Russians and the government of Russia wake up to deepening economic crisis as rouble plunge to lower levels

RUSSIAN leaders like to radiate confidence and talk down financial crises. But stories of laid-off workers, unpaid salaries and involuntary holidays are having more impact. The government blames America and insists on the rouble’s stability, but sceptical Russian people and companies have rushed to change their roubles into dollars. Now, after spending $57 billion defending the rouble in two months, the Kremlin is worried. This week President Dmitry Medvedev conceded that the crisis was spreading to the real economy.
Wage arrears rose by a third last month. Growth of industrial production, running at 5.4% in the first half of the year, has almost stopped. The World Bank predicts that economic growth will fall by half in 2009, to 3%. Rising oil prices and cheap credit—the two main sources of money for the Russian economy—have gone sharply into reverse. In just five months the stockmarket has lost two-thirds of its value.
In theory Russia should have been prepared for a drop in oil prices. It has a big stabilisation fund and the world’s third-largest reserves. But even as it has saved money, Russia has allowed firms, including state-controlled ones, to borrow cheaply abroad. According to the World Bank, debt made up almost 85% of total capital inflows to Russia last year. The result is that, although Russia has $475 billion in reserves, external (mostly corporate) debt is higher. For the first time since 1998 Russia may be running a current-account deficit.
Rory MacFarquhar, an economist at Goldman Sachs, says the immediate concern is the rouble. The policy was to stop the rouble appreciating too fast when oil prices were high. Now the central bank is having to resist rouble depreciation. As Mr MacFarquhar puts it, Russia’s reserves were meant to offset temporary drops in the oil price, not to keep the currency at the wrong level.
At first the government tried to blame foreign speculators for putting pressure on the rouble, but it soon became clear that the real pressure came from within Russia. Igor Shuvalov, the first deputy prime minister, says that the outflow of capital is the result of firms exchanging roubles for dollars, either to repay short-term foreign debts or to protect themselves from currency fluctuations. This has also undermined the government’s attempt to inject liquidity into the banking system.
Natalia Orlova, an economist at Alfa Bank, says that non-payments between banks and firms are a growing problem. Rising wage arrears suggests that non-payments will also dampen consumption, the main source of growth in recent years. (State bureaucrats and those working for Gazprom, the state gas giant, seem oddly insulated from this problem.)
On November 11th the central bank allowed the rouble to depreciate against a basket of currencies by 1%. At the same time, it raised interest rates by a point to 12% to stem capital outflows. But this has made its job even harder. For by signalling that depreciation of the rouble will be gradual, it has only encouraged people to change roubles into dollars before the next currency move. Sergei Ignatiev, head of the central bank, says that interest rates should now rise above inflation, which was 14% in October. (Until now, Russia has had negative real interest rates.) But given the extent of state corruption and red tape, the small and medium-sized businesses that Russia needs to grow will struggle.
The central bank is now stuck between a rock and a hard place. Defending the rouble from further depreciation will bleed its reserves. Raising interest rates without liberalising the economy might suffocate it. Devaluing the rouble in one go would be more helpful right now, Mr MacFarquhar argues, but it is politically impossible because the government (especially Vladimir Putin, the prime minister) has staked so much of its reputation on preserving a strong currency.