Russia and the Financial Crisis

Sascha Tamm Until a few weeks ago, Russia´s government still pretended to be optimistic about the world financial crisis: according to many experts, it would hardly affect the country. But today, the situation is quite different, for the world crisis did not bypass Russia. Over the last six months, the Moscow Stock Exchange has reported huge losses, large companies in the raw material industries have been offered government aid, Russian oligarchs have been feverishly selling bonds and shares, and a shortage of finance has suspended many building projects. The causes of this are numerous and complex.

The world´s dependence on Russia´s export of raw materials is obviously enormous. The general credit crisis has complicated the situation of Russian business. Previously, when speaking of Russian enterprises, attention was focused on corporate profitability while the companies´ enormous debts in foreign currency were totally ignored. Most major investments in Russia enjoyed short-term financing by international banks while Russian politicians held the public´s trust. Despite their apparent confidence, Russians secretly admit that, to a large extent, the country is dependent on the world economy.

In an instant, Russia´s economy lost its good name. The consequences are that some banks are working only thanks to state financial help and investment activity is declining while unemployment rates are rising. However, a repetition of the severe shock of 1998 seems improbable: this time, there are sufficient financial reserves to soften many short term losses.

The political consequences are difficult to foresee. The public supported Medvedev and Putin in return for economic stability and prosperity, which could be achieved only through vast investments and social expenditures. But now that oil prices are going down and without another profitable part of the economy except for the raw materials sector, current levels of investment and spending are unsustainable in the long term. Crises are the best time to learn lessons: Russians are on the way to lose trust in their President´s sagacity and in the never-ending progress of their economy - something that is been going on in the West for a long time. The question is: what actions will Russian politicians undertake to attract long-term domestic and foreign investments in fields other than the raw materials sector? Will they lower themselves to blaming international markets, employing nationalistic rhetoric and blustering threats or will they be responsible and offer serious legislative reforms? Let´s hope that the latter will be their choice.

Sascha Tamm, Potsdam