It’s impressive just how quickly and convincingly the wheels have come off the Russian economy. Obviously the plunge in oil prices is the big driver, but the ruble has actually fallen more than Brent crude – oil is down 40 percent since the start of the year, but the ruble is down by half.
What’s going on? Well, it turns out that President Vladimir Putin managed to get himself into a confrontation with the West over Ukraine just as the bottom dropped out of his country’s main export, so that a financing shock was added to the terms of trade shock.
But it’s also true that drastic effects in terms of trade shocks are a fairly common phenomenon in developing countries where the private sector has substantial foreign-currency debt: The initial effect of a drop in export prices is a fall in the currency, which creates balance sheet problems for private debtors whose debts suddenly grow in domestic value, which further weakens the economy and undermines confidence, and so on.
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A central bank may (or may not, as seems to be the case in Russia right now) be able to limit this currency plunge by raising interest rates. But it will do so only at the cost of deepening the recession. In a 2004 paper, the economists Barry Eichengreen, Ricardo Hausmann and Ugo Panizza offered a good discussion of all this in a Latin American context. In the paper, they give the example of Chile, which was hit very hard by falling copper prices at the end of the 1990s despite enjoying a much more favorable institutional setup than Russia has right now – and, of course, without having effectively invaded a neighboring country.
I have no idea what all this implies for either Russian politics or geopolitics. But talk of a new cold war, and comparisons between Mr. Putin’s Russia and the U.S.S.R., look a bit silly now, don’t they?
I was recently at a conference in Dubai, and have been thinking about oil prices. (A lot of the conference was actually about geopolitics, and I have no interest in thinking about all that grim stuff right now.) So, here are some not especially organized notes.
One involves the failure of the Organization of the Petroleum Exporting Countries to restrict production to support prices. I wonder why anyone thought that was likely. My understanding has always been that when people say OPEC, they really mean “Saudi Arabia” – the only player that has ever done much to restrict output in order to sustain prices. But Saudi Arabia only accounts for about 13 percent of world oil production, which gives it limited power.
Also, consider the precedents: The last time there was anything like the recent oil glut, namely back in the 1980s, even drastic cuts in Saudi production weren’t enough. Eventually the Saudis gave up, and prices crashed, so why should they go through that again?
My other thought is that Venezuela-With-Nukes (Russia) keeps looking more vulnerable to crisis: long-term interest rates at almost 13 percent, a plunging currency and a lot of private sector institutions with large foreign-currency debts. You might imagine that large foreign exchange reserves would allow the government to bail out those in trouble, but the markets evidently don’t think so.
This is starting to look very serious.