#12 - JRL 7206
June 3, 2003
Bear Market for President
By Boris Kagarlitsky
The Russian economy depends entirely on the export of oil and gas. The state of world financial and commodity markets, therefore, determines the country's political future to a significant extent.
After the war in Iraq, many feared that the United States would punish the Kremlin for its support of France and Germany by dumping huge quantities of oil onto the market, driving prices down to a level at which our economy would simply go belly up. This scenario, however, was always unlikely -- not because the current White House is known for its willingness to forgive and forget but because dumping would hurt U.S. oil companies even more than their Russian counterparts. Burning the house down to drive out the cockroaches might be a viable option for Russian leaders but not for the pragmatic Americans, even with President George W. Bush at the helm.
Rather than flood the world market with cheap oil, the U.S. leadership elected to pursue a much more effective and comprehensive strategy. As Iraqi oil starts to flow again, oil prices will gradually drop, but the dollar will fall at the same time. This gives the U.S. economy a number of advantages. The U.S. domestic market will remain more or less stable. The cost of raw materials will decline, but not enough to ruin the companies that supply them. U.S. exports will become more competitive, and America's trade balance will improve. Most important, U.S. foreign debt will shrink as the value of the dollar falls. America's competitors may be pleased by the strength of the euro, but Europe's current depression will only deepen as a result.
This policy does not guarantee an upswing in the U.S. economy, of course, as America currently faces long-term structural problems. However, this strategy does guarantee a prolonged depression for the rest of the world.
Russia is paid in dollars for its oil but services its debts and pays for a large percentage of imported goods in euros. Where the U.S. foreign debt shrinks as the dollar falls, ours increases proportionately. What's more, the Russian Central Bank's currency reserves, whose growth has been such a source of pride to our leaders over the past few years, are mainly held in dollars. Presidential economic adviser Andrei Illarionov calculates that in the past two years Russia has lost $15 billion to $17 billion due to changes in the dollar-euro exchange rate. Our exporters are also losing money because of dropping oil prices, even though that drop has not been as sharp as many expected. The strengthening ruble could potentially impinge on Russia's trade balance.
In short, the years of plenty are over. The majority of Russians probably didn't notice that the country has enjoyed four years of economic growth, but they will definitely feel the pinch in the hard times to come. The people are left out of the decision-making, of course -- that's the prerogative of the oligarchs and bureaucrats. Yet even these groups are in for a rough ride. As the money dries up, competition for scarce resources will increase and political stability will diminish. President Vladimir Putin knows this better than anyone.
According to poll results reported in the media, support for Putin has plummeted to just 48 percent. This, however, doesn't mean that Russians have turned on their leader overnight. The media used to report Putin's approval ratings, while now they refer to his electoral rating (i.e. the percentage of the electorate prepared to vote for him in an election). The pollsters now explain that even in the salad days of 2000, no more than 45 percent of voters actually backed Putin. For some reason, we never heard about voter support back then, and now you almost never hear about the president's approval rating.
Chechnya is front-page news once more. Until recently, we heard very little of the bombings, attacks on federal convoys and dead soldiers. Where once the media tried to make us forget about the war, now they have decided to remind us of it.
In Russia, sociology and war are propaganda weapons. Putin's stock is in decline, and our media magnates and oligarchs, being seasoned businessmen, have started speculating on a further fall. Previously they happily insisted that there was no alternative to Putin. Now they are anxiously asking: "Who will be the next president?" The spectrum of possible candidates is broad, from Boris Gryzlov to Sergei Glazyev. But one thing's for sure: The fight to succeed Putin has begun.
Boris Kagarlitsky is director of the Institute of Globalization Studies.