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New challenges ahead for Russian economy
Officials are gearing up for global currency devaluation game
The current wave of optimism on international stock markets will soon subside, Finance Minister Alexei Kudrin said at the annual board meeting of the Economy Ministry today, warning that Russia was set to see new depths of the global financial downturn. The devaluation race was named as one of the most imminent risks for national economies. Yet the government is sticking to its economic modernization plans, seeing it as the optimal way of getting through the crisis.
This time, both ministries’ officials forgot their usual rivalry, characteristic of such joint sessions, and put up a united front. “So far we have been coping successfully with the unfolding crisis,” stated Deputy Prime Minister Igor Shuvalov. At the same time, he admitted that Russia would suffer from volatile export prices this year, coupled with “other difficulties of which we know little.”
Growth on global stock markets will not last long, Kudrin agrees, predicting “a new downward correction and new stock falls” ahead. His grim forecast was not long in coming, with Russian shares sinking today following a few days’ rally. The global economy is at a crossroads: “We’ll wait and see whether the U.S. administration is in a position to overcome the financial crisis.”
Economy Minister Elvira Nabiullina is more concerned about currency devaluation, seeing “the risk of a global devaluation race” as one of the new challenges provoked by certain countries’ attempts to stimulate their national economies. “The launch of this mechanism can be no less dangerous for the world economy than protectionist measures,” she asserted.
The ruble has already lost more than 40 percent of its value against the U.S. dollar, while it retained stability against the currencies of certain counties, including Britain, Turkey, Sweden and Korea, and even strengthened against Ukraine’s hryvnia and the Polish currency. And now, it seems to be the dollar’s turn to lose value. “A devaluation race is possible,” confirmed Oleg Vyugin, chairman of the Board of Directors of MDM Bank. The United States has already turned on its cash printing machines, and this is the only way out for the U.S. economy. In the long term, however, this is fraught with high inflation.
If all these measures do in fact work and the American economy shows signs of recovery, investors will return to the U.S., and Europe will be lagging behind, Vyugin believes. “In this case, the U.S. will be able to slash borrowing and stop printing money,” he said. Europe is unlikely to resort to such measures, which means that the dollar will be depreciating, while the euro will be on the rise. If the U.S. economy does not revive, investors will flee the country. “This will mean defeat for the United States. They are now risking it all,” Vyugin explained.
Elaborating on the internal challenges of the Russian economy, Kudrin predicted a second wave of financial problems soon due to delinquent loan payments. Deputy Economy Minister Andrei Klepach confirmed that a second wave could come in the autumn, but he said there was also a chance to avoid that thanks to the government’s support for banks, which will amount to RUB 555 billion (approx. $16.67bn) in 2009. He stressed that the money must reach the real sector. The Economy Ministry expects the national economy to decline 2.2 percent this year. Officials hope for internal growth factors, including import replacement, to take effect towards the end of the year. “However, if we do not take decisive efforts to change the structure of our economy now, our prospects of recovery will hinge on the performance of other economies, including those of the U.S., China and Europe,” Nabiullina warned.
For his part, Audit Chamber head Sergei Stepashin stressed the importance of domestic demand, which he views as a far more important factor than production in the current situation. He described the current economic crisis as one of overproduction, and urged the government to shift its focus from supporting corporations to supporting people.
Analytical department of RIA RosBusinessConsulting
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