Russian Government Is Not Without blame for the Recession

The Russian economy contracted by 9.5% yoy in the first three months of 2009, after a 1.2% GDP yoy growth in the last quarter of 2008. What is behind this unprecedented drop? Could Russia have been better prepared for the downturn?

Obviously, there are several factors behind the ongoing deterioration of the Russian economy. However, none is so important like its dependence on exports of oil, gas and metals. Even so, initially Russia seemed to be prepared for the financial crisis. The country had the world's third-largest foreign currency reserves and a stabilization fund worth more than $157 Billion, Yet, the country allowed its companies to borrow cheaply abroad in order to finance long term investments. So, once the currency started depreciating in 20008, Russia got buried in debt and may run a current account deficit this year, the first since 1998.

The Russian government has not only failed in diversifying the economy but has also made a big mistake by wasting its reserves in a war to defend the value of the Ruble. In fact, instead of allowing the Ruble to devaluate, the government has been using its currency reserves to inject liquidity into a select group of banks allowing them to speculate on the currency market instead of lending money into the real economy. It is estimated that after reaching a record high of $597.5 billion in early August 2008, reserves have declined by more than $200 billion this year. To make things even worst Russian banks have reduced their credit lines denominated in Rubles, preferring to lend in Dollars to avoid any further depreciation and making this way credit less available for Russian companies and investors.

Russian Government Is Not Without blame for the Recession, Bloomberg
5/18/2009 5:33:14 PM