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. Last Updated: 07/27/2016

Turn-of-Year Blues Turn Serious

Deep within the Garden Ring, they waited. Pundits and hacks -- they watched and waited, then waited some more. The summer ended, and the snow started to fall. But it never came. They said that it would come, but it didn't.

Turn-of-the-year blues has become a regular event in Russia's post-Communist economic calendar. The cycle started in October 1992 when Yegor Gaidar's efforts to transform the economy came under sharp criticism from a previously enthusiastic Supreme Soviet. November saw the endorsement of Viktor Gerashchenko as Central Bank chairman. And by December 1992, Gaidar was no longer prime minister. The outcome: inflation soared. Prices rose on average by 25 percent per month between October and December 1992, compared with 10 percent during the third quarter.

October 1993 similarly heralded a dismal three months. Tanks fired on the White House. The Rutskoi-Khasbulatov coup attempt sunk Western perceptions of Russia to new lows. Pessimism snowballed with Zhirinovsky's 'victory' in the December 1993 Duma elections. Gaidar and fellow reformist icon Boris Fyodorov left the government altogether. Experienced Slavophiles said it was all over. Hedge funds were put on ice. As 1993 ended, inflation jumped again, reaching 18 percent in January 1994.

Regular as clockwork, after a summer that saw the birth of Russia's stock market, October 1994 rolled around and with it snow, gloom and the Black Tuesday currency crash. Within weeks, an obscure Far Eastern bureaucrat called Vladimir Polevanov single-handedly sunk Russian equities with loose talk of re-nationalization. In January 1995, the turn-of-the-year blues became endemic. Monthly inflation again hit 18 percent. The Chechen war, the "Mexico retreat," it was all too much. February saw The Moscow Times Index plunge 33 percent in real terms. It has yet to recover.

This year's bout of the strange malady was late. October came, the end of another low-inflation summer, yet inflation stayed at 4.7 percent. November, a fluke: inflation fell some more. December, again, inflation down, a new post-reform low: 3.2 percent per month. Russia seemed to have outgrown the illness.

Then, an icy blast. The Communists took 35 percent of the Duma. Reformist guru Anatoly Chubais was removed as first deputy prime minister in charge of the economy. Suddenly, the usual political slew of expenditure promises translated into an immediate drain on the budget. Pundits talked about policy reversals and fiscal collapse, and Moscow's press corps, desperate for a fix of turn-of-the-year alarmism, relocated the exclamation mark button.

Every year since 1992, Russia's blues have reflected genuine illness. Mid-winter pessimism has been justified by a serious deterioration in the economy -- especially inflation. This year, we've had the pessimism, but the economy has been steady. Four months from an election handing huge constitutional power to the victor, and despite the doom and gloom, inflation is at a post-reform low.

Budget pledges? Revenue shortfalls? Problems exist, but observers of the Russia scene should take a tip from the players -- the equity analysts, GKO brokers and currency traders -- all insiders who know Russia's economic and political life intimately and who daily put their money where their mouth is.

What is undeniable, even incredible, is that despite the Communist victory, Zyuganov's lead in the polls, and the usual turn-of-the-year blues, economic fundamentals are improving. The ruble is steady -- appreciating in real terms; the dollar futures market believes the band will withstand June's election; and yields on state treasury bills are falling.

In steering the market this way, the money crowd has combined educated assumptions and shrewd observations. Announcements often don't amount to genuine decrees. Decrees usually don't lead to actual expenditures. Moreover, the Federation Council can overturn any expenditures the Duma decides upon, as it did with the recent hike in the minimum pension and minimum wage. And if any extra-budgetary spending does take place, as long as it is covered by T-bill sales, it is not inflationary anyway.

The markets have also noticed that wage arrears in 1995 -- significantly lower than in 1994 -- are mostly in the private sector and so won't affect the budget. And in terms of industrial fallout, less than 0.5 percent of Russia's work force took strike action in 1995, compared with an average of more than 4 percent in the West.

The government's recent, underreported, IMF deal is both a symptom and a cause of the strength that the markets perceive. In the run-up to the presidential elections, the eyes of the world are focused firmly inside the Garden Ring. The implications of turn-of-the-year hypochondria could be serious.