From bad can come good

Oil prices are not going to rise tomorrow or the day after. Global prices for all the most important types of raw material, which had been growing since 2000, shot up faster than ever before in the first half of last year, but then a ruinous collapse began right across the commodities market. Prices rose and fell on a huge scale.

In normal times fluctuations like these last for a year or two. That's the way it has been over the last 20 years with oil, steel, aluminum, nickel and many other exports. But does that mean that this time too we've only to wait for 12 or 18 months and then everything will proceed in the familiar way that we've seen many times in Latin America, Asia and Africa? It looks as if this is not going to happen. In December, industrial production in the USA and the euro zone fell by 8pc (against December 2007), and construction in the USA by 14pc. The USA has experienced nothing like this since the transition from wartime to peacetime production in 1945 - and we haven't seen the end of it yet.

Before the crisis, Russia's economy was growing faster than those of the other industrialised countries. The reasons for this were a commodity price bubble, raw material exports, and unlimited access to foreign money. But now we've got to address the vexed questions: how can we maintain social stability in 2009-2010, feed the population and touch bottom as quickly as possible so that we can start growing again?

In January Russia's economy entered a new phase in the crisis. The first phase was in September-October of last year, with systemic risk in the banking system, the collapse of the financial market and the start of an industrial slump. The second phase (November-December) saw the beginning of a squeeze in the industrial economy, and the state's foreign currency reserves (which had fallen by 30pc since September) were pumped into private currency holdings without any perceptible reduction in the bank and business foreign currency debts that were hanging over the economy. The third phase, in January, opened with a jump of 20-30pc in prices for some consumer goods, a 35pc reduction in goods movements by rail, and a 20pc devaluation of the rouble.

The brakes are on in China. This means that demand for Russian raw material exports will fall still further, which will lead to a further fall in production, a new devaluation of the rouble, a general flight to foreign currency, a loss of currency reserves and the approach of hyperinflation.

With the situation developing in this way, monetary medicine on its own is not a panacea. Cuts in expenditure of 15-30pc, underway now in the whole country, and the Central Bank's strict monetary policy (unlike the rest of the world, raising interest rates and restricting the money supply) will create a scenario in which there will be competition between external and internal demand to see which falls furthest. The way out of this is to deliberately increase internal demand (government orders, public works, refinancing commercial banks), to expand tax incentives for long-term investors, and to reduce interest rates. It's time to tackle non-monetary inflation - the consequence of an oligopolistic economy. The population increasingly needs to see limits imposed on prices for medicines, foodstuffs, utilities and transport. Retail prices are not responding to the fall in demand. The greed of those who set these prices is notorious and unlimited, and has brought the world to crisis.

But are there other scenarios with a happy ending? The fascinating thing about crises is that sometimes the storm clouds disperse in a single day, refuting the gloomiest of predictions.

While we don't know what lies ahead, we must learn the lessons of the 2007-2009 crisis here and now. They are simple. The post-crisis economic model cannot be derived from raw material prices and foreign money. It cannot be resurrected as a system of buy-outs, land barons and state monopolies, based on a low standard of living and capital outflow.

The author is director of the Institute of Financial Markets in the Russian government's Financial Academy.

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