The economic crisis in Russia: Fragility and Robustness of Globalisation

1. The economic crisis in Russia: Fragility and Robustness of Globalisation Satoshi Mizobata KIER, Kyoto University Workshop in Vietnam, September 2009

2. Introduction • Transition economies and the global crisis: Is transition over? • The economic growth and the crisis: The crisis spread to the success market. Dual surpluses are the base of the growth, but they become weak points. • Is the Russian market normal or abnormal?

3. 1.Reconsidered economic growth in the 2000s High economic growth by energy and resources: an increase of reserve and export revenue Heavily dependent on the mineral resources: fragility and sensitivity of the Russian economy to the global market The state budgets depend on the global markets.

5. Macroeconomic indicator

6. Export of petroleum and gas in Russia: changing into Middle East

7. Share of export in the main products 7

8. Integrated government finance

9. Foreign trade in Russia($ billion)

10. Oil export price ($/barrel) 10

11. Export of energy ($ billion) 11

12. Foreign trade changes

13. Domestic market heavily depends on import. • Russian market expanded, and now it is No.1 in Europe. • Low technology and quality of consumption goods like automobile • Imported food and medicine, automobile (like Toyota and Nissan) • Russians cannot live without the global market.

14. Russia became a Bubble economy • Skyrocket of asset price like stock and real estate (housing): The stock bubble supported another bubble, residential bubble. (in big cities) The regional gaps are large. Partial bubble economy • Continuous inflation • mismanagement of the government and inflow of cheap money

15. Balance of payments

16. Balance of payments and external debts (end of year, $10 billion)

17. External debts of enterprises($ billion) 17

18. Net international investment position ($ billion)

19. Net capital flows to the private sector ($ billions) 19

21. Russian economy drastically changed in the 2000s. • Economic growth maintained a twin surplus. • The economic structure becomes a fragile and sensitive to the global market. • Russia has been integrated into the global economy, and in this point, the transition is over.

22. 2.The global crisis hit The economic crisis hit the Russian economy, and the Russian gets mired down in the crisis.

23. Crisis under transitionTransition economy and economic crisis Contagion to transition economies Financial crisis and economic crisis (real sector crisis) Difference of CIS countries and Central Eastern Europe: high debts and critical case of external debts in Kazakh, Ukraine, Belarus, Moldova, Tajikistan. Contagion to non-open economy (Kyrgyz) Global crisis is strained in transition economies. Dependence on the European markets. Hungary, Latvia, Serbia…But From financial crisis to economic crisis

24. When Russian crisis? 2008 September: a drop down of stock price 2008 July: limited growth of money supply and the increased interest rates 2007 November: a decline of M&A transaction 2007 August: weakening liquidity (V.Senchagov)

26. A sudden drop of trading volumes in stock exchanges MICEX

27. Asset price dropped suddenly after September 2008-Lehman shock • Stock price declined in MICEX and RTS. • A decline of real estate price negative chain functioned and… a collapse of bubble economy from financial sector to real sector

28. A violent change of housing price($/m2)

29. Average price change of cottage in Q3 2008-Q3 2009 (%)

30. Financing: stock market and Repo market 30

31. Financing: stock market and Repo market 31

33. Enlargement of Repo market Similar to GKO-OFZ in 1998 Failure of Repo:7.1 billion Ruble of “KIT Finance”

34. Margin calls：Firms with non-performing loans in November 2008 34

35. Crisis Phenomena Stock prices Foreign borrowing Margin calls Bankrupt of banks Financial crisis as SvyazInvest Consumer loans crisis: automobile and construction The sharp decline in petroleum price, aluminum and metals Construction, development, and retail External repayment: repayment $ 160 billion till the end of 2009 Labour market Regional gaps

36. Industrial sectors in Crisis Big shock sectors: banks, developer, retail with high leverage ratio Export and resource sectors: metallurgy, non-ferrous, oil and gas, diamond, paper Import substitute sectors: automobile, cement Some Company cities faced difficulty. Decline of consumption and investment

37. Production was diminished by three waves. • Reduction of speculation and expensive credit: developers---a decline in employment and income-a chain of reduction • Reduction of export profits • A decline in the state budget

38. Changes of export prices in Russia ($ per ton)

39. Export structure of Russia (2009.1-6)

40. Economic crisis in 2008-2009 40

41. Perspective of economic growth:Crisis is serious (pessimist)⇔no crisis, crisis hit the bottom (optimist) 41

42. Defaults of corporate bonds (cases)

43. Employment (million)

44. Unemployment rate (%)

45. Russian recovery perspective and positive scenario signals First Quarter 2009 oil and gas price increase and stabilisation. Urals price $ 55 per barrel in May 2009. Ruble Exchange rate stability against the USD/EUR currency basket. Russian government and households sectors are not overleveraged. Russian corporate sector is restructuring and servicing the debts. Volume of payments $ 114 bln. Per year 2009. Reserve Fund and public debt resources are used to support 2009-2010 Budget expenditures. Public budget and Central bank of Russian capital and subordinate credit investments supported the Bank System equities. Public guarantees and credit placement to refinance corporate debts 2009-2010 Public and private capital investments to start GDP recovery. 45

46. Symptoms of recovery After the first quarter of 2009, we can observe some symptoms which signal the end of the panic period. A.Kudrin, the Minister of Finance, considered Russia got out of the crisis in August. I.Shuvalov, the first vice-prime minister also announced a recovery of the economic growth. Oil price increased after May 2009, and the ruble exchange rate seems to be stabilised. Many corporations are restructuring and servicing their debts. The resident house price began to increase. In July 2009, almost all economic indicators were better than in June. Unemployment also declined to 6.3 million (8.3%).

47. 3.Outcomes of the crisis: A collapse in the growth factors What did the crisis bring about in the Russian economy? Can Russia hold the growth factors based on the path in the 2000s?

48. Specificities of the crisis in 2008 • The economic crisis is greatly influenced not only by the global economy but also by national specificities. Further, the crisis was contagious among not only the weak economies but also those showing strong macroeconomic performance; as a matter of course, the transition economies and emerging markets became the main target. Twin surplus in Russia • The subsequent dismal economic performance seems to have led Russian economists to describe extreme scenarios. These often included the ‘hard landing’ scenario

49. Crisis in Russia not once in a hundred years but in ten years • Reconsidered 1998 crisis: GKO and the East Asian currency crisis • Fragility of domestic markets • From deficits in 1998 to surplus in 2008 • common features and differences in the crisis

50. International financial flow (1998 crisis) Global oil and gas markets International fiancial markets State bonds government banks Foreign reserve Enterprises Households 50