A financial meltdown has ravaged Russia in the last two weeks in a fashion reminiscent of 2008 and 1998. The value of the ruble has fallen by more than half since June and import prices are set to double, setting the stage for President Vladimir Putin to address the crisis at his annual big press conference on December 18.
Yet the president said virtually nothing about economic policy, although his initial statement was entirely devoted to the economy. He reassured his vast audience that the economic situation was really quite good, offered no changes in economic approach, blamed external forces exclusively, and expressed the hope that things would get better. The sole positive message came later on, when he said that Vladimir Yevtushenkov, a Russian oligarch, would be let out of house arrest, and that the charges of money laundering would be dropped, suggesting some softening by the Kremlin toward big business.
Listening to Putin, you would think there was no financial crisis. “First the most important thing: the economic performance,” he said. “In the first 10 months of this year, the gross domestic product grew by 0.7 percent, and the final figure may be around 0.6 percent.… The trade surplus grew by $13.3 billion to reach $148.4 billion…. The main achievement of the year in the social sphere is of course the positive demographics.” The “federal budget this year will show a surplus… [of] about 1.9 percent of the GDP.”
With supreme understatement, Putin referred to the financial crisis as the “current situation,” attributing it to outside forces even if the economic policy was not perfect. “The current situation was obviously provoked primarily by external factors,” he said. “However, we proceed from the view that we have failed to achieve many of the things that were planned and that needed to be done to diversify the economy over the past 20 years.” Putin avoided using the word crisis, and he protested when journalists invoked the term, though he was happy to talk about the “Ukrainian crisis” or even the “continental crisis.”
Putin offered two vague indications on how Russia would get out of the unmentionable crisis, namely applying the lessons from 2008 and thriving on external growth: “What do we intend to do about this? We intend to use the measures we applied, and rather successfully, back in 2008. In this case, we will need to focus on assistance to those people who really need it…. We would certainly be forced to make some cuts.” GDP fell by 7.8 percent in 2009, and Russia’s dollar GDP has fallen by half since 2008 with the current devaluation. If that is success, one is left wondering what failure might be.
Putin continued: “However, it is equally certain—and I would like to stress this—that there will be what experts call a positive rebound. Further growth and a resolution of this situation are inevitable for at least two reasons. One is that the global economy will continue to grow, [although] the rates may be lower, but the positive trend is sure to continue. The economy will grow, and our economy will come out of this situation.” He failed to mention a second reason.
With charming honesty, Putin clarified his thinking by saying that he had no idea when the economy would turn. “How long will this take? In a worst-case scenario, I believe it would take a couple of years. I repeat: after that, growth is inevitable, due to a changing foreign economic situation among other things. A growing world economy will require additional energy resources. However, by that time I have no doubt that we will be able to do a great deal to diversify our economy, because life itself will force us to do it.” Alas, he was forgetting that Russia lost a decade of economic growth with the collapse of communism after the end of the last oil boom.
In the end, his only hopes were external markets and Russia’s international reserves, for which he used old data: “I would like to remind you that Central Bank reserves amount to $419 billion. The Central Bank does not intend to ‘burn’ them all senselessly, which is right.” In fact, the official reserves were down to $414.6 billion on December 12, and further reserves of $11 billion have probably been spent this week.
I have quoted Putin at length, because it is remarkable how lighthearted and vague he displayed himself to be in not dealing with this crisis. It is rare to read a confession by a top policymaker in a severe financial crisis that he has not a clue what to do. He is not even contemplating what he could do or how, but just hoping that global growth will also lift his leaking boat. Clearly, without a solution from the Kremlin, the crisis will continue.
This piece was republished with the kind permission of the Peterson Institute for International Economics
© 2014 Peter G. Peterson Institute for International Economics