Is Russia Heading Toward Crisis?

14.08.2012

Usually a crisis is triggered by some disaster, like the collapse of Lehman Brothers in September 2008. When this happens, consumption declines more than earnings because people start saving out of fear. But consumption has come back to normal in Russia in the past two years. We can expect a slowdown of domestic demand because of the expectation of the crisis, but to avoid this we must stop scaring the public.

In Russia, as in the rest of the world, the economy can do one of three things. There are times of broad-based growth, prosperity and happiness. There are times of economic crisis where the economy crashes and urgent measures must be taken to avert disaster. And finally, the most unpleasant times are when there is weak growth and wages rise slowly, affecting consumption, when industries are unstable and people are unhappy – with some expecting a crisis and others watching their neighbors struggle. This uneven growth of both regions and industries makes people nervous that something bad could happen at any time.

Judging by everything, Russia won’t face a crash like in 2008 when oil prices plunged from $147 to $30 per barrel. In 2009, they averaged $60. Then they rose to $90 in 2010 and to $100 in 2011 and 2012. They are likely to remain in the $90-$100 range. To sum up, there is no indication that we will be hit by such a serious crisis as in 2008.

No, we face a different problem. We’ve just pulled ourselves out of a deep crisis during which our economy contracted by 8%. In 2010-2011 it grew by 4% per year, allowing us to return to pre-crisis levels. Yet it is unclear what the future has in store for us. Everyone wants to see this growth continue.

We must realize that this state of expectation of another crisis is making us crisis-weary. This is a crisis of consciousness. Formally, we have low unemployment and inflation, and our budget deficit is not big, either. Nothing serious is happening but we keep talking about the crisis that may be creeping toward us from Europe.

But Europe is showing no obvious signs of disaster, either. Industrial production has dropped in some countries but by a fraction of a percent. The annual decline in the Eurozone is 0.2%-0.3%. This is nothing compared to the crisis of 2008 and 2009.

Therefore, we must revise the term “crisis.” We had a crisis in 2008-2009. What is taking place in Europe now can be called a second wave, but this dip, albeit small, is truly agonizing because of general fatigue. The extent of the dip does not matter. The trouble is that since mid-2008 – for 50 months now – we have been seeing either decline or weak growth. All budgets have been sapped by cuts, and people are staging riots like in Greece and Spain.

The Americans are faring much better than Europe. They have more or less overcome the crisis. Barack Obama has pulled it off. Asian countries are registering substantial growth.

It is important to note that the world is not being roiled by general chaos. We shouldn’t fear that a tidal wave will come from abroad and sweep us away unless we take urgent measures to protect ourselves.

Usually a crisis is triggered by some disaster, like the collapse of Lehman Brothers in September 2008. When this happens, consumption declines more than earnings because people start saving out of fear. But consumption has come back to normal in Russia in the past two years.

Strictly speaking, we can expect a slowdown of domestic demand because of the expectation of the crisis, but to avoid this we must stop scaring the public. It is unclear why journalists predicting disaster are so much in demand in Russia. We are the only country where journalists are trying to bury the American economy and the U.S. dollar. Despite their efforts, the dollar is still alive because it is the currency of a country that accounts for a quarter of the world’s GDP.

Reports of the euro’s death have been also greatly exaggerated – Europe has already survived the Greek crisis. Many predicted the Eurozone’s collapse, but now things are more or less back to normal, and some of Greece’s debts have been written off. Our lovers of horror stories keep speaking about a host of difficult problems. Yet, this does not add up to a threat of total collapse. We may be entering a period of very long and painful depression, which will adversely affect both the economy and politics. All governments are now losing elections in the West because they once promised prosperity that has been deferred by the crisis.

To sum up, we shouldn’t heighten tensions and use the word “crisis” in the same sense we did in 2008-2009. A slowdown is possible but it won’t compare with the catastrophic crash in 2008. The main thing is not to panic. Smart macroeconomic and budget policies are what’s needed. We have already come to realize that we cannot rely on oil and coal forever. Now we just have to take practical steps to make the necessary transition.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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