Monday, 9 January 2012

Forecasts for 2012: Russia and the FSU

When I was a kid growing up in north-west London, there was a popular rhyme I recall at primary school …Hungary was hungry, ate Turkey, slipped on Greece and broke…China. 

Needless to say with such a aposite upbringing, it was perhaps no surprise to folk, that I became a big fan of developing-cum-transition economics and economies!

There is something prescient however about such a cross-country linkage for these emerging economies because in many ways it describes lucidly the increasing connectivity that exists between economies and across regions – a trend that has accelerated in the post WWII era. The collapse of communism ushered a wave of wannabee free marketers from Tallinn to Beijing and an outcome what others such as Thomas Friedman have have ascribed as a 'flattening of the world'.

These transition economies have tried to “converge” with developed economies – be it in terms per capita incomes, human development indices or simply put to aspire to similar quality of life. Those that entered EU have had to jump hoops to comply with the EU’s entry requirements…and those on the periphery …from the Western Balkans that are formally in queue with Croatia now granted an entry ticket in 2013…to a ring of countries that form the “External Neighbourhood” from Morocco around the Med to Egypt, taking in Jordan and Syria and then into the Caucuses and up through Ukraine and Belarus….

Apples and oranges? Yes maybe..

It also leaves out Russia and the ‘stans in the former Soviet Union which I'lll have a stab at here.

That said, the above-stated interlinkages are still playing out – be it the asset bubbles that have mushroomed within the EU that allowed free movements of capital but without genuine prior structural convergence OR macro imbalances regionally as China followed a mercantilist route to growth, exporting to the West and then parking the receipts to finance the balance of payments deficits back in the West that had bought its exports…ostensibly the US. 

…Or the impact of the entry of the transition economies’ entry into the global economy in terms an initial deflationary force that kept down global inflation and which is now reversing as the growing masses in these emerging economies raise their demand for resources, toys and gadgets..
So 2012?

1.       Lets start with mother Russia: a country, language and people I know a wee bit… forget about the is it 3 or 4% growth this year and the central bank's would-be new inflation targets in the offing....expect status quo with the hydrocarbon sector continuing to drive growth and revenue flows on the budget…even if global demand for oil declines in the short term due to an unexpected confluence of slowdown across different geographies, volatility in the Arab theatre will keep prices fizzling over the medium term….anything over US80/barrel and the Russian elite is happy… and as already clear in the last couple of days uncertainty in the oil markets will help the rouble and help the regime to raise current expenditure.
2.       Will we see a Russian-Spring or Perestroika II? Insufficient time for a sustained impact on presidential elections slated March 2012 and no change from the scheduled Putin 2.0. That said, I expect increased pressure for improved governance as an increasingly informed middle class and youth with access to Internet-based information from outside state-control continue gaining traction although it’ll be interesting to see if the rag-tag umbrella coalition of ‘anybody but the P n M’ with nationalists and communists thrown in can hold it together or whether the pros in the Kremlin play the age-old divide-and-rule strategy. Russia won’t go down the route of Belarus and jail anyone opposing the regime....unless you're a billionaire who didn't follow the piper's tune..
3.       As in almost any economy the key demand of citizens/electorates is job security and general economic prospects. There is sufficient ‘fiscal space’ for the govt to spend its way out of the political problems – although there are 2 major risks here in the medium term:
a)      the Russian economy will continue to suffer from the Dutch-Disease facing any oil/commodity producer. Put another way, the hydrocarbon sector is a curse on the non-hydrocarbon sector through rising real exchange rates unless it is able to adjust through faster improvement in productivity. The fate of the non-hydrocarbon sector – the size in the relative share of economy, the size of the its fiscal deficit – are continuing medium term risks.
b)      the problem of policy advice inc. the IMF’s prescriptions is that the very structural adjustment required: be it a re-adjustment of the non-oil fiscal target, facing up to the future growth trjectory of the non-hydrocarbon sector, or reforms in healthcare and pensions, are policy choices that that are simply not politically feasible for a Russian polity that needs oil funds to finance its way through the political headwinds in 2012. More worryingly it is not clear if the former spooks in power have any real notion or political will to initiate genuine structural reforms that could incentive the non-hydrocarbon sector to improve productivity and create jobs. The wannabees that joined the EU had an anchor for reform through the very basis of membership's requirements (..ahum ahum... except Romania and Bulgaria that is).


  • Status quo for the ‘stans… although a ratcheting up of cross-border trade and flows of energy from  Turkmenistan will continue…
  •  No change in Ukraine…a lost hope
  • Or Belarus…where Russia will continue to “Russify” remaining prime assets – the country is awash with Russian capital …and ever more tied to Russian largesse for balancing its books….which will continue at least till late 2012 and post-Russian elections…whilst the Lukashenko regime without any checks-and-balances will be able to continue imposing “inflation tax” domestically through massive devaluations as happened in 2011 without real fear.
  •   .. and Moldova where nothing will change...except braindrain, Romanianisation of citizens before they head off to the Latin countries in the EU and rampant corruption... but it will continue to blindly sign-up to the EU Association Agreement hoping for EU freebies and Romanian good-will.
Alas, we haven't got to Hungary...

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