Drawing by Niyaz Karim
Just before the start of the recent G20 summit in Los Cabos, Mexico, economists at the Brookings Institution announced that policy paralysis was hitting the global recovery. This news, while true, is far from shocking. The markets have been complaining for years now that both the U.S. and the European Union have been making minor adjustments rather than enacting real reform and the most far-sighted economists were saying two years ago that the best policy response to the crisis was to stimulate growth in the short term so that debt could at least be serviced, but the priority has gone to austerity, growth has stalled and investors aren’t investing because of policy uncertainty.
The main reason behind the failure of the G20 to push the growth agenda in recent years is hardly understood and its inaction has contributed to the ongoing global policy drift. Russia’s official stance indicates that part of the reason is that the bigger picture is still blurry. In his op-ed on the role of the G20 in the global economy, which was published in the Mexican newspaper El Universaljust before the recent summit, Russian President Vladimir Putin said that he would like to see greater control over the global economy vested in the G20 and emerging economies such as the BRICS. The BRICS are indeed making solid contributions, confirming recently, for example, that they would contribute to recapitalizing the International Monetary Fund and create a joint pool of reserves to help each other out if a country was hit by sudden outflows of capital.
But many investors have become very bearish on the BRICS due to falling commodity prices, which especially affects Brazil and Russia, not to mention their endemic corruption and their leaders’ lack of vision and inability to solve their own domestic problems.
Many global political and business leaders doubt that these countries really have any answers, let alone the ability to get them implemented.
While Putin likes to trumpet Russia’s successes and compare its higher growth and low sovereign debt with the position in most developed economies, international investors, and indeed most Russian analysts, see the country as dangerously addicted to oil and gas and facing looming budget and pension problems, not least after Putin’s generous campaign promises, while protests by ordinary Russians against the regime and endemic corruption by officials continue.
And even if Russia does follow through with plans to sell $9 billion worth of state assets this year, the sales will do little besides fill the state coffers. They will not diversify the country’s economy or make it more efficient. Russia simply cannot get away from its old Soviet mentality of gigantism – it was display at this year’s St. Petersburg International Economic Forum in St. Petersburg, which was all about grandiose plans and mega-projects. As usual, there was precious little about encouraging small and medium-sized enterprises, the backbone of every advanced economy.
Putin should also be careful what he wishes for. He talks about the high debt levels in advanced countries and says they should be reduced. This, too, is true – but these fueled Russia’s commodity exports between 1999 and 2008. As soon as the European and American economies hit the skids, they dragged down the BRICS economies as well – despite the views of many economists who talked about “decoupling” but who should have known better.
So while the hubris of the BRICS and other developing countries is now rather subdued compared to the go-go years after 2000, the underlying problems in the global economy remain. The spending splurge in the West sucked in huge amounts of imports – including from developing countries – and led to a sharp rise in what was already massive debt. This greatly benefitted the BRICS, as well as manufacturing countries such as Japan and Germany, which all ran up huge trade surpluses – and led to huge global trade imbalances.
These countries, like the financial markets, would dearly love to get back to the status quo ante, but now that austerity is the order of the day, consumers are deleveraging, budgets being cut and no attempts are being made at supply-side reforms or increased trade. As a result, growth has slowed or even stalled
Besides, a return to the status quo ante is highly problematic. Take out debt-fueled growth and innovations such as consumer electronics, and it turns out that many developed countries have seen precious little real growth since the beginning of the equity bull run in the early 1980s.
This view is now gradually dawning even on hedge funds, many of whose managers gathered for a bash in Monaco in mid-June. Jamil Baz, chief investment strategist at GLG Partners, which is part of the Man Group, the second-biggest hedge fund in the world, opined that “the crisis has not even started... it will take 20 years for us to reach escape velocity.”
Even worse, some analysts believe that the dollar is heading for a bust and is not doing that well in spite of the Euro’s problems because once again it faces a huge “fiscal cliff” in December 2012. The U.S. debt ceiling is now up to $16 trillion and investors were disappointed when the Fed refused to announce another much-expected round of quantitative easing.
For Moscow, more immediately worrying are Europe’s problems, since more than 50 percent of Russia’s trade is with the continent. Given Russia’s dependence on Europe, it is no surprise that the ruble has been weakening lately. At first glance, this looks like good news for Russian exports, but as the Institute of Contemporary Development, a think tank chaired by former president Dmitry Medvedev, pointed out, virtually all of Russia’s modernization is imported and the country doesn’t actually manufacture very much.
Russia also has no real services to speak of which it can export, either.
So in mid-June, Russian Finance Minister Anton Siluanov told the Financial Times that Russia was earmarking $40 billion to bolster the economy in case the problems with the eurozone get even worse, and claimed that the country could now react more quickly and effectively than during the 2008-2009 crisis.
This is interesting, because it flatly contradicts Putin’s oft-repeated, but erroneous claim that Russia did well in handling the crisis and did so in good time.
At around $500 billion, Russia’s gold and foreign currency reserves are the third-largest in the world, but these could disappear all too quickly – Moscow spent $200 billion in just a few months in 2008-2009 shoring up the ruble. Oil demand remains high, but prices are falling on fears about growth, and crude inventories in the U.S. reached a 22-year high this week, while Saudi Arabia continues pumping 10 million barrels a day, a 30-year high.
In short – Russia remains awfully vulnerable to global commodity prices and the problems in Europe. It therefore needs to cut bureaucracy and corruption sharply and quickly, and at the same time encourage business and entrepreneurship to diversify its economy and achieve better quality growth.
So far, however, Moscow remains unwilling to tackle the former and remains too focused on mega-projects to promote the latter.
Ian Pryde is Founder and C.E.O. of Eurasia Strategy & Communications in Moscow.
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