Posted on November 4, 2008 - by Venik

Russia’s Financial Crisis and Beluga Caviar

I just ran across a rather amusing article in the Financial Times by Robert Skidelsky. The point of his rant is nicely summarized in the last paragraph:

“Russia needs to scale down its geopolitical ambition to its real weight – that of an emerging economy with only 3 per cent of the world’s gross domestic product and a quarter of America’s living standard.”

Interestingly enough, the United Kingdom also accounts for about 3% of the world’s GDP. Moreover, the IMF and WB analysts estimate that Russia’s “shadow” economy, which is not included in the official GDP figure, still accounts for at least twenty five percent of the real GDP. It would appear, Prof. Skidelsky did not pick the best facts to support his little theory. Perhaps it is Britain that needs to scale down its geopolitical ambitions.

The biggest problem with Russia’s economy is its chaotic diversity – a product of the Yeltsin era. As Skidelsky correctly noted, Russia has too many small, undercapitalized banks that play no role in the country’s economic growth and introduce an element of instability. The same can be said about many other Russian businesses that multiplied like rabbits in 1990s, because Kremlin needed to get IMF loans and one of the conditions was encouragement of small businesses. Large Soviet enterprises split into smaller and smaller pieces, losing their competitive edge not just abroad but also at home.

The wild, wild West privatization of the Soviet industry in the early 1990s concentrated tremendous manufacturing resources in the hands of a few adventurers who had no interest in running their newly-acquired enterprises. Entire factories were shut down and sold off piece by piece or were further fractured into hundreds of small businesses destined for failure. At the time the average Ivan had a hard time feeding his family and so buying stocks and shares was out of the question for the vast majority of former Soviet citizens, whose country was being sold off to the highest bidder.

Our current global economic crisis presents Russia with an opportunity to bring some order to its economy, which is in desperate need of consolidation and federal regulation. Perhaps Russia, too, needs some wealth-spreading. How did Russian economy respond to the global banking crisis? The answer depends on your perspective. CEOs of loosely-regulated Russian firms got over their heads into debt to foreign banks. It is ridiculous for companies turning huge profits to run into liquidity issues in just a month or two of being cut off from foreign lenders. All the more surprising is the Kremlin’s apparent lack of interest in borrowing practices of companies, partially owned by the state.

But is this really lack of interest, or is this something else? It is not a secret that the results of the 1990s’ privatization is one of the last but most formidable obstacles left standing between the Kremlin and the former Soviet glory, which it wants to reclaim. The state still needs foreign investments and it needs its thieving, tax-evading business elite. Recent economic downturn showed that, perhaps, the Kremlin can dramatically enhance its influence in the country’s business circles and do so – quite uncharacteristically – both cheaply and legally, without the usual for such situations arm-twisting tactics.

Another masterpiece of deliberate misunderstanding of Russian economic reality is the “Economic Darkness Descends on Putin’s Russia” by Yuri Zarakhovich, a well-known representative of the early post-Soviet culture of universal experts. Mr. Zarakhovich draws some far-reaching conclusions based on a few superficial facts. Apparently, an elitist restaurant in Moscow that he frequents has been running short of the usual generous corporate customers with a taste for Kobe beef, smoked salmon, Beluga caviar and gold flakes.

Zarakhovich is also upset that a friend of his may be forced to move his corporate office from a penthouse in the “Moscow City” business center to a more affordable location. And God only knows what will happen to Russia if the VTB bank may have to delay the move of its headquarters to the hugely-expensive “Federation Tower” building in Moscow. What the world is coming to? Zarakhovich thinks another Bolshevik revolution is in the wind:

“But a Russian state that narrows the options of legal protest available to its people during a major national crisis may be courting serious trouble — it’s certainly a principle that Czar Nicholas II failed to understand.”

Clearly, people across Russia will rise up and come to the defense of the rights of CEOs everywhere to eat endangered species of fish and play indoor golf in their skyscraper offices. It is a true pleasure to see that the “Time” and its leading Moscow correspondent are one with the people of Russia. I can hardly wait for more in-depth economic analysis from these evidently gifted but simple people.

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