Backfire: How Sanctions, Cheap Oil, and a Weak Ruble Are Sparking Russian Reform
Everything intended to hurt Russia is actually helping to reform the country's economy.
Here's an interesting opinion article on
MarketWatch:
Sanctions, drop in oil price best things that ever happened to Russia.
A round of punitive sanctions designed to cripple the economy. A collapse in the price of its key commodity. A currency in freefall and a central bank hiking rates to emergency levels while a corrupt, authoritarian government embarks on foreign adventures at potentially huge expense. For the whole of 2014, the Russian economy was the most toxic in the world, with one calamity coming hard after another.
But here is something nobody expected. In the first quarter of this year, Russia was doing a bit better than anyone could have forecast. We learned last week that the economy managed to grow by 0.4% in the latest quarter, compared to the zero growth or the outright recession that most economists had penciled in. The ruble is the best-performing currency of the last three months. Even the Moscow stock index has started to recover.
In reality, sanctions and a fall in the oil price might have been the best thing to have happened to Russia since the invention of double-glazing. Why? Because the problem for a country rich in resources and well-educated, creative people has been an over-reliance on energy, and a tight-knit kleptocracy that distributes the wealth it generates. It has failed to create its own industrial economy.
The predictions of collapse have turned out to be wide of the mark.
Putin is still in power, and still in possession of Crimea. Nor is there much sign of anything more than short-term damage. A 0.4% quarterly growth rate is not fantastic, but it is better than France, and roughly the same as Germany or Japan.
True, the forecasts are for gross domestic product to fall for this year the IMF suggest it will contract by more than 3% but those may well turn out to wrong as well. What is certainly true is that the economy has not been devastated.
The interesting question, however, is whether it might actually be strengthened. That might sound odd. But the main problem for the Russian economy over the past decade was an over-reliance on oil revenues, and a state-led kleptocracy, which stifled the emergence of a productive domestic economy.
The big reason might well be what plenty of analysts over the years have described as the curse of oil. The black stuff generates lots of easy money, and by filling the state coffers with cash, it makes it relatively easy for a corrupt, authoritarian regime to entrench itself in power. That has been seen in countries ranging from Saudi Arabia, to Saddam Husseins Iraq, and Hugo Chavezs Venezuela. Putins Russia was no different.
Without oil, Russia will have to develop its own industries. And with sanctions slowing down imports, there will be space for entrepreneurs to move into. The state will become less powerful, because it will have lower oil revenues, and so will the oligarchs. Russia will have the opportunity to gradually replace crony capitalism with competitive capitalism. In the medium term, that can only be for the better.
Of course, just because it might happen does not mean that it will.
Keep in mind as well that this is one of the cheapest markets in the world. The Moscow index trades on a price-to-earnings ratio of 6.7, less even than Greece. For an economy that is solvent, and growing at 0.4%, that is a bargain. Sanctions and a collapsing oil price were meant to torpedo Russia but they may end up doing it a favor.
I sent the article to Pater Tenebrarum at Acting Man. He replied:
I bought into Russia near the peak of the panic, but not enough. I have plans to add more.
lee van cliff
Source:
Backfire: How Sanctions, Cheap Oil, and a Weak Ruble Are Sparking Russian Reform
