Predicting the Next Aug. 17
- By Marshall I. Goldman
- Aug. 21 2008 00:00
Ten years ago, on Aug. 17, 1998, Russia went through a severe economic crisis. It seemed to mark the financial bankruptcy of the country, a bankruptcy that looked like it would endure for years. As we have come to say, "It seemed to be a perfect storm." Few if any of the rich, especially the oligarchs, were paying their fair share of their tax obligations, so the government had to borrow heavily to pay its bills. But after months of such borrowing and ever-larger debts, the government eventually found itself unable to attract enough new buyers for these government bonds. Therefore, by mid-August 1998, the government had no choice but to tell those who had earlier bought government bonds that the state would not be able to redeem them. Even sophisticated foreign institutional investors like Bankers Trust in New York got caught and had to write off several hundred million dollars worth of Russian bonds.
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But they did recover -- and in a most impressive way. In part, the recovery was a result of good leadership. But more than anything, Russia was the beneficiary of a remarkable turnaround in energy prices. It helped, of course, that the ruble lost so much of its value. That made goods produced in Russia much cheaper in foreign markets. The cheap ruble combined with a gradual but persistent increase in oil prices induced the oil companies and the oligarchs to stop stripping assets and instead invest within Russia, especially to increase oil production. So as world oil prices rose from $12 a barrel in 1998 to $75 a barrel in 2007, Russian oil output jumped from 304 million tons in 1998 to 491 million tons in 2007 -- a 60 percent increase.
As for then-President Vladimir Putin's impact, it has been more positive than negative. On the negative side, his heavy-handed methods with Shell, BP, ExxonMobil and Total undoubtedly frightened investors and developers both within and outside of Russia into deferring or canceling some important projects. As President Dmitry Medvedev put it, the blatant disregard for law resembled "legal nihilism."
But because not many places in the world are as richly endowed as Russia, companies looking to develop energy resources don't have very many alternatives. And not everything Putin has done has scared off investors: He did support the passage of a flat 13 percent income tax, which accounts in part for an increase in tax collections. He also has been an outspoken supporter of what he calls "national champions." These are companies that are influenced, if not owned, by the state. They tend to act as agents of the state in promoting its interests, as least as defined by Putin.
But while Russia has paid off most of the state's debt and built up foreign currency reserves of almost $500 billion, not everything is perfect. Relatively little has been set aside for infrastructure. One glaring example: Portions of the road between the countries two largest cities, St. Petersburg and Moscow, are still only two lanes. An equally serious concern is that the Russian population has diminished by roughly 650,000 people each year for almost a decade. Moreover, the high earnings generated by oil exports have caused a strengthening of the ruble. While that is good for importers, it undercuts efforts to build up the domestic manufacturing sector. If oil prices should suddenly collapse, Russia would have very little else going for it. Depending on how far oil prices drop, Russian companies and local government jurisdictions might also have trouble generating the funds they need if they are to pay back the money they have borrowed. Unlike 10 years ago, the central government has not overextended its borrowing, but many of the local and regional governments as well as individual companies have. Should oil revenues shrivel up, we could see at least a partial replay of the credit crisis of 1998.
For the time being, however, Russia in many ways looks to be economically and financially healthier than it has ever been in its history. But one thing we have come to learn about Russia: Predicting a decade ahead about what will happen to Russia is a risky business. As solid as Russia has become under Putin, such predictions remain as unpredictable as ever.
Marshall I. Goldman, emeritus professor of economics at Wellesley College and senior scholar at Harvard University's Davis Center, is author of "Petrostate: Putin, Power and the New Russia," which was published in April.