Wednesday, December 03, 2014

Russian meltdown

I make little apology for returning to the subject of Russia. The crisis in Ukraine is rapidly becoming a crisis in -and for- Russia.

The third term of Vladimir Putin, began with a constitutional sleight-of-hand to allow the job swap between Dimitri Medvedev and Putin to take place- and we can date the breakdown of Russia quite precisely from the announcement of this cosy arrangement on 24th September 2011.

Since that time the political atmosphere has darkened dramatically. As I have noted several times, Russia has already fallen 61 places in Transparency International's Index of corruption perceptions since the beginning of Putin's first term, but the breakdown of all rule of law has been confirmed by a series of extra-legal decisions taken in the past few months. The gap between rich and poor is now on most measures the widest in the world, and the ruling elite now comprises merely a few ten of individuals wielding astonishing power and wealth against an increasingly impoverished mass society.

Earlier this year, as the Russian intervention in Ukraine began, I was interviewed on BBC Radio, and the presenter seemed surprised when I described Russia as a fundamentally very weak economy. At that time the Russian economy was roughly the size of Italy.  

Now it is the size of Spain. 

The collapse of the Rouble is now well advanced, and the almost total buyers strike by potential investors in Russian bonds or equities is leading to astonishingly low valuations for the Moscow Stock exchange. Yet even the current valuations may be too high: The Rouble collapse could quickly lead to hyperinflation, and the breakdown of the Russian banking system. 

In short the crisis that might have come late next year if a bank had failed to roll over its debt is happening now, because oil continues to trade at levels which destroy the Russian state budget. 

Meanwhile, the mass exit of all the most creative and innovative minds in Russia- the latest is Pavel Durov- is dismissed because moronic politicians, like Vitaly Milonov can say things like: 

"Russia won't lose anything if the entire so-called creative class leaves. What's the creative class anyway? For me a woman who gets up at 5AM to milk a cow is creative because she produces something. Not some guy with a stupid haircut who sits in a cafe all day writing his blog". 

Not surprisingly the Russian brain drain is now almost as astounding as its capital flight. Thousands of the best educated are leaving, billions of dollars are leaving, and the trend has accelerated since the brutal annexation of Crimea.

The absurd pit bulls of Putinism continue to bark at the wrong target: at the responsible, but increasingly desperate Central Bank of Russia, for example, which Evgeny Federov- almost the definition of of a political dinosaur- claimed was run by a "liberal-feminist cabal"- presumably because the intelligent governor of the bank, Ksenia Yudaeva,  is a woman. Now there seems little doubt that Putin will try to impose capital controls, and the consequences of this fatal misstep could lead to the total collapse of the currency and with it the banking system. The fact is that there wasn't enough money in Russia to satisfy the investment needs of the economy before the crisis. Now there is barely enough to satisfy the current spend requirements. It is a meltdown on a truly spectacular scale.

I had a few ideas about what I was going to write next year as the inevitable liquidity crunch began to cause real damage to the Russian economy. Now the scale of the damage caused by the collapse in oil is an order of magnitude greater than I had forecast and the outlook which was one of stagnation is now one of breakdown.

Although some- including John Kampfner- think Putin has several years before he faces his doom, I think it quite possible that the situation for the regime could become irretrievable surprisingly quickly.

In the short term that might make Putin even more aggressive, yet every day that passes is draining a little more of the life-blood of his regime. The West has begun to answer the Russian challenge, and the Kremlin may already be ruing the day that a relatively weak country decided that it still wished to act with the impunity of its former Imperial shell. The Imperial Overstretch that has been created may not merely bring down the incompetent, corrupt and brutal Putin regime, but Russia itself. 

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