The 2008–2009 Russian financial crisis, part of the world Economic crisis of 2008, was a crisis in

the Russian financial markets as well as an economic recession that was compounded by political fears

after the war with Georgia and by the plummeting price of Urals heavy crude oil, which lost more than

70% of its value since its record peak of US$147 on 4 July 2008 before rebounding moderately in 2009.

According to the World Bank, Russia’s strong short-term macroeconomic fundamentals made it better

prepared than many emerging economies to deal with the crisis, but its underlying structural weaknesses

and high dependence on the price of a single commodity made its impact more pronounced than would

otherwise be the case.[1]

In late 2008 during the onset of the crisis, Russian markets plummeted and more than $1 trillion had been

wiped off the value of Russia's shares,[2] although Russian stocks rebounded in 2009 becoming the

world’s best performers, with the Micex index having more than doubled in value and regaining half its

2008 losses.[3]

As the crisis progressed, Reuters and the Financial Times speculated that the crisis would be used to

increase the Kremlin's control over key strategic assets in a reverse of the "loans for shares" sales of the

1990s, when the state sold off major assets to the oligarchs in return for loans.[4] In contrast to this earlier

speculation, in September 2009 the Russian government announced plans to sell state energy and

transport holdings in order to help plug the budget deficit and to help improve the nation's aging

infrastructure. The state earmarked about 5,500 enterprises for divestmentand plans to sell shares in

companies that are already publicly traded, including Rosneft, the country’s biggest oil producer.[5]

From July 2008 – January 2009, Russia's foreign exchange reserves (FXR) fell by $210 billion from their

peak to $386 billion as the central bank adopted a policy of gradual devaluation to combat the sharp

devaluation of the ruble. The ruble weakened 35% against the dollar from the onset of the crisis in August

to January 2009.[6] As the ruble stabilized in January the reserves began to steadily grow again

throughout 2009, reaching a year-long high of $452 billion by year's-end.[7][8]

Russia's economy emerged from recession in the third quarter of 2009 after two quarters of record

negative growth.[9] GDP contracted by 7.9% for the whole of 2009,[10] slightly less than the economic

ministry's prediction of 8.5%.[11] Experts expect Russia's economy will grow modestly in 2010, with

estimates ranging from 3.1% by the Russian economic ministry[12] to 2.5%, 3.6% and 4.9% by the World

Bank, International Monetary Fund (IMF), and Organisation for Economic Co-operation and

Development (OECD) respectively.[13][14][15]

Background[edit]

Russia is a major exporter of commodities such as oil and metals, so its economy has been

hit hard[16] by the decline in the price of many commodities. Russian stock market declined

significantly. Foreign investors have pulled billions of dollars out of Russia on concerns over

escalating geopolitical tensions with the West following the military conflict between Georgia

and Russia,[17] as well as concerns about state interference in the economy.[18] Those

concerns were underscored in July by Prime Minister Vladimir Putin's criticism of steel

company Mechelcollapsing the company's stock.[19][20][21][22] By September 2008, the RTS

stock index plunged almost 54%, making it one of the worst performing markets in the

world.[23] Russian involvement in the US subprime mortgage crisis contributed to the

volatility in Russia's financial system. The Russian Central Bank owned US$100 Billion

of mortgage-backed securities of the two American mortgage giants Fannie

Mae and Freddie Mac that were taken over by the US government. This investment most

likely will have to be written off.[24]

Many analysts, including Andrei Illarionov, former economic policy adviser to then-President

Vladimir Putin, claim that in Russia the crisis in the stock market was deepened dramatically

by internal factors, including concerns over state interference in the economy fueled in June

by Putin's criticism of Mechel and the conflict over TNK-BP, lack of transparency in banking

and political risks associated with escalating geopolitical tensions following the 2008 South

Ossetia war in August.[25] Swedish Foreign minister Carl Bildt said on 17 September that the

current Russian financial crisis is "obviously more worrying" than the ongoing subprime

mortgage crisis in view of the political development in Russia.[26] Furthermore, Russia's

overt reliance on the oil and natural gas sector made it particularly vulnerable.

According to the Wall Street Journal and Gazeta.ru, as the Russian market declined in

September, conspiracy theories circulated in Russia among the leadership that the U.S.

government allegedly incited American investors to withdraw their capitals from Russia,

punishing Moscow for the recent war in Georgia.[27][28]

Financial markets[edit]

Major Russian stock market RTS Index with S&P 500 and Oil Spot Prices. All data are in percentages to 1 May

2008 values. A – Vladimir Putin criticises Mechel; B – 2008 South Ossetia war starts; C – Recognition of

Abkhazia and South Ossetia by Russia; D – Alexei Kudrin "no systematic crisis" speech; E – measures to save

major banks are adopted by the Russian government; F – Global financial crisis of September–October

2008; G – PresidentDmitri Medvedev announced additional bailout financing

Stock markets[edit]

On 24 July 2008, Mechel's stock plunged by almost 38 percent after Russia's Prime

Minister Vladimir Putincriticized its CEO Igor Zyuzin, and accused the company of selling

resources to Russia at higher prices than those charged to foreign countries. The

comments, which raised fears of another attack similar to that made onYukos in 2004,

contrasted sharply with previous efforts by President Dmitry Medvedev to improve Russia's

reputation as an investor-friendly country.[29] On the following day, Mechel issued a contrite

statement promising full cooperation with federal authorities,[29] while share values

rebounded by nearly 15 percent. 28 July presidential aide Arkady Dvorkovich  then sought to

restore calm, declaring that all parties would "act in a civilized way," and confirming that

Mechel was cooperating with antitrust authorities.[30] Just hours later, however, Putin

announced that Mechel had been avoiding taxes, by using foreign subsidiaries to sell its

products internationally. His renewed attack caused share prices to tumble once more—this

time by almost 33 percent.[31]

On 16 September Russia's most liquid stock exchange MICEX and the dollar-

denominated RTS were suspended trade for one hour after the worst one-day fall in 10

years as Finance Minister Alexei Kudrin reassured markets there was no "systemic" crisis.[32] Next day, trading was suspended for the second day in succession on Russia's two main

stock exchanges (MICEX and RTS) after shares fell dramatically, forcing the Federal

Financial Markets Service to intervene.[33][34] The simultaneous collapse of money

markets prompted reaction from the government and the Central Bank, while Finance

Minister Alexey Kudrin  sought assurances from U.S. Treasury Secretary Henry Paulson that

the U.S. did not play politics with Russia in the crisis.[27]

The crisis continued on 18 September, as trading was suspended for the third day in

succession on Russia's two main stock exchanges amidst fear of financial collapse. News

agencies are quoting Russia's finance minister Alexei Kudrin as saying trading on Russian

exchanges will not resume until 19 September 2008.[35] Officials at MICEX stock exchange

describe conditions in the Russian markets as "extraordinary"[36] Deputy Finance

Minister Pyotr Kazakevich asserted that "Russia is facing its worst stock market decline in a

decade mainly because of a confidence crisis rather than liquidity problems".[37]

On 6 October the MICEX and RTS crashed by 18.6% and 19.1% respectively. The losses

forced the Federal Financial Markets Service to suspend the stocks three times. The

decreases in other world markets on that day were considerable, but less dramatic than in

Russia.[38] Trading on both exchanges was suspended on the next day; Russian companies

have augmented in price at London LSE.[39] On 8 October the MICEX and RTS plunged

14.4% and 11.3% respectively, trading on the markets was halted until 10 October,

respectively.[40][41] However, on 9 October MICEX trading resumed ahead of schedule, and

the stock market rose 14.7%.[42] On the next day the regulator, wary of crises in American

and Asian markets, decided not to open trading at all.[43]

Money markets[edit]

The crisis in money markets was imminent since spring, when Central Bank of

Russia warned the public of a gradual contraction in bank lending due to unfolding world

liquidity crisis. However, the regulator preferred to combat inflation, raising the refinancing

rate and bank reserve contributions. 1 September hike in reserve rate alone withdrew nearly

100 billion roubles from the money market.[44] The raise coincided with a seasonal peak in

tax payments and left the banking system in a worse state of liquidity than that of August

1998.[44] A subsequent drop in rouble-to-dollar exchange rate and dollar-denominated prices

of Russian corporate securities forced investors to crowd out, worsening the positive

feedback loop. The interbank money market that traditionally relied on Russian corporate

stock as a collateral for the repurchase agreements, immediately imploded in what was

called "a crisis of trust" or even "elimination of trust":[45] when the borrowers defaulted on

loans, leaving lenders with impaired collateral, other banks stopped lending as a precaution.[44]

Money market crunch passed its first lowest mark 15–17 September. 17 September the

government lent the country's three biggest banks, Sberbank, VTB

Bank and Gazprombank, 1.13 trillionrubles (US$44 billion) for at least three months to

boost liquidity;[46] the Central Bank lowered the reserve requirement.[47] This was followed 24

September by Central Bank loans to keep the current accounts afloat and prevent a bank

run. The regulators also raised the cap for deposit insurance from 400 to 700 thousand

roubles (equivalent to 25 thousand dollars).[48] These actions served their short-term

purpose but failed to revitalize the money market: no bank was willing to lend for longer

than overnight.[44]

17 November MosPrime interbank interest rate on rouble loans reached a record high of

22.67%, indicating another shortage of liquid funds as the bank clients transferred funds

overseas or paid taxes due. Rates on six-month US dollar forward contracts fluctuated at

40–60%, short-term currency swaps averaged around 80% as the banks anticipated further

drop in exchange rates.[49]

Bank failures[edit]

On 15 September the KIT Finance brokerage failed to pay off its debt, signalling problems

in Russia's financial sector.[50][51] On 8 October the Russian Railways and Alrosa agreed to

acquire a 90% stake in KIT Finance.

In the beginning of October Sergei Ignatyev, chairman of the Central Bank, announced

imminent bankruptcy of 50 to 70 banks.[45] Actually, in late August – late November the

regulator has shut down only nine banks.[48] More smaller banks showing signs of distress

are allowed to operate, like the Moscow Mortgage Bank that defaulted on returning

individual deposits in November.[52]Regional banks, heavily dependent on individual

deposits, were in particular hit. A bank run registered in Bashkortostan in November caused

local crises. Three of the four worst affected banks were promised rescue by their

shareholders or third-party buyers; fate of the fourth one is yet to be decided.[53]

Government intervention[edit]

Refinancing foreign capital[edit]

Sergei Ignatyev (Chairman of the Central Bank of Russia), German Gref (Chairman and CEO of Sberbank)

and Andrey Kostin (Chairman and CEO of Vneshtorgbank) at a meeting convened by President of Russia Dmitry

Medvedev dealing with economic issues in Russia on 18 September 2008.

On 18 September, Russian President Dmitry Medvedev ordered ministers to inject

500 billion roubles of funds from the state budget into the markets and pledged that the

financial system would receive "all necessary support".[36] On 7 October, Medvedev

announced an additional $36 billion for banks on top of the $150 billion approved in

September.[54]

On 29 September, Vladimir Putin announced a government policy aimed at refinancing

Russian corporations that previously relied on foreign loans. Government

authorized Vnesheconombank as its principal agent in distributing state loans to these

corporations, amounting initially up to 50 billion US dollars, or 8% of Russia's foreign

currency assets. At the same time Putin recommended the Central Bank to

extend unsecured stabilization loans to Russian banks,[55] which was duly implemented.[49] The policy was immediately dubbed "soft re-nationalisation" and criticized for selective

picking of "eligible" borrowers.[45] The 50 billion installment covers only the current portion of

477 billion US dollars owed by Russian corporations to foreign lenders; total assets of the

government and the Central Bank combined are estimated at 550 billion US dollars.[55]

On 23 October, Standard & Poor's changed the long-term outlook on the sovereign credit

ratings of Russia from stable to negative, warning of the costs of bailing out troubled banks

and a rising risk of a budget deficit in 2009. It also lowered Russia's Transfer and

Convertibility (T&C) assessment to BBB+from A-. At the same time, the 'BBB+' long-term

foreign currency, the 'A-' long-term local currency ratings and the short-term ratings of A-

2 were affirmed.[56]

By 13 November, Russian government spending to quench the recession reached

222 billion US dollars, or 13.9% of its GDP;[57] in November the state was spending its

reserves at an average 22 billion dollars a week.[58]

On 8 December 2008, Standard & Poor's additionally lowered Russia's foreign currency

credit ratings to BBB (long term) and A-3. It also lowered Russia's Transfer and

Convertibility (T&C) assessment to BBB and the long-term local currency assessment

to BBB+. On the other hand, the short-term credit rating in local currency was left intact as

A-2. The lowering of credit ratings was caused by the sharp decline of reserves and

investment flow.[59][60] Standard & Poor's also launched a downward revision of Russian

municipal and corporate bond ratings.[61]

Tax and state budget policy[edit]

See also: Federal budget of Russia

20 November Vladimir Putin announced government package of tax reforms. Corporate

profit tax rate (24% in 2008) is to be reduced to 20%.[62] Profit tax base will decrease for

companies investing in capital assets as the immediately recoverable depreciation

allowance is raised from 10% to 30% of the asset cost. There will be no change in value

added tax rates (maximum 18%) in 2009, but the government considered changing VAT

accrual rules in favor of the taxpayers. Minister of finance Alexey Kudrin , who resisted tax

breaks until September,[63] concurred with Putin's proposal, estimating that they will save the

businesses around 500 billion roubles annually.[64]

Earlier in November, Kudrin announced that the state has accepted the fact of a long-term

drop in oil prices and that the existing state budget plans will hold unchanged if the oil prices

stabilize on 50 dollars per barrel mark.[65] Even with tax breaks effective, Kudrin estimated

that the 2009 state budget will break even or, in worst case, bear no more than 1% deficit.[62]

[64] The deficit will be covered by Stabilisation Fund, without resorting to borrowing.[62]

In December the government lifted import tariffs on industrial equipment imported by

metallurgy, construction, forestry and textile industry,[66] at the same time enforcing

increased tariffs on imported cars.

On 15 April 2009, Finance Minister Alexei Kudrin said the federal budget will show a deficit

of 7.4% of GDP in 2009. In comparison, the US expects a budget deficit of 13.5% of GDP,

Britain 9.3%, and France 6.6%. According to Kudrin forecast for the 2010 deficit is 5%.

Kudrin warned, that Russia must cut down its budget deficit before 2011. "Our vulnerability

to the crisis is higher than that of the countries with more diversified economies. This is why

2009 should be a unique year. We must not have a comparable budget deficit in

subsequent years. We must work to reduce it to 3% in 2011," he said.[67]

On 25 May 2009, President Dmitry Medvedev said the budget deficit in 2009 will be "at least

7%" of GDP.[68]

Corporate governance[edit]

Federal Financial Monitoring Service of Russia, the agency in charge of domestic stock

markets and corporate governance, pressed the corporations to reveal their true owners

and signed an agreement with the government of Cyprus (20 November) that may enable

inter-government dislosure of ownership records. Cyprus is, nominally, the number one

investor in Russia; 99% of RTSstock trades are arranged between foreign shareholders.[69]

International cooperation[edit]

Russia has agreed to co-finance International Monetary Fund emergency loans to other

states, initially contributing one billion US dollar.[70] Earlier, in October, Russian ambassador

to Icelandannounces that Iceland will receive a €4 billion loan from Russia to mitigate

the 2008–2012 Icelandic financial crisis. The loan will be given across three or four years,

and the interest rates will be 30 to 50 points above LIBOR.[71] Prime minister Geir

Haarde had been investigating the possibility of a loan provided by Russia since the mid-

summer.[72][73] Iceland's Central bank Governor Davíð Oddsson  later clarified that the loan

was still being negotiated.[74]

Crisis in real economy[edit]

At the end of November 2008, The Russian economy as a whole was not in a state of

recession. The government forecast for 2009 stood at a 6.7% annual growth rate while a

November 2008World Bank report projected 3% growth for 2009,[58] However, a revised

projection issued 30 March 2009 by the World Bank projects a 4.5% decrease for 2009 with

unemployment projected to rise to 12% by the end of 2009. The World Bank report

expressed concern about the condition of the poor and recommended increases in social

support payments such as unemployment payments and child support payments. The

report projected a slight rise in the average price of oil during 2010, up to $53 a barrel from

the projected average of $45 for 2009.[75]

In the middle of December 2008 Russian officials confirmed that possibility of a recession

was inevitable. "Russia is headed for a recession", the country's deputy economy

minister, Andrei Klepach, has said. Asked whether Russia would have a recession, he said:

"It's started already. I'm afraid it will not be over in the next two quarters. ... A major drop

began in October and there will also be drops in November–December," he said, according

to official reports. Recessions are normally declared after two quarters of negative growth.

He also said that full-year economic growth for 2008 would be lower than the 6.8%

previously forecast.[76]

Steel industry[edit]

Russian steel industry is dependent on foreign markets and domestic construction and

automobile industries. Crisis in the industry was first publicly reported in the end of

September – early October. Magnitogorsk Iron and Steel Works laid off 3,000 workers (10%

of its Urals staff) and reduced output by 15% on 7 October,[77][78] another layoff of 1,300 was

announced in early November.[79] Severstal reduced domestic production by 25%; its US

and Italian production dropped by 30%.[78] Evraz Group , employer of 40 thousands workers

in Kemerovo Oblast, was reported negotiating layoffs with the unions and regional

government since 30 October. The company, specializing in construction-grade rolled steel,

was inherently in worse position than other Russian steel mills. 13 November Evraz

announced that, instead of layoffs, it will decrease workers' wages by a third. Some of Evraz

facilities were converted to a four-day working week; the company reduced output to an

estimated 50–60% of its capacity.[80]

On 18 November Goskomstat insider reported an unprecedented drop in industrial prices –

minus 6.6% monthly, following a 0.8% drop in September (the agency itself delayed its

regular monthly report). Most of the losses concentrate in raw material industries;

automobile and tool-making industries dropped only 0.4%.[81] In two months, gasoline and

diesel oil wholesale prices dropped by 12.8% and 16.5%. The worst price fall hit the steel

industry: pig iron and ferric alloys dropped 21.7% in October after a 8.9% drop in

September. Prices on aluminum and nickel are down to break-even point. The decline is

sufficient to indicate a recession.[82]

In November the industry relied on government funds distributed

through Vneshtorgbank loans. VTB issued a 10 billion roubles emergency loan to Evraz to

finance its current tax payments;[83] a similar 5 billion loan was issued to OAO

TMK. Magnitka was reported "in the line" for VTB financing.[84] The industry continued to

implode, and on 14 and 18 November Novolipetsk Steel  shut down two of its five[85] blast

furnaces, reducing its pig iron capacity by 2.5 million metric tons, or 27%.[86] On the same

day Novolipetsk Steel denied steel shipments to GAZ due to automobile maker's default on

payments.[87]

Automotive industry[edit]

Main article: Automotive industry in Russia

In June 2008 The Economist described "Russia's booming car market" as a place where

"you just need someone to count the money".[88] In November the market slowed to its

lowest since January 2007. AC Nielsen linked the market drop to a collapse in auto

loan programs and general uncertainty among consumers, and predicted that unless auto

loans recover, the market will slide back into 1990s.[89] The government supported domestic

auto makers by an increase in tariffs on imports, leading to an expected 7.5–8% price

increase for imported cars.[90]

GAZ and KAMAZ were the first auto makers to declare production cuts in September–

October 2008. GAZ truck production has decreased by 23.4% in September 2008; in

October the company announced week-long shutdowns of the main assembly line to meet

decrease in demand for its most successful line, the GAZelle truck.[91] KAMAZ, the target of

acquisition by Daimler AG since July,[92][93] has been reporting financial difficulties since

September. In October KAMAZ reduced working hours by a third, from six-day to four-day

working week.[91] KAMAZ requested a 15 billion rouble state-backed loan and took a private

loan from Citigroup at 9% over prime rate;[94] in December Daimler AG acquired the first

10% in KAMAZ stock, citing "perfect storm" as a good time acquisition.[95]

AvtoVAZ disclosed emergency measures on 16 October, when Igor Sechin held an

industry-wide anti-crisis brainstorming session in Togliatti.[96] AvtoVAZ reported a stockpile

of 100 thousands unsold cars (two months' output). The company requested government

assistance of 1 billion US Dollars arranged through a Vneshtorgbank loan. Unlike other

major borrowers who used VTB loans to substitute foreign capital, AvtoVAZ loan was

intended solely to pay current expenses.[96]

AvtoFramos, Moscow-based manufacturer of Renault Logan, has confirmed that instead of

a planned weekly New Year holiday, the plant will stop for a month, 12 December 2008 to

12 January 2009. Trade unions asserted that AvroFramos has practiced short-time

stoppages in November; plant administration refuted these statements. According to the

unions, unsold stock reached 8 thousand cars, a month's output of the plant.[97]

Amtel-Vredestein has closed two of its tire plants due to cash flow problems.[98] On 2

December media announced closure of Bor Glass Works , the principal supplier of auto

glass,[99] but the news was soon refuted as false by the plant administration.[100]

Construction and real estate[edit]

In the first half of 2008 Russian construction industry, apparently immune of the global

financial squeeze, grew by 22% in nominal money compared to 2007.[101] In September–

October Mirax Group , Sistema Hals , ST Group and other real estate developers announced

freezing of future projects and intention to dispose of ongoing projects in early stages, citing

an unacceptable increase in interest rates and uncertain demand. According to a Mirax

executive, "our clients are panicking, and that is affecting our business",[102] "... bank

financing for developers has practically ceased".[103] Developers and builders of a lesser

scale are facing a "struggle to survive",[102] especially in regional cities. In October

2008 Orenburg construction executive described regional business prospects as "very bad",

notably the fact that "there is no single bank for today which grants mortgage loans...

Construction industry will not survive under such terms."[104]

27 October Vladimir Putin urged the government agencies to increase state purchases of

road and housing construction services, arguing that the state must capitalize on the

decrease in prices of raw materials. The state allocated 50 billion roubles to buy ready-to-

occupy urban housing from cash-strapped developers. Putin emphasized that the new

contracts must be struck on new, decreased, price terms – estimated to be 20–30%

cheaper than in spring.[105] Strabag executive estimated that in 2009 construction costs will

decrease a further 30%.[106] In November Moscow city government has been successfully

pressing local developers for a 25% discount against October auction prices; the only

developer who attempted to sue the city for a breach of contract withdrew their lawsuit and

accepted the government terms. City government also pulled out of the 118-floor Russia

Tower project,[107] which was immediately suspended by its developer, citing "credit crunch".[108]

Other industries[edit]

In November, the volume of Russian paper exports to China decreased by 30–40%,

coupled with a 30% drop in prices. Exports to Western Europe fare marginally better, with

an estimated 25–40% drop in production volumes. Russia's largest producer of industrial

paper bags, Segezh Paper Mill  (controlled by the Bank of Moscow and the City of

Moscow[109]), declared a ten day shutdown on 24 November.[110] UPM-Kymmene

Oyj anticipates at least a 30–40% decrease in output compared to 2008.[110] In June 2010,

President Dmitry Medvedev visited Silicon Valley in San Jose, California in order to cultivate

ideas of how to develop Russia as a major research center. Skolkovo, a mid-sized city near

Moscow, is the proposed location for this Russian Silicon Valley, and will have its own tax

structure. Yet, Medvedev has been criticized by opposition politicians for deflecting attention

away from the struggling economy and corruption.

Airlines[edit]

In June–August 2008 the fleet of KrasAir, a Krasnoyarsk-based airline with a controlling

state interest, was grounded by the fuel suppliers' refusal to extend credit to the company

that defaulted on payments. Other members of AiRUnion consortium, notably Dalavia, also

folded in August. Thousands of passengers were stranded in airports; flight delays and

cancellations became a national agenda.[111] Government action focused on setting the cap

on jet fuel prices and restructuring its assets into a new company managed

by Rostechnologii, a newly formed state conglomerate. Ministry of Transportation

distributed the licenses to fly former KrasAir routes to other companies. KrasAir also

defaulted on payments to its staff, and on 27 October a strike action, coupled with fuel

suppliers' denial of service, finally ruined the airline. Dalavia lost its license earlier in

October.[112] The collapse of KrasAir also threatened Sky Express, Russia's first low cost

carrier co-owned by the EBRD and former manager of KrasAir.[113] 22 October the assets of

bankrupt KrasAir, Domodedovo Airlines , Samara Airlines and Atlant -Soyuz Airlines  were

consolidated in a new company, Rosavia, co-financed by the City of Moscow and

Rostekhnologii.[114] Rossiya, Orenair, Kavminvodyavia, Vladivostok

Air, Dalavia and Saravia were originally planned to join this proposed airline holding

company, too, which would have made Rosavia the largest Russian airline by fleet size.

Following a 20 percent drop of domestic passenger numbers in Russia per month,

the federal government scrapped all plans concerning the new airline on 5 March 2009[115]

Agriculture, food industry and retail[edit]

Russia had a high grain harvest in 2008, but so it was elsewhere in the world, bringing the

prices down. To support the trade, Dmitry Medvedev authorized a state export subsidy of 40

US dollars per metric ton. This, according to the minister of agriculture, is sufficient to

maintain exports at 20–25 million metric tons.[116] The food industry is, however, locked

between high costs of farm produce and tight price and credit terms dictated by retail

chains. Food industry executives anticipate that the chains will eventually lose part of their

clients to street markets, as the suppliers are forced to develop this independent sales

channel.[117]

Domestic retail chains, heavily leveraged,[118] were experiencing liquidity crisis at least since

April 2008.[119] The first chain to go bankrupt in May 2008, Grossmart (190 stores in Moscow

region), had a particularly high debt-to-EBITDA ratio of 6 to 1.[119][120] Arbat Prestige , subject

to government attacks since 2007, defaulted on its bonds in June.[120] In November 2008

nine leading food retail chains (out of nearly 300) received access to government-backed

financing.[117] Nevertheless, retailers are pressing food suppliers for longer credit terms or

bigger cash discounts, demanding up to 50% price cut for cash payment. Suppliers, in a

mirror move, raised "regular" credit prices by 20–60%. Rather than submit to the chains'

demands, they simply refuse to sell; visible depletion of stocks has affected only a few

affected chains.[118]

Social impact[edit]

Unemployment[edit]

A proprietary Ernst & Young survey of 113 clients that leaked into Russian press in

November summarized their losses at 8% of managerial and 6% of low-level jobs by end of

October. All companies in the survey practiced some sort of reducing labor costs. One

company in four practiced unpaid "vacations"; 8% of clients settled for reduced working

hours.[121] Federal Migratory Service announced in November that 1123 Russian companies

reported upcoming layoffs of 45 thousand.[79]

Most layoffs were reported in metallurgy and financial services: 20% in Uralsib, 1000

in Vneshtorgbank's VTB24 retail division.[79] 1 December Vedomosti reported upcoming

40% cuts in MDM Bank and 80% in IFD Kapital.[122] Sberbank endorsed a long-term

program to reduce headcount by 25% in 2014.[79] In telecommunications, Sitronics laid off

up to 10% in all business units; in audit services, Deloitte Touche Tohmatsu reduced

number of partners in its Russian division by 17 out of 180.[121] Vedomosti has set up a

private "layoff newsreel" syndicating independent reports of job cuts, yet as at 7 December

2008, there are no reliable nation-wide statistics on white-collar unemployment, which

usually escapes official unemployment record.[123]

By late November, Kremlin First Deputy Chief of Staff, Vladislav Surkov , was warning that

the middle classes should be defended from poverty during the crisis. He called for swift

measures to protect the middle class from layoffs and to support consumption.[124] "If the

1980s were the times of the intellectuals and the 1990s were the times of the oligarchs then

the 00s can be seen as the epoch of the middle classes,' Surkov said in a speech published

on the Web site of the ruling United Russia party ... The main task of the state during the

slump must become the preservation of the middle class, the defence of the middle class

from the waves of poverty and confusion that are coming from the West," he said.[124]

According to official statements released 9 December, rate of unemployment growth

peaked in the middle of November and slowed down in subsequent weeks. In the week

ending 3 December overall unemployment grew by 1.6% to 1.315 million people, following a

2.3% increase in the preceding week. The state also reported an increase in unpaid

vacations and reduced working week employees to 149.3 thousands. The number

increased by 84% in a single week ending 3 December. The trade unions anticipate that

official unemployment will peak at around 2 million people in 2009, when hidden forms of

unemployment become visible to statisticians.[125] Yet on 12 December Putin announced

completely different unemployment numbers – 4.6 million in October.[126]

In February 2009 the unemployment rate peaked at a seven-year high of 9.4%, then began

to steadily decline, falling to 7.7% as of October.[127]

Consumer price inflation[edit]

Official consumer price inflation in January–August 2008 reached 14.8%.[118] By the end of

November, food price inflation for an 11-month period reached 15.3%. Overall price

inflation, taking into account consumer and industrial prices, reached 12.5% compared to

10.6% for the same period of 2007. Decline in short-term inflation was credited to a

reduction in monetary supply.[128] Inflation slowed through 2009 with a year on year rate of

9.1% as of November, down from 13.8% a year earlier.[129]

The Russian policymakers had enough financial resources ($600 billion with the Central

Bank of Russia) to manage the cost of a bailout package of $200 billion at 13 percent of

GDP. It was used to support the declining ruble toward the end of 2008 and early 2009, to

provide some funding to the oligarchs so that they could repay their hard currency loans,

and above all to provide cash to the banks. With improving oil prices, the situation has

improved for the budget, and the CBR reserves have moved up to $400 billion from a low

$300 billion last December. But unemployment has been edging up and inflation still

remains high at annual 7 percent. It limits the ability of the policymakers to mount another

stimulus for helping the unemployed. The main problem however consists in diversifying the

economy away from commodities (among them oil and natural gas) and dealing with

massive corruption in the system. Russian President Medvedev described Russia as a

"corrupt, raw-material based economy." That will be the challenge facing the policy makers

in the years ahead.

The financial turmoil originating from the U.S. subprime mortgage crisis

hit Russia by early September 2008, prompting the Russian government

and the Central Bank of Russia to undertake a set of speedy and

concerted measures to soften the impact of the crisis. These initial

measures supported the value of the ruble as ruble holders, domestic

and foreign, switched to dollars. They also provided hard currency to

major Russian banks and Russian big business (the so-called oligarchs)

which had borrowed heavily from foreign banks for their expanding

operations from 2000 to 2007.1

As the crisis unfolded, the Russian central bank’s policy choices for

unlocking the credit crunch and reviving the declining economy were

constrained by a double-digit inflation rate in 2008. At the same time, the

Ministry of Finance faced a high budget deficit as tax revenues from oil

export earnings steeply declined from the end of 2008. In short, the

Russian economy faced a negative growth rate and a significant budget

deficit in 2009, a sharp reversal from their sustained positive record

from 2000 to 2007.

Symptoms of the Crisis

The initial severity of the crisis was underlined by a series of indicators.

By mid-October 2008, the Russian stock market (Fig. 1) had plummeted

by 70 percent from its May peak. Its fall was accelerated by nervous

foreigners discarding their ruble-denominated assets following the

Russian-Georgian war of early August.2 The Russian ruble had also

declined by 14 percent against a combined dollar/euro basket since mid-

July (Fig. 2). The foreign exchange reserves of the Russian central bank

had dropped to $484 billion from approximately $600 billion (Fig. 2)

although they still remained the third largest in the world after those of

the central banks of China and Japan.3

Figure 1: Russia’s Benchmark RTS Stock Index,

October 2005-December 2009 (Daily Figures)

Source: Bloomberg, “Russia’s Benchmark RTS Stock Index, October

2005-December 2009,” Bloomberg Chart Builder.

The plunging stocks severely threatened the financial fortunes of Russian

oligarchs who had borrowed heavily from western banks to expanding

their businesses, offering their company stock as collateral.4 The

plummeting stock market, however, had not affected ordinary Russians

because they did not hold stocks as American households do (although

labor layoffs by the troubled companies had begun to have an effect). But

the declining ruble had the Russian populace worried. Toward the end of

the year, currency exchange booths in Moscow began facing demands

from Russians wanting to convert their rubles into dollars and euros.

Marketing surveys of the period also report that the Russian middle

class, including those who could afford to buy household appliances and

mobile phones, had shrunk for the first time in a decade, from 25 percent

to 18 percent of the population.5 According to a report by Russia’s

Interior Ministry, 5.5 million Russians had demonstrated in 30,000

protests during 2009.6

Initial Remedial Measures

By the middle of October 2008, the Russian central bank and

government sources had earmarked up to $200 billion to stabilize the

situation and contain the outflow of dollars from the economy. The

stabilization measures included outright purchases of plunging stocks (in

the amount of $20 billion), capitalization of selected banks, and financial

support (of up to $50 billion) to companies owned by Russian oligarchs

who had scrambled to raise cash in order to meet margin calls.7 A

significant amount of cash had been assigned (about $36 billion) to the

two largest state-owned banks, Sberbank (the savings bank) and

Vneshekonombank (the foreign economic bank).8 The total proposed

bailout, estimated at 13 percent of GDP, was the largest bail out among

the G-8 member countries.9 It was substantially higher in terms of

national GDP than the U.S. stimulus package (amounting to $787 billion)

adopted by Congress, which was 5.5 percent of U.S. GDP.

Figure 2: Russian International Reserves and the Ruble Against a $/€

Basket, July 2008-December 2009 (Daily Figures)

Source: Bloomberg Chart Builder.

The Central Bank of Russia continued offering dollars in exchange for

the continuing flood of rubles in the foreign exchange market (as rubles

earned from the sale of ruble-denominated assets were converted into

dollars which were then whisked out of Russia). It had substantial

foreign exchange reserves but this process could not continue

indefinitely. Toward the end of 2008, it was losing dollars at the rate of

$12 to $14 billion a week. Despite the hemorrhaging, the bank had

refrained from imposing explicit exchange control measures to stem the

outflow of dollars. Some foreign banks located in Moscow had reported

that they were contacted by officials from the Russian central bank with

suggestions that they should voluntarily discourage dollar outflows from

their coffers.

The initial Russian bailout was a top down, speedy process involving a

few decision makers without being subjected to independent scrutiny or

legislative oversight or systematic winnowing of the turmoil victims. One

looked in vain for the likes of Congressman Barney Frank insisting on a

vigilante role for lawmakers. Vneshekonombank, fully state-owned,

handed out cash in the amount of $11 billion (out of the earmarked $50

billion) to the oligarchs who were threatened with the loss of their assets

(in the nickel, aluminum and steel companies’ and a telecommunication

conglomerate) to European banks.10 The choice of who would be

rescued and in what amounts was influenced by the judgment of Prime

Minister Vladimir Putin and his close advisors. More to the point,

European banks were not allowed to capture stocks of “strategic”

Russian companies. By a strange irony of circumstances, the Russian

state (via the state-owned Vneshekonombank) was regaining stocks

which it had given away to the oligarchs who had provided cash support

to the Russian budget in 1996 and 1997. This move to larger state

ownership reflects a danger facing the Russian economy, despite Prime

Minister Putin’s reassuring comment on 29 October 2008 that, “the

expansion of the government’s presence in the economy is a forced

measure, and is of a temporary nature.”11

On October 23, President Dmitry Medvedev posted this encouraging

entry for Russian citizens on his video blog on the Kremlin website: “I

will tell you honestly, Russia has not yet been caught in this whirlpool

and has the opportunity to escape it.”12 Despite the concerted measures

and presidential cheerleading, Russia’s policy makers faced two

immediate issues.

Immediate Policy Concerns in Early 2009

The slide of the ruble, continuing almost through the first quarter of

2009 from 34 rubles for a combined dollar/euro basket to 41 rubles by

mid-March (Fig. 2), remained the chief preoccupation of the Russian

central bank. Similar to the preoccupation of Washington policy makers,

Russian authorities wanted Russian banks to start lending to alleviate

the credit crunch. The declining ruble (in contrast to the reviving dollar

which was a safe haven in late 2008 for risk-averse clients), however,

had serious implications for Russia’s finance minister and central bank

chairman. A weakening ruble implied that it was worth less for Russian

buyers of imported goods as well as of homemade items (in the absence

of domestic productivity gains). Russian inflation, which had been

steadily brought down to an annual 10 percent in 2006 (Fig. 3), was

running at 13.7 percent in the first quarter of 2009, and the declining

ruble aggravated the policymakers’ inflation control maneuverability.

Unlike the U.S. Federal Reserve, the Russian central bank could not

lower the rediscount rate in order to facilitate commercial bank

borrowing so that the credit crunch in the economy could be overcome

via bank lending to businesses. Instead, it continued fighting the high

annual inflation rate of 13 percent in March 2009 via an exorbitant

rediscount rate of 13 percent.

Figure 3: Annual Percentage Change in Consumer Price Index, 1998-

2009

Source: Economist Intelligence Unit.

The second issue was related to declining oil prices in world markets

which had tumbled from $147 a barrel in July 2008 to $30 per barrel by

December 2008. At a price of $50 per barrel in late March 2009, the

projected deficit of the government would be as high as 8 percent of

GDP. On the other hand, at an oil price of $70, the 2009 budget of the

government would break even. Unless oil prices rose above that level,

the budget surpluses of the immediate past (Fig. 4), which provided

resources for defense spending and infrastructure upgrades, would

vanish. The Russian energy sector, which included oil and natural gas

together, generated a significant portion of central government

revenues. Previously, the high oil prices in world markets (combined

with revived Russian oil production) supported an export-led annual

growth rate of the Russian economy averaging 7 percent starting in 2000

(Fig. 5). That growth performance, which kept the unemployment rate

(Fig. 6) at 6 to 6.7 percent of the economically active population in 2008,

was in danger as 2009 unfolded. Not surprisingly, the Ministry of

Finance was geared up for the challenge of supporting unemployed

workers from a separate, off-budget Welfare Fund of $49 billion set up

using the budget surpluses from the years 2000 to 2007.

Figure 4: Annual Central Government Receipts Minus Central

Government Outlays as a Percentage of GDP, 1998-2009

Source: Economist Intelligence Unit.

2009 Policy Issues

Throughout 2009, the Central Bank of Russia continued lowering the

rediscount rate from a high of 13 percent in order to facilitate bank

borrowing while warily watching the high inflation rate, which to its

relief was declining as the economy moved into a recession with lower

spending by businesses and households. At the same time, the Putin

government managed to finance the stimulus, which was directed at

supporting the unemployed from a separate off-budget fund accumulated

during years of oil-revenue-financed budget surpluses. To its dismay, the

projected budget deficit of 8 percent of GDP in 2009 required an overall

cutback of expenditures and strenuous juggling of budget appropriations

among several categories of defense, infrastructure buildup, and social

services maintenance.

Figure 5: Annual Percentage Change in Real GDP, 1998-2009

Source: Economist Intelligence Unit.

Figure 6: Annual Recorded Official Unemployment as a Percentage of

Total Labour Force, 1998-2009

Source: Economist Intelligence Unit.

But not all was lost as far as budgetary policy was concerned. As the

global economy revived, oil prices began moving up from a low of $30

per barrel in December 2008 to around $75 per barrel a year later. This

increased Russia’s oil export earnings, its central bank foreign exchange

reserves moved up, the ruble stabilized, and foreign capital started

returning to Russia. On the eve of the G-20 London Summit of 2 April

2009, the Russian ruble traded at 41 rubles against the dollar/euro

basket, and the official reserves of the Russian central bank were close

to $385 billion. In late November, the exchange rate had appreciated to

29 rubles measured against the combined basket, and the central bank’s

foreign exchange reserves had risen to $444 billion. Even the stock

market had gained 176 percent from its low rating in January 2009.

On the macroeconomic front, the projected GDP decline of 8 percent for

2009 could turn out to be lower, although the estimates varied. Rosstat,

Russia’s official statistics gathering agency, announced on 18 February

2010 that retail sales had increased by 0.3 percent (year-on-year) in

January for the first time in a year.13 More substantively, the projected

budget deficit of 8 percent of GDP for 2009 promised to be smaller in the

end as oil prices revived, oil export earnings picked up, and tax revenues

trickled in. Indeed, the federal budget signaled improved performance

and posted a surplus of 2.4 percent of GDP for the month of January

2010.14 The most worrisome macroeconomic indicator proved to be the

unemployment rate, which had climbed to 9.2 percent of the

economically active population of 74.8 million, up from 8.2 percent in

December 2009. It was expected to rise to 10 percent by the end of

2010, similar to that of the U.S. economy.15 Problems in Russia’s

banking sector hobbled the economy’s growth and employment

prospects as it moved into 2010.

Russian Banks in Continuing Trouble in 2009 and Early 2010

The Central Bank of Russia was unable to promote liquidity in the

economy by encouraging banks to borrow from it at a low rediscount

rate. As I have noted, the central bank could not lower the rediscount

rate significantly because the annual inflation rate (in terms of the

Consumer Price Index) was still a high 9.1 percent in November 2009.

By contrast, Ben Bernanke, the chairman of the U.S. Federal Reserve,

repeatedly declared in meetings of the Federal Open Market Committee

in 2009 that the short-term interest rate at which U.S. banks could

borrow from the Fed would remain at close to zero “for an extended

period of time,” because inflation was not an imminent danger for the

U.S. economy.16 At the same time, the nonviable condition of Russian

banks continued to pose a major hurdle with regard to the prospects for

the Russian economy’s revival. During the economy’s expansion from

2000 to 2007, some banks had expanded their loan activity on the basis

of foreign deposits which foreign claimants had begun withdrawing. The

Association of Russian Banks (ARB) reported on 18 February 2010 that

overdue commercial bank loans, relative to total loans, would rise from

about 12-13 percent at the end of 2009 to as much as 20 percent in the

first half.17 On the other hand, Russian central bank chairman Sergei

Ignatiev suggested that bank lending would rise by 20 percent in 2010

because Russian banks had excess liquidity.18But precise details

relating to the balance sheets of Russian banks are difficult to track

down. By contrast, the U.S. Federal Reserve carried out a stress test in

May 2009 for assessing the financial health of the “too big to fail” (TBTF)

U.S. banks, and the U.S. Treasury provided them with taxpayer dollars to

bolster their capital requirement.

Russian banks have received bailout funding from the government, too,

but they remain closed to Russian lawmakers’ watchdog surveying and

public scrutiny. A major complicating feature with regard to the speedy

and decisive cleanup of these banks arises from their ownership by

Russian oligarchs.19 Despite this dilemma, the reorganization of banks

with a view to restoring their essential function as business lenders

constitutes the most urgent policy task confronting Russian authorities

today. According to Standard and Poor’s, nearly fifty banks are likely to

be merged in the coming months. The performance of the banking

sector, however, calls for tougher oversight by the Russian central bank

and improved banking practices.20 Beyond 2010, the leadership also

faces the formidable challenge of diversifying the Russian economy away

from an excessive reliance on volatile exports of energy and

commodities.

Long-Run Policy Challenges

With a reviving global economy, the demand for oil and natural gas in

particular is forecast to bounce back. In the assessment of the

International Energy Agency, the demand for energy will remain high for

the foreseeable future.21 The current expansion plans in the Russian

energy sector are predicated on the near-term potential of the energy

market. But beyond excessive dependence on energy exports, the

Russian economy’s diversification dilemmas arise from the interlocking

of massive industrial companies in the commodities sector with large

service, technology, and trading enterprises. For example, Gazprom, the

world’s largest natural gas monopoly, not only supplies gas to customers

inside and outside the country but also effectively controls the entire

natural gas transport network. Both, in turn, with majority ownership by

the Russian state, are effectively controlled in their production and

pricing decisions by state-appointed executives. The interlocked

structure not only prevents the emergence of robust corporate

governance and market–based competitive decision making but also

fosters an attitude of “legal nihilism.”22 In a striking display of

forthrightness, President Medvedev remarked on 10 September 2009:

“Can a primitive economy based on raw materials and economic

corruption lead us into the future?”23

Clearly, the adoption of market-based budgetary, monetary, and

exchange rate policies by technocrats in the Ministry of Finance and the

Central Bank of Russia has helped them steer the economy through the

financial crisis. But these policy instruments may not be enough to alter

the nature of Russia’s entrenched, state-controlled big business. The flow

of foreign investment into Russia’s big businesses, even in a minor role,

can help initiate the process but it is a risky venture. Russia’s entry in

the World Trade Organization (WTO) can also promote rule-based

procedures in pricing and trading activities, but foreign investors and

WTO rules can only play a marginal role. Ultimately, the Russian

economy’s overhaul from the top down will depend on “destructive

creation” initiatives from the leadership in Moscow, to replace an opaque

state-controlled economy with a open, transparent, and market-driven

system.

NOTES

1 William Mauldin, “Russia Providing $200 Billion for Banks,

Builders,” Bloomberg, 7 October 2008.

2 Jason Bush, “Georgia War Hits Russian Investment,” Business Week,

27 August 2008.

3 The Central Bank of the Russian Federation, “International Reserves of

the Russian Federation in 2008,” 5 December 2008; Ministry of Finance

Japan, “International Reserves/Foreign Currency Liquidity (as of

December 31, 2008),” 9 January

2009, http://www.mof.go.jp/english/e1c006.htm; State Administration of

Foreign Exchange China, “Monthly Foreign Exchange Reserves,

2009,” http://www.safe.gov.cn/model_safe_en/tjsj_en/tjsj_detail_en.jsp?

ID=30303....

4 Yuriy Humber and Torrey Clark, “Oligarchs Seek $78 Billion as Credit

Woes Help Putin,” Bloomberg, 22 December 2008.

5 Mikhail Delyagin, Novaya gazeta, 22 September 2008, 2.

6 Itar-TASS, 17 February 2010, cited in U.S.-Russia Business Council

Daily Update, 23 February 2010, 1.

7 Lyubov Pronina and Maria Levitov, “Russia Pledges $20 Billion for

Stocks, Cuts Oil Tax,” Bloomberg, 18 September 2008; and Andrew E.

Kramer, “A $50 Billion Bailout in Russia Favors the Rich and

Connected,” New York Times, 30 October 2008.

8 Andrew E. Kramer, “Russia Approves $36 Billion Loan Plan,” New York

Times, 10 October 2008.

9 International Monetary Fund, “Russian Federation: 2009 Article IV

Consultation,” August 2009, IMF Country Report No. 09/246, 14-26.

10 Igor Naumov, “The Country Has No Need for Metal,” Nezavisimaya

Gazeta, 13 March 2009.

11 “Putin: the Role of the State in the Economy is Temporary,” Vesti, 29

October 2008, http://www.vesti.ru/doc.html?id=219561.

12 Dmitry Medvedev, “The Latest Video Message in Dmitry Medvedev’s

Blog Deals with the Global Financial Crisis,” President of Russia: Official

Web Portal, 23 October

2008

,http://eng.kremlin.ru/text/speeches/2008/10/23/2126_type207221_20829

0.shtml, accessed 7 February 2010; for video in Russian

see http://blog.kremlin.ru/post/2.

13 Bloomberg, 18 February 2010, cited in U.S.-Russia Business Council

Daily Update, 18 February 2010, 1.

14 Nezavisimaya gazeta, 9 February 9 2010, cited in U.S.-Russia

Business Council Daily Update, 9 February 2010, 1.

15 Vedomosti, 18 February 2010 cited in U.S.-Russia Business Council

Daily Update, 18 February 2010, 1.

16 Statements can be accessed at Board of Governors of the Federal

Reserve System, “Meeting calendars, statements, and minutes (2004-

2010),”http://www.federalreserve.gov/monetarypolicy/fomccalendars.ht

m, accessed 7 February 2010.

17 Bloomberg, 15 February 2010, cited in U.S.-Russia Business Council

Daily Update, 17 February 2010, 1.

18 Alfa Bank, Morning Brief, 5 February 2010, cited in U.S.-Russia

Business Council Daily Update 5 February 2010, 1.

19 A 2005 study by Standard & Poor’s shows that 77 percent of

aggregate ownership capital of the top thirty banks represented by

controlling or blocking stakes. See Julia Kochetygova et al.,

“Transparency and Disclosure by Russian Banks: Disclosure Practices of

Russian Banks Currently Dismal,” Standard & Poor’s, 26 October 2005.

20 Forbes, 9 December 2009 cited in U.S.-Russia Business Council Daily

Update, 9 December 2009, 1.

21 International Energy Agency, “Energy to 2050. Scenarios for a

Sustainable Future,” 2003, 63; International Energy Agency, “Oil Market

Report,” 15 January 2010, 4.

22 On becoming president on May 7, 2008, Medvedev remarked: “ We

have to achieve a true respect for law and overcome legal nihilism.”

Details can be found

athttp://www.rian.ru/politics/20080507/106773965.html.

23 See President Medvedev’s remarks

at: http://eng.kremlin.ru/speeches/2009/09/10/153_-type104017

_221527.shtml.

http://jia.sipa.columbia.edu/russia%E2%80%99s-financial-crisis-economic-setbacks-and-policy-responses

MOSCOW — The financial turmoil in Russia might not be all-embracing yet, but

some of its features suggest its gloomy prospects. Big business’ lack of

confidence in national economy is what primarily strikes the eye.

Speaking at a Cabinet meeting last week, Prime Minister Vladimir Putin unveiled

scandalous information concerning the bank giants — government bailout money

recipients stepping up their operations to move funds offshore in lieu of

channeling the money to its intended recipients in industry that badly need it.

There are some other reasons for capital outflow, though. Bank of Russia is

forced to expend billions of dollars to prop up the ruble that is sinking

dramatically over the economic confusion and plummeting oil prices. Russia’s

stabilization fund lost $100 million over the past month – a cause for serious

concern to the Russian leadership.

If recently the accumulated hard currency reserves have seemed enormous and

reliable, today, at the current spending pace, they may well be exhausted as

early as next year. Panic buying of cash dollars among the population does

nothing to help consolidate the ruble. Depositors are withdrawing their savings

even from such reliable government-run banks as the nation-largest Sberbank.

Last month saw its deposits plunge by $3 billion (2.5%).

Despite the country’s financial leaders’ numerous vows that there will be no ruble

devaluation, is it a fait accompli. Over the past two and a half months ruble lost

over 15% of its value. This is none other than devaluation.

What are the government’s plans to reverse these negative trends? In fact, it

looks like it goes out of its way to employ government regulation measures,

including the use of power structures, rather than market levers. For example,

the Cabinet meeting where Putin accused the banks giants of funneling money

into foreign accounts was attended by Prosecutor General Yuri Chaika and

Interior Minister Rashid Nurgaliyev. Captains of industry must have unequivocally

interpreted such a meeting make-up as a signal that some day these very people

might well call them to account.

In line with the tough government regulation policy, President Dmitry Medvedev

called for the Central Bank to appoint “commissars” to oversee the use of the

government funds allocated to combat the crisis. The Federal Financial Markets

Service — Russia’s securities watchdog — called for all market participants to

disclose their ultimate owners, largely offshore residents.

Rather than work to establish a business-conducive environment, the

government is pouring oil on the flames. Last week saw Deputy Prime Minister

Igor Sechin give the directions to resume investigation into the 2006 accident at a

mine developed by a major fertilizer producer Uralkaliy. As a result, Uralkaliy

could well be fined several billion dollars.

Sechin’s resolution sent Uralkaliy’s shares into a 75% freefall. It looks like the

government is seeking to gain control of this lucrative business through

bankrupting it and crowing out the present owners. Under the circumstances this

would inevitably raise concerns with other Russian businesses. They will most

likely wind up their operations and take the resources out of the country. The

financial crisis in the country is going to exacerbate.http://blog.heritage.org/2008/11/17/understanding-russias-financial-crisis/