Transcript hit by the crisis – but why less than many others by Dr Pekka Sutela

Russia – hit by crisis but why
(perhaps) less than many others?
Pekka Sutela
28.4.2009
www.bof.fi/bofit
Growth forecasts for 2009 – darker and darker
Konsensus
%
IMF
Yhdysvallat
Euroopan komissio
4,0
4,0
3,0
3,0
2,0
2,0
1,0
1,0
0,0
0,0
-1,0
-1,0
%
Euroalue
2007
2008
OECD
-2,0
-2,0
-3,0
-3,0
-4,0
-4,0
-5,0
-5,0
2007
2008
2009
2009
Lähteet: Consensus Economics, IMF, OECD ja Euroopan komissio.
2
7.4..2009
Veli-Matti Mattila
Recent movers of the world economy
• Globalisation
– Up to two billion people entered global exchange
• Major change in division of labour
• Trade growth roughly twice as high as production growth
– Development of information and communication techs
• Distances of diminishing importance
• Metropolies of increasing role
• Financial markets integration
– Growth in movement of capital, integration of national
financial markets
• Promoted trade growth and internationalisation of business
3
A paradox of globalisation?
•
•
•
•
•
Given such trends, nations should thrive through
Large and deep financial markets
Financial integration, and
Participation in international production chains
But do we really see that? Countries with worst
GDP forecasts for 2009 include Asian tigers and
European deeply integrated economies, while
resource dependent economies seem to fare
relatively well
IMF April 2009 forecasts for certain
countries
2008
2009
2010
USA
1.1
-2.9
0.0
Germany
1.3
-5.6
-1.0
Ireland
-2.3
-8.0
-3.2
Taiwan
0.1
-7.5
0.0
Japan
-0.6
-6.2
0.5
Turkey
1.1
-5.1
1.5
An intervening factor: indebtedness
• Globalisation and financial market integration also
created problems
– Large surpluses in several counries Lower interest rates
– Financing deficits (too) easy  Growing indebtedness
• Low interest rates boosted search for new revenues
– New financial instruments
– New modes of operation
– New customer groups (”subprime”-mortgages)
Faulty deficits, underestimated risks
• Due to low inflation monetary policy remained slack
– Growth in global liquidity
6
Delevereging
• Banks
• Companies
• Households
Less consumption, investment and capital
mobility
– A self-supporting vicious circle: financial crisis 
real economyy crisis  financial crisis…
– Central banks and governments try to stop the
circle
7
Globalisation under risk?
• Financial markets turning inwards
– Foreign investors returning home
– Domestic saving channelled into domestic markets
– Support channelled to domestic banks
– Weaker financial intermediation
 Problems with investment finance  Lower investment
 Fewer new technologies introduced  Lower
productivity growth
• Protectionism on the rise
– Supporting domestic production, hindering imports
 Lesson of the 1930s
8
Lessons from distant times
• Why did Enlightenment and then the
Industrial Revolution take place in Western
Europe?
• One explanation: a combination of common
economic and cultural rules with political
competition creates a virtuous circle
• But under the threat of a vicious circle, what is
the outcome of common economic rules and
nationally-based political responsibilities?
Should we expect first deflation, then
high inflation?
• In the short run, weak aggregate demand may
imply lower price level, leading to (a) vicious
circle, as demand is postponed, (b) declining
asset and thus security values, (3) impossibility of
standard monetary policy
• Over a longer period high inflation threatens due
to (a) liquidity pumped into the economies, (b)
monetisation of deficits, (3) temptation of
inflating debt stocks nominated in domestic
currency
Global conclusions
• After the crisis, a period of lower global growth
• Worsening public finances
• Permanent exclusion of employees
• Shift in the relative position of surplus and
deficit countries
11
7.4..2009
Veli-Matti Mattila
How the crisis entered Russia?
• Financial crisis: Drying of foreign financing
(note the duality of Russia’s financial system),
turning of capital flow
• Declining export prices (oil: 2007 75 USD,
2008 95 USD, 2009 55 USD (?)). Major impact
on public finance
• Collapse of some export volumes
RTS stock index and price of Urals-oil
3000
Urals, USD/barreli
RTS-indeksi
150
RTS
Urals
2500
2000
110
1500
90
1000
70
500
50
0
1.6.08
Lähde: RTS ja Bloomberg
13
130
30
1.9.08
1.12.08
1.3.09
1.6.09
Bank size and income level
350
Domestic credit to private sector, % of GDP
300
250
200
150
China
100
Slovenia
Hungary
Czech Republic
50
Russia
0
0
10000
20000
30000
40000
50000
Per capita GDP, USD (PPP)
60000
70000
80000
Was Russia prepared?
• Underlying goals of the Putin regime:
sovereignty and stability
• Paying back debt, accumulating reserve funds
also served crisis management
• On the other hand, the well-known structural
weaknesses
• The sudden stop was exceptionally hard
• On the other hand, expected shrinkage of the
economy about average
Russian currency reserves after 2000, bln USD
600
mrd. USD
500
400
300
200
100
0
2000
Lähde: CBR
16
2002
2004
2006
2008
Economic policy reaction
• Awakening to reality in late 2008; currently
continuous emphasis on severity of situation
• Liquidity support and demand managing
basically similar to other countries
• Special feature: step-wise devaluation of
currency. Failed to fail, so far!
• Special feature: how to treat failed oligarchs?
• Problem: original belief in V-style depression,
and policies measured accordingly
EUR exchange rates in some oil exporting
countries
140
Norjan kruunu
Kanadan dollari
Australian dollari
Venäjän rupla
2.1.2008=100
Kazakstanin tenge
120
100
80
2.1.08
Lähde: EKP
18
2.4.08
2.7.08
2.10.08
2.1.09
2.4.09
Forecasts for Russia: also turning worse (MER) –
and this is the more optimistical scenario
2009 (Feb)
2009 (April)
2010 (Feb)
2010 (April)
GDP
-2.2
-6.0
+6.6
+3.8
Industrial
production
-7.4
-9.1
+6.0
+3.2
Real
investment
-13.8
-21.1
+13.3
+6.7
Retail sales
+0.3
-4.9
+10.5
+4.2
Oil price
41
45
90
50
How Russia compares with other CIScountries (IMF)
2008
2009
2010
Russia
5.6
-6.0
0.5
Ukraine
2.1
-8.0
1.0
Kazakhstan
3.2
-2.0
1.5
Belarus
10.0
-4.3
1.6
Turkmenistan
9.8
6.9
7.0
Azerbaidzhan
11.6
2.5
12.8
How Russia compares with other
energy producers (IMF)
2008
2009
2010
Russia
5.6
-6.0
0.5
Norway
2.0
-1.7
0.3
Mexico
1.3
-3.7
1.0
Venezuela
4.0
-2.2
-0.5
Saudi Arabia
4.6
-0.9
2.9
Angola
14.9
-3.6
9.3
Further risks
•
•
•
•
Using reserves: social purposes or investment
High and possibly worsening inflation
Bad loans and other financial problems
Lower incomes; increased unemployment;
potential for social unrest?