TWEEK - Topic of the Week
RUSSIA TO THE RESCUE…. OR FALSE ECONOMY

Dr James Warren - Reading, UK 11 November 2011

In London’s high court, two of Russia's most influential oligarchs from the early post-Soviet era are trading punches in a high profile litigation battle; Boris Berezovsky suing Roman Abramovich to the tune of $5 billion for unpaid profits from the oil company Sibneft. Of course, the reality is considerably more complex with Abramovich insisting no such sum is owed.

Back in the real world of European economic torpor, the Eurozone is beginning to crumble around Greece's ancient ruins while it stumbles from crisis to crisis in attempts to avert economic meltdown. The disputed $5 billion between Berezovsky and Abramovich would be little more than a small dent in Greece’s €340 billion debt, but given that two economic bail outs have failed to avert fears of a default, can Russia and its BRIC partners help rescue the situation? Christine Lagarde, head of the International Monetary Fund (IMF) hopes so, emphasising the IMF’s role in reinforcing ties between countries.   Lagarde is hoping that her three day trip to Russia to address global economic issues will produce some positives.  She’s counting on ‘Russia to continue playing this bridge role between Europe and Asia, between the old and the future’.  So what do such grand words mean in practice?  Read more…..

Money for nothing?

The fact is that Russia and other BRIC partners contribute to the IMF, which, in turn, is used to rescue the debt-laden Eurozone. Thus far, Russia is committed to a contribution of $10 billion (a seemingly small sum given the fortunes of Abramovich alone) but, according to President Medvedev’s economic advisor, Arkady Dvorkovich, this could rise further and a ‘financial contribution’ to the fund will be decided in the ‘coming weeks’. So is such financial input merely a gesture of altruistic goodwill to aid a financially depressed Europe? One would be foolish to see things in such simplistic terms. Russia and her partners expect concessions from the IMF not least – according to Irina Filatova, writing for The Moscow Times – in the redistribution of membership quotas that determine the size of countries financial contributions and their voting power within the fund. Furthermore, President Medvedev has called for a ‘significant increase’ in the influence of developing countries within the IMF. The negotiations, according to Lagarde, are slow and painful and are not without cost. The problem being, that in order to increase quotas for countries such as Russia, other countries must give up their own quotas. Whether they are prepared to do so, and at what price, is an entirely different matter.

Make hay while the sun shines

Whether Russia can continue to sustain its influence over the IMF and have an input into the European debt crisis is another important question? Russia’s economic growth for 2011 is expected to be approximately 4.3% with Bloomberg quoting 3.4% for the last quarter and 4.1% for the first. The UK could only dream of such seemingly utopian growth figures with its own rates of 0.2% and 0.5% in the last 3 months up to September. However, Russia is still heavily reliant on oil prices and vast natural resources. Oil prices dipped below $100 a barrel in October and there is certainly a case to be made for building up cash reserves from natural resources and energy while prices still remain relatively high. The problem is that Russia is still strongly susceptible to price fluctuations in commodity prices. Recognising this Largarde argues that Russia should cut inflation in a bid to ensure its economic stability and further develop its financial market. She also warned against budget expenses ahead of upcoming parliamentary and presidential elections in the light of increased public sector salaries as well as pensions.

Stagnation on the cards?

The recent debate concerning Russia’s president after the 2012 elections has also heightened fears that the economy and political situation will stagnate over the coming years and this will in turn affect its ability to affect global economics. In September, Vladimir Putin, declared that he would once again join the presidential race and that president Medvedev would not be seeking a second term. Changes to the Russian constitution would, more than likely, see Putin ‘reign’ Russia for another 12 years after a brief 4 year hiatus as prime minister from 2008-2012. Critics have argued that Russia will slip into an era of 1970s Brezhnev style stagnation as economic and political policy will be stifled under the auspices of one man running the country. The former finance minister Alexei Kudrin was forced to resign days after the announcement from Putin and Medvedev arguing he could not work for the government under such circumstances. Foreign investors will be dismayed by his resignation and have praised him for his handling of the Russian economy as well as saving much of Russia's oil revenue in a fund that helped Russia weather the global financial crisis in 2008. Time will tell, whether Kudrin's resignation has a deep impact. Political opposition and civil society in general took a retrograde step during Putin's last presidential tenure and there is certainly no optimism that things will improve from 2012 onwards. Former Soviet leader and architect of the reform that ultimately brought about the collapse of the Soviet Union, Mikhail Gorbachev argues that, ‘we can assume there will be no movement forward if there are not serious changes along the lines of a replacement of the entire system. Without this we could lose six years.’ If this is indeed the case, can Russia still expect to maintain an influence over the IMF and the global economy? Can Europe turn a blind eye to a stagnant civil society, increased state influence and a weak electoral system in exchange for assistance out of its own financial quagmire? If so, at what cost? Have your say…..