People's solidarity - Face-off

Dipankar Bose

The Russian economy may have been badly hurt, but it is not crippled

The United States of America has been waging an economic war against Russia from last June onwards by dragging down oil - Russia's main foreign exchange and revenue earner - from $115 to less than $50 between June and January. Saudi Arabia was the US's main ally that refused to cut oil output to raise the price. The US and its European allies also declared 'economic sanctions' against Russia to isolate it. But the whole thing has backfired. Russia has come closer to Asia and even the Middle East and is not relenting on Ukraine at all.

Predictably, Russia's dollar earnings and reserves and also the rouble fell sharply along with the oil price, and consumer inflation spiked to over double-digit, since Russia has to import a host of consumer goods. Its capital flew out and the central bank raised the interest rate from 10.5 per cent to 17 per cent in mid December and lost $88 billion in trying to defend the rouble. It failed. Russia is now set for a full-scale recession with a contraction of 4.5 per cent in 2015. So, Russia is badly hurt. But is it crippled?

Not quite. First, oil analysts have reported that output will fall, leading to rise in price, thanks to the biggest ever strike in the US oil industry recently, significant drop in the number of shale oil rigs in the US and the fall in the investment and expenditure of the major oil companies around the world. They expect oil to stabilize at $70-75 at least by the second half of 2015. Second, despite Western sanctions, Russia is strengthening bilateral trade relations with China, India and Egypt. China and Russia have come closer. So much so that trade settlements in yuan between the two have increased nine- fold in the first nine months of 2014 and their trade is growing. Third, though its reserves dropped $124 billion last year, Russia had a $368.3 billion reserve on February 13, enough to see it through for more than a year even if oil remains at $50 or a little less. Last, the European Commission has announced that though recession-bound in 2015, the Russian economy will stabilize next year, thanks to a rise in demand for oil from growing economic activities around the world leading to higher price.

Clearly, the US and its allies had misread Russia. They had underestimated the degree of solidarity the Russian people have achieved since the Soviet break-up that enables them to withstand economic hardship. The West also forgot that Vladimir Putin came to power after the chaotic 1990s promising to restore order at home and to re-establish Russia's status as a world power. Easing his singular grip over the political and economic leverages of power or pulling it back on Ukraine would threaten the very foundations of his presidency. Putin and his close advisers remain wary of 'too much economic freedom,' given Russia's bitter experience of opening up its economy before modernizing its manufacturing sector adequately. It had inherited a well-diversified economy from the Soviet era, but the prodding of the International Monetary Fund and the US treasury department and the slavish following by the then Russian leadership landed it in a state where its major revenue-earning source became oil and other minerals. Its manufacturing industries were not competitive at all vis-à-vis the West, since they used old technologies and too much resources. Once it opened its gates, Western competitors simply engulfed its manufacturing industries, raising its import bills enormously, forcing it to export more oil.

The Russian story boils down to one of strong leadership and people's solidarity versuseconomic hardship because of high inflation and a shrinking economy. But economic deprivation is something that the Russians have known from the last days of the Soviet era - the financial crisis of 1998 - when it had to default in repayments, and from the Great Recession of 2008-09, just a few years back.