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Crisis-ridden 2009 ends, but leaves behind an agonizing legacy for global leaders

Author: Christopher Kenneth Section: Economy

Issue: Vol. 4, No. 11

Tags: Financial crisis

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As the beleaguered 2009 finally entered its long-awaited last lap in the world history’s chronology, TRCW, in line with its existing traditions on wrapping an outgoing year up in a special end-of-year-edition, has reviewed the key events that happened in 2009, their impacts on the Russian and global economies and how they will shape the coming year and beyond. Unlike in the previous, pre-crisis years characterized by buoyant economic activities, this year’s task was both easier, by virtue of the dominantly omnipotent presence of the ongoing global economic crisis, and more appalling, again due to the catastrophically negative impacts of the economic downturn on all nations.

Without going into the traditional debates over the causes of the worst economic depression since the Great Depression and those responsible for it, suffice it to say that both governments’ lax oversight mechanisms — borne from a misguided belief by western economists in a free market capitalism’s capacity for effective self-regulation and restraint as well as the boundless greed and gross irresponsibility of CEOs entrusted with public and shareholders’ assets on those markets — were pivotal, if not the actual causes, of the current unprecedented catastrophes in the global economy and their ricocheted consequences for national economies.

Just like other countries, the Russian economy has been hard-hit by the crisis for a combination of reasons. One of this was the initial lack of understanding of the scope of the crisis, evident in years of official claims that Russia would be ‘an oasis of stability’ in the looming financial storms, and later the conflicting anti-crisis strategies — such as bailing out the oligarchs and their corporations at the expense of citizens — finally put forward to rein the unfolding negative drama, when the actual scale of the crisis and its longevity became known. By this time, all the anti-crisis-measures, to use a more appropriate term from medical terminology, were more ‘palliative’ than ‘curative’ in their applications.

"Globally, it is estimated that between $5trln and $10trln were injected into the world and national economies earlier this year to avert the-then imminent financial apocalypse."

The Russian president, Dmitry Medvedev, aptly described the situation, when he noted that the current crisis has practically shown that the local economy is far from ideal. “It is now apparent that almost 20 years of active economic reforms have not lifted Russia from the ‘humiliating grip’ of its almost absolute dependence on raw-materials,” the president said in his State-of-the-Nation Address. “Indeed, our economy, to a high degree, has continued to ignore the basic consumer needs with impunity, as locally made goods are characterized by generally low quality and incompetitiveness vis-a-vis their analogs from abroad,” he continued. “Similarly, local companies, with few negligible exceptions, do not create the types of goods and services that are really needed by consumers, as they mostly trade in goods — natural resources or imported commodities — that are not manufactured by them.”

Consequently, the country’s losses from the ongoing crisis were significantly higher than previously projected. “If we speak purely about the economic scenarios, we are at the bottom of the worst expectations. In other words, the actual losses suffered by Russia are considerably higher those forecast by us, as well as those of the World Bank and other expert organizations,” the president said. “This is because, contrary to our previous expectations of a 3.0-3.5% decline in GDP size, the actual fall by yearend is expected at 8.5%.”

Russia and the global economic crisis

Presenting a report on the Russian economy to the president in October, Industry and Trade Minister Viktor Khristenko noted that though the October industrial output data indicated an improvement over the September figures, there was, however, still unambiguously clear evidence of negative crisis phenomena in all the sectors of the economy. The same negative trends were collaborated by the Ministry of Economic Development (MED) data on economic performance between January and September 2009 released in October. “In January-September 2009, the industrial output continued to fall in almost all the seven Federal Districts and majority of regions across all sectors of the economy, notably in the mining, processing, electricity, oil and gas industries, compared to the same period in 2008,” the ministry said.

The worst declines were observed in the mining and processing industries in the Central and Volga Federal Districts, where outputs stood at 79.9% and 82.9%, respectively, of the 2008’s levels. Equally hard-hit were the auto industry, where the flagships — AvtoVaz, GAZ, etc. — are on the verge of bankruptcy, despite repeated state bailouts, and the construction sector, where output stood at 2.63trln rubles, or about 81.6% of 2008’s level.

Also, the retail industry went down, standing at 10.5trln rubles, or 94.7% of 2008’s data, while the public services dipped by 4.0% over the 2008’s data to peg at 379.1bln rubles. The citizens’ disposable incomes on average dipped 3.3% nationwide in January-August, while salary arrears pegged at historically high level of 5.56bln rubles. Expectedly, the volume of consumer credits was down, falling 8.3% from 4.02trln rubles on Jan. 1, 2009 to 3.68trln rubles on Aug. 1, 2009, a negative trend that starkly contrasted with an almost 135% increase over the same period in 2008.

The negative global investors sentiments on the international markets prompted a more than 50% decline in the nation’s gross volume of exports and imports. Thus, according to the MED data, the volume of exports between January-August totaled $180.9bln, or about 54.9% of the value for the same period in 2008. Similarly, the import volume also fell, though less dramatically as the export figures, a reality that stemmed from the fact that Russia is an imports-dependent country. Thus, the volume of imports totaled $114bln, or about 59.6% of the previous year’s value.

The drastic decline in Russia’s external economic activities, and hence the sharp drop in its foreign revenues earning, stemmed from the country’s worrying lopsided dependence on export of raw materials, notably oil and gas, thus making the local economy heavily reliant on situations on the international markets. Hence, any volatility on these markets always sends ripples through the economy. For instance, the crisis-borne negative trends on the EU market, Russia’s largest trading partner, which accounts for 50% of its foreign trade, including 66% of its energy exports, has significantly lowered the country’s forex revenues. It is a known fact that economic decline always reduces the demand for oil and gas. This is more vividly illustrated by the MED data, which say Russia’s losses in the energy sector alone will total about $70bln-$80bln, half of which will result from a significant decline in demand for energy by its European partners.

Anti-crisis measures and their effectiveness

Indeed, at the height of the current crisis, the Russian economy, like most other economies, was heading for an irreversible tailspin, with sovereign bankruptcy looming in the horizon, were it not for the collective global efforts mounted by the G20 leaders on one hand, and the pre-crisis accumulation of billions of ‘petrodollars’ stored in the Kremlin’s Stabilization Fund from the unprecedented windfalls from oil and gas revenues, on the other.

Globally, it is estimated that between $5trln and $10trln were injected into the world and national economies to avert the-then imminent financial apocalypse. But despite the enormous size of this bailout, the collective global efforts were unable to avert the catastrophes that occurred in some countries such as Iceland, which declared sovereign bankruptcy at the peak of the crisis, and several other nations such as Ukraine, Baltic States, Hungary in Europe and several developing countries across the globe, whose economies are still tethering on the rim of probable collapse.

A major implication/outcome of the current crisis is the final establishment of China as the new growth locomotive of the global economy. Thus, according to the IMF global economic outlook report, released in October 2009, while most advanced economies, notably, the United States and the EU zone, are projected to expand sluggishly in 2010, averaging modestly positive growth of 1.25%, following a contraction of 3.5% in 2009, Beijing is expected to lead the rebound in global GDP, forecast to reach 5% next year, up from 1.75% in 2009, thanks to the expected 9% growth in the Chinese economy (see The IMF Economic growth outlook in 2008-09 and projections for 2010). Similarly, The Conference Board of Global Economic Outlook also foresees China remaining a dominant economic force in 2010, thus confirming the Beijing’s new status as the center of gravity of the emerging, post-crisis global economic affairs and international business activities (see Cover).

Compared to the economic, social and political backlashes from the current crisis in these and other countries that now threaten their stability, Russia fared relatively better because of its unprecedented stock of cash, which in conjunction with the global collective efforts, helped ameliorate the drastically negative impacts of the crisis on the country. Specifically, Russia has so far spent between 2.05trln-2.15trln rubles, or about 5.2%-5.4% of its GDP, in its anti-crisis strategy via both direct cash injections and prudent fiscal-monetary policies. Broken down, between 900bln-1trln rubles, or 2.3%-2.5% of GDP, came via taxation incentive policies, and about 1.14trln rubles, or 2.9% of GDP, came via anti-crisis budgetary measures.

"The Russian economy has been hard-hit by the crisis for a combination of reasons. One of this was the initial lack of understanding of the scope of the economic meltdown, evident in years of official claims that Russia would be ‘an oasis of stability’ in the looming financial storms."

Other unprecedented anti-crisis steps included setting aside 300bln rubles as state guaranties to help companies survive the economic meltdown, optimization of all previously approved budgetary allocations to free up cash from less pressing projects to solve more acute social problems, allocation of billions of rubles to support mortgagees and mortgagers tethering on the brink of insolvency and disbursement of huge grants to select state banks to boost liquidity in the financial system. Equally notable was the provision of billions in foreign currencies in loans at nominal rates to several Russian companies indebted to foreign corporations so to prevent their collateralized assets, which are of strategic importance to the state, from falling into foreign ownership and/or into the ‘wrong’ hands. All these measures, according to the Russian president, helped prevent the worst-case scenario development of the current crisis and/or dampen the projected consequences on the economy, thus enabling the government to plan for next year.

Lessons from the crisis

With the initial greenshoots of global recovery from the worst economic recession in over 70 years now becoming increasingly evident, experts are also becoming increasingly concerned over whether or not the Russian political and business leadership have learned any lessons from the crisis, and if they have, then, how this new knowledge would help avert possible repetitions of the negative pre-crisis scenarios that triggered the ‘current financial tsunamis’ that almost brought the world and national economies to the brink of extinction.

Particularly, the Russian president is also personally worried that his ministers and titans of Russian capitalism will swiftly revert to their ‘business-as-usual behaviors,’ as soon as the economic recovery signs finally crystallize and global oil consumption returns to its pre-crisis normalcy. “There is fear that as soon as the oil prices return to the growth trajectories that anticrisis measures/strategies will be discarded, as businesses will revert to their traditional addiction on raw materials,” he said.

In this context, it is worth noting that the president and his prime minister, Vladimir Putin, have repeatedly called the current crisis ‘an eye opener,’ which, therefore, should not be seen only as difficult challenges for the economy, but also as a unique opportunity to put ‘things in order.’ Specifically, such actions include rooting out corruption, de-bureaucratization of business procedures, reformation of all vital business institutions, full overhaul of the judiciary system and comprehensive diversification of the domestic economy away from the lopsided dependence on raw natural resources, etc.

These measures, according to the Russian political leaders, will prepare the ground for Russia to leapfrog into global prominence in the post-crisis era. “This is why there are searches for answers to questions that are sources of worry to all of us. One of these is what are we going to do in the post-crisis era, has this current crisis taught the Russian government and the economy anything, and will Russia continue to remain a hostage to a raw-materials-based model of economic development?” the president said, listing some of the yet-to-be solved issues on his agenda.

However, the president is worried that, despite the fact the affirmative nature of the answers to these questions is obvious, his constant interactions with the nation’s top business representatives and civic groups leaders have revealed that no real positive changes have so far emanated from the tragic lessons of the current crisis. “No one has seen such changes, that we have learned the required lessons and drawn the appropriate conclusions from the global crisis and its impacts on our economy. But this ought to be a top-priority task of all,” Medvedev said. “But it is becoming clear that this crisis has not taught us anything, as the raw-material model of economic development has so remained unchanged. This should not be the case as the postcrisis Russian economy should be based on new knowledge and innovative technologies, rather than on raw materials, notwithstanding their abundance in our land.”