Russian Economy Approaching ‘Perfect Storm’ -- Oil at 25 Dollars a Barrel, Ruble at 125 to the Dollar, and Inflation at 30 Percent

Paul Goble

            Staunton, August 14 – Vladislav Zhukovsky, an economist known for predicting disasters in the Russian economy and for then turning out to be right, says that the situation is more dire than almost anyone imagines because oil is heading to 25 US dollars a barrel, the ruble to 125 to the US dollar, and inflation to 30 percent.

            He attracted widespread attention earlier this week for an appearance on RBK, but the analyst for the Rikom Group gave more detailed answers to the URA.ru news agency.  If he is even partially correct, Russia faces not a “black Monday” or a “black September” but a “black” and bleak future (pda.ura.ru/articles/1036265585).

            Indeed, Zhukovsky argues, the combination of falling oil prices, the collapse of the ruble exchange rate, and rising inflation means that Russia is entering what might be described as “a perfect storm,” one with the capacity to destroy much of the country’s economy this year and next.

            And this situation is made worse by the fact that many at the top of the Russian economic pyramid are behaving as they did in 1998, betting on an ever weaker ruble by buying hard currency and then planning to get back into the Russian market later at firesale prices and thus improving their position but not the country’s.

tThese people, Zhukovsky says, “have their families, portfolios and property abroad. They are interested in having the situation in Russia be as bad as possible and the ruble to fall as far as possible so that they will be able to sell their apartments there and buy them here on the cheap.”

            In 1998, at the time of defauls, the Russian stock market fell 80 percent, the ruble fell 84 percent, “and all our bureaucrats … took the money they had and converted it into hard currency. “When the market collapsed, they bought shares at three cents on the dollar. The very same thing is happening now.”

            Moreover, Zhukovsky adds, after the coming collapse “the American, European or Chinese investors will come.” They too will take advantage of the low prices just as they did in 1992 and 1993

             Unless the government changes course, the ruble has no prospects even at the current price of oil, and oil prices are going to continue to fall, the economist says. Eleven of Russia’s 14 oil processing firms are now operating at a deficit; and consequently, “what we see today is just the quiet before a very strong storm.”

            Russian officials are in denial about all of this, and their projections are not predictions of the usual kind: they are issued only to convince people that things will somehow turn out all right. The numbers don’t lie, but officials do. None of their predictions about the ruble exchange rate, prices for oil and inflation have ever been confirmed by events.

            The Russian economy has not reached its bottom, he says; indeed, it doesn’t have one “because the economy has no limited given that it is in a state of disintegration and is constructed on crude aligarchic raw materials capital.” Thus the ruble could fall to 75 to the dollar by the end of the year and more than 125 per dollar sometime in 2016.

             Even if oil prices were to rise to 70 dollars a barrel, that would not be enough to prevent a further decline in the Russian economy. And given that the actual price will be much lower, that decline will be very steep indeed. As prices fall to 40 dollars a barrel, Zhukovsky says, Rsusia will discover “a third bottom” and then “a fourth” and so on.

            Russians need to recognize that the low oil prices are not the product of “a conspiracy of the US and the Arabs against Russia.” Instead, they are the result of an Arab effort to drive down the price so that the latest technological innovations in extraction technology the Americans have will not be profitable.

Russia isn’t part of the equation for either, Zhukovsky says, but this also means, the basic trend won’t change anytime soon. Moreover, if Russia sits and does not make fundamental change, the new oil extraction technologies will in fact be “a death sentence” for the Russian economy.

Russia’s only change to “move forward” is to focus on scientific and technical progress, to behave as the Chinese have done gradually shifting into ever higher tech areas rather than relying on the sale of natural resources or minimally processed goods.  But that is not what the Russian government is doing.

As a result, Zhukovsky says, the middle class in Russia is being liquidated. Several years ago, it formed 19-20 percent of the population. Now, it is falling toward six percent. One measure of this: In 2013, 18 to 20 percent of Russians said they could by a car; in 2014, that figure had fallen to 12014 percent; and now, it is 8 to 9 percent.

What must happen, the economist argues, is that Russians must invest in their own development, not reduce spending on food or especially on the education of their children because the latter “are the only hope for the future in this country with its destroyed pension system and economic crisis.”