Thursday, March 26, 2020

Economic Crisis in Russia Will Be ‘Much Worse than the One in 2008,’ Inozemtsev Says

Paul Goble

            Staunton, March 22 – The looming economic crisis in Russia will be “much worse than the one in 2008,” Vladislav Inozemtsev say, because the underlying fundamentals that mean Russia does worse than other countries in a world crisis haven’t changed and because Vladimir Putin and his team do not understand the nature of the problems they face.

            In 2008, the Russian economist says, “Russia showed the worst results among all developed countries, a decline of 7.9 percent. In no other country was there anything like that … the Western world showed that it was much more effective and that it had more resources and mechanisms than Russia to deal with these problems” (

            But when the world recovered so too did Russia. However, because of Moscow’s actions in Ukraine, Russia entered another crisis in 2014; but that crisis, Inozemtsev says, was “a purely Russian one which occurred even as the entire rest of the world moved forward.” That shows that Russia won’t be able to “save itself” even if economies elsewhere recover quickly.

            In sum, he says, “we never cope with world crises better than the next poorest one involved.” And in this case, the same will hold. Unfortunately, the Kremlin doesn’t understand this because it does not understand either the nature of the Russian economy or the nature of the economies of other countries.

            The Kremlin thinks that the budget sector is the economy, but that is not the case, Inozemtsev continues. “There are two societies within one country: There is the society of those paid out of the budget – pensioners, bureaucrats, teachers and doctors.” They will continue to be paid.

            But there is also the private sector and it will contract because the collapse of the ruble will lead people to spend less. “Large companies will survive this, but smaller ones will not be able to pay their rent, because they won’t have customers, and they will close.”  And that will further depress the economy.

            Evidence that the Putin regime does not understand this is all around, Inozemtsev says. It is most clearly in the decision of the Russian central bank to raise key rates at a time when the US Federal Reserve is cutting its. What that means is that Russian banks won’t lend to those who want to buy cars or apartments but to big business, and consumer demand will drop.

            The Putin regime also doesn’t understand something else: When American firms are forced to declare bankruptcy under Chapter XI, they continue to operate and therefore do not push down the economy as much as might be expected. When Russian firms go under, they close and production and the income their workers had received is lost.

            Moscow is not going to be able to send oil prices back to where they were anytime soon. Talks with Saudi Arabia won’t succeed in doing that, and the American shale oil revolution will continue. As a result, depressed prices will continue for at least several years; and the Russian economy will suffer worst of all. It will be “a long bottom” for Russia.

            Inosemtsev makes two other observations worthy of note. On the one hand, he says that it is a mistake to focus on rising regional debt because in almost every case, Moscow is covering it rather than taking the chance of letting this or that region sink.  “Only 12 or 13 regions are making ends meet without subventions and transfers from the center.”

            And on the other, Putin could hardly have chosen a worse time to seek approval of his constitutional amendments. Not only is the voting likely to be when the ruble’s decline will be hitting hardest, but in contrast to 2018, few are going to believe any positive results his regime will undoubtedly announce. That too will make the situation worse.

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