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. Last Updated: 07/27/2016

Bring On Another Crisis

Three years ago, Russia was in the throes of a financial crisis. Today the situation, on the contrary, looks rather favorable, although voices portending a re-run of the 1998 crisis are getting more audible -- as exports get more expensive and economic growth slows.

The 1998 crisis occurred against a backdrop of global financial instability and falling oil prices. Back then the United States seemed to be the only island of prosperity, and the world's financial flows rushed towards it -- strengthening the dollar, while the ruble and other soft currencies collapsed.

In 2001, however, the situation is in reverse, as the United States is now a source of instability. Having benefitted from previous shocks to the world economy, America has discovered that it doesn't enjoy a miraculous immunity to crises -- but is merely stronger and richer than other countries.

The situation here over the last three years has also changed. Output is growing and the standard of living has improved a little. However these achievements are not so much deserved, as they are the corollary of high world oil prices. This is the main source of ruble stability: As an oil currency, the ruble could almost be said to be the dollar's twin.

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Three years ago, the weakened ruble played into the hands of those operating in the real economy, as Russian goods unexpectedly became competitive on the world market. Today, however, industry has exhausted its growth potential. Prices are not sufficiently favorable for a boost in production to take place -- moreover, investment is needed into new equipment and technology.

At first glance, the situation doesn't look too bad, insofar as the inflow of hard currency from abroad has even exceeded export earnings of late. According to financial analysts, this is due to the fact that it has become less profitable for Russian businessmen to invest their money in the West. For many years the government has discussed various programs to stimulate the repatriation of capital, and economists have argued over how to ensure a favorable investment climate. However, for all the effort expended, there has been no appreciable difference. Now the minute the first symptoms of a recession in Europe and the United States surfaced, flight capital -- without any special prodding -- started to head home.

Nonetheless, boosting output in conditions of global economic recession is a lost cause, and the domestic market is too thin due to the miserable standard of living suffered by the majority of the population. The only way to stimulate domestic demand would be through a large-scale redistribution of income in favour of the poorest sections of society. This, however, goes against the Russian authorities' ideological convictions, and generally flies in the face of the prevailing tenets of the modern world.

Major state investments in Russia today are not possible for ideological reasons. And the weakening of the ruble and dollar relative to European currencies bodes nothing particularly positive in terms of private sector investment. Nor does foreign investment seem particularly forthcoming.

It is still not known how serious and protracted the world crisis will be. It has already been said that the current events are reminiscent of 1929 -- only in slow motion. If this is the case then Russia should expect serious shocks, moreover drawn out over a long period.

In Russia today, a different team is at the helm of state and this is the third and final difference from the Great Default of 1998. Then, Yeltsin was in power and always strove to accelerate a crisis, exacerbate it and find a painful -- but quick -- solution. Today, the Putin administration shies away from making painful decisions and tries to maintain the illusion of stability and prosperity at all costs. As a result, ailments take longer to detect, but are much more deep-seated when they finally are. The authorities, for their part, will only acknowledge that there is a crisis when it is absolutely and irrevocably out of control.

The only small consolation is that plunging into the next crisis, we will finally catch up and overtake the United States.

Boris Kagarlitsky is a Moscow-based sociologist.