has a significant stake in the Russian economy and significant interests in its success" in spite of all the shortcomings in Russian policy, I will not be in hurry to mourn over Russia that is "loosing investors" 

[Andrew James]

Andrew,

my point is:

while I can see and read such article and news as "Business remains robust between Germany and Russia", while I can read such words as "U.K. business has a significant stake in the Russian economy and significant interests in its success" in spite of all the shortcomings in Russian policy, I will not be in hurry to mourn over Russia that is "loosing investors" 

Ah, sorry about that. Taking your comments out of context (probably because they came hot on the heels of mine).

[Misha]

This one Misha?:

http://en.novayagazeta.ru/data/2008/65/00.html

Here are a couple others:

Putin and Gazprom http://en.novayagazeta.ru/data/2008/63/00.html
Putin and Gazprom: How and in whose interests the assets worth $60 bn were taken away from the concern http://en.novayagazeta.ru/data/2008/65/00.html

[Makkin]

AndrewJones,

  You are correct and Russia is not ready for this.


   OlgaH may think otherwise but we shall surely see the Russian economics fall by the road in comparison to the EU and Great Britain. It's not hard to figure but I supose hope springs eternal.

Gator,

  I agree with m o s t of what you say..lol

Makkin

[Misha]

Nevertheless, Russia is now a creditor nation rather than a debtor.  ...  So I would not bet on them; i. e., I am not buying rubles.

Also, keep in mind that even though the Russian state has $500 billion in reserves, even the official figures state that Russian companies, many of them government owned partially or wholly, owe over $500 billion to foreigners. And, there are the "official" numbers. The real amount owed to to foreigners by Russian companies may be much higher. If you take the reserves and subtract the monies owed, you end up with a negative (i.e. Russia being a debtor as opposed to creditor), and the crisis has only begun.

If oil prices stay below $60 a barrel for long (as they are now for the Ural Blend), this will leave Russia with the choice of letting its companies going into default and foreigners acquiring large chunks of Russian business, or the Russian state paying off their debt and leaving the Russian state at risk of going into default. Call it the fire and frying pan dilemma.

I agree about not betting on them or buying rubles. That would be a wise move IMO.