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Russian Economy Approaching ‘Perfect Storm’ – OpEd

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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.”

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Paul Goble

Paul Goble

Paul Goble is a longtime specialist on ethnic and religious questions in Eurasia. Most recently, he was director of research and publications at the Azerbaijan Diplomatic Academy. Earlier, he served as vice dean for the social sciences and humanities at Audentes University in Tallinn and a senior research associate at the EuroCollege of the University of Tartu in Estonia. He has served in various capacities in the U.S. State Department, the Central Intelligence Agency and the International Broadcasting Bureau as well as at the Voice of America and Radio Free Europe/Radio Liberty and at the Carnegie Endowment for International Peace. Mr. Goble maintains the Window on Eurasia blog and can be contacted directly at [email protected] .

5 thoughts on “Russian Economy Approaching ‘Perfect Storm’ – OpEd

  • Avatar
    August 15, 2015 at 2:13 am
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    Error/Typo in % for Paul Goble article follows:
    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.

    Reply
  • Avatar
    August 15, 2015 at 5:52 am
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    Mr. Goble wishes to rule out a US/Arab conspiracy to drive down world oil prices so as to ruin the Russian economy. However, if one considers that the thrust of US policy has been and is to destroy the world’s largest oil/natural gas producer, which is Russia, so that the US and its allies can control not only the oil supply but the pipeline routes that are being built and will be built, I think the picture is one in which Saudi Arabia (leader of OPEC) is complicit with U.S. policy in reference to Russia, which is also the thorn in the U.S./Israeli desire to control the entire Middle East. Russia, we may remember, is Syria’s advocate and supporter; it has also been a primary ally of Iran. The wild card in the Middle East at the moment is the effect that will be produced by the astonishing decision of the US to normalize its relations with its long-time adversary, Iran, which means that Iranian oil will now enter world markets with, one would suspect, a further lowering of world oil prices, which will, in turn devastate the Russian economy. To destroy Russia, one way or another is the US goal, as evidenced by its installing its puppet-led government in Kiev, and CIA Dir. J. Brennan’s appearance there, (April 2014) to launch Poroshenko’s attack on the Eastern provinces, now regularly referred to as “terrorists” and major examples of Russian-led “aggression” against Ukraine. Putin, however, warned the Eastern provinces against voting for independence, and I see no evidence that he is planning to invade Poland, the Baltics, or any other of his neighbors, notions regularly fanned by NATO’s Gen. Breedlove, whose propaganda on this subject alarms the Germans. We may also reflect that in the two Minsk agreements, the US was notably uninvolved. The countries concerned (Germany and France) are the ones that will be on the front lines once the US has precipitated WWIII.
    As for the high-tech “extractive technologies” developed by the U.S., I presume Mr. Goble is referring to fracking, but fracking will turn out to be the nemesis to the U.S.’s fresh water aquifers, a fact being regularly denied. There is already much evidence that fracking is far more difficult and dangerous than is admitted, so unless the world is prepared to drink its oil, fracking will turn out to be a self-limiting technology for any human beings still concerned about long-term survival–which does require uncontaminated water.
    To sum up, Mr. Goble’s argument is a regular one we usually call “blaming the victim.” Understandably, Mr. Putin would like to save his country, but he has an incredible array of adversaries lined up against him. The neo-Cons in D.C. are prepared, as we have already seen in Iraq, Afghanistan, Libya, Syria, to take extraordinary risks to maintain the US/Israel axis as the global military/economic hegemon. It’s a very high stakes game, one that makes the Great Game of the 19th Century look innocuous by comparison. One needs to remember that wars are fought to control resources, that the industrial world is rapidly depleting resources that can never be replaced, and that our present system of globalized capitalism exacerbates every problem we now face. Those at the top care nothing for the lives of the millions of ordinary people that will be destroyed in WWIII, just as they cared nothing for those destroyed in World Wars I and II. It’s all collateral damage to them–unavoidable in the light of their goals.

    Reply
    • Avatar
      August 15, 2015 at 4:55 pm
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      Vivienne E. Perkins your comment is so true,it is a delightful reading,
      thank you!

      Reply
      • Avatar
        August 16, 2015 at 8:48 am
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        I am so thankful, Peter, to have a reader who can recognize truth when he reads it. In a world of incessant
        lying and propaganda truth is a rare and fragile creature; it must be regarded as precious because it alone can save us–if indeed we are capable of waking up. We have been on this evil path for a long time now; our national arrogance has never been greater, and the longer we remain on the path of technological arrogance, the more impossible it seems that we can escape our vast folly. Sackcloth and ashes are required but we are refurbishing our evil nuclear arsenal to the tune of a trillion dollars. Only one old lady nun and her two male friends have had the courage and faith to confront our national idolatry, only to be tried and im-prisoned as terrorists. We are a nation that does not wish to see our terrible peril.

        Reply
  • Avatar
    August 15, 2015 at 11:43 am
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    One wonders why should Washington amass all this war machinery next to Russia”s border. A few articles by Paul Goble and Brian Whitmore in the Eurasia Review would the the job much cheaper.

    Reply

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