Despite western propaganda, Russia is not in economic crisis

78% of 2014 capital outflow was debt repayment

Following the prophecies of doom that were going the rounds in December the rouble appears to have stabilised, the Central Bank's reserves are intact and the government looks calm and in control.

This appearance of calm appears to have annoyed some of the government's Western critics.

The economist Anders Aslund sees it as evidence that "Putin is in denial".

Most remarkably, the Economist sees the government's "Zen-like calm" as "proof" "the economic crisis has officially arrived".

This rather begs the question of what the Economist would make of signs of panic. Would that be proof the crisis is officially over?

Nobody denies Russia faces a difficult year. The sanctions are obliging Russian companies to pay off their foreign debts at the same time as the dollar price of oil - Russia's main export commodity - has halved, making repayment more difficult.

The rouble as a result has come under serious pressure and has halved in value. Investment and spending as a result are being cut back.

The rouble's fall is causing inflation this year to be significantly higher than it has been over the last few years or that the authorities had planned for. This in turn will cause real incomes to drop.

It would be impossible for the economy to avoid a recession in these conditions and the only question is how severe it will turn out to be.

A recession however is not the same as a crisis and as an article by Dr. Constantine Gurdgiev shows, talk of a crisis is overdone.

As we have said before, there is no doubt even in these difficult conditions that Russia will pay its debts. As Dr. Gurdgiev points out, 78% of what is called "capital outflow" from Russia last year was debt repayment.

A significant part of the other 22% (or $33 billion) was remittance payments by foreign workers in Russia to their families located in countries around Russia's periphery like Ukraine.

This is a significant factor in causing Russia's capital outflow, though it is one that is scarcely ever discussed. This article in the Guardian is a rare exception, putting the figure at around $19 billion for 2014. If so, then around 2/3rds of capital outflow minus debt payments is accounted for by foreign worker remittances.

That leaves just $14 billion (less than 10% of the total) to account for all remaining capital outflow, which in a $2 trillion dollar economy ($3.5 trillion calculated on the basis of purchasing power parity) hardly suggests any great rush for the exits.

What the sanctions are doing is forcing Russian companies to pay off their dollar and euro debts more quickly in a way which over the not-so-long-term will improve their balance sheets.

This, together with the advantages that the rouble's devaluation gives domestic producers all but guarantees an eventual return to growth even if oil prices do not rise soon, as they probably will.

It would be a very different matter if there were serious concerns about the ability of Russian companies to pay their foreign debts. That was the case in 2008, when signs of panic were everywhere.

At the height of that crisis in November 2008 the Central Bank was burning through its reserves at a rate of $22 billion a week, whilst Russia's two stock markets, the MICEX and the RTS, crashed with falls on certain days amounting to almost 20%, with trading repeatedly suspended sometimes for days in succession.

There is nothing like that this time since unlike in 2008 there are no doubts about Russian companies' underlying solvency and therefore ability to pay their debts, whilst the authorities this time, having learnt their lessons from what happened in 2008, have provided liquidity support to Russian companies (especially the banking sector) when this has been needed.

The reason therefore for the government's "Zen-like calm" is not because the government or Putin are "in denial" about the situation. It is because the situation does not call for the sort of panic Aslund and the Economist apparently want them to engage in.

Chomsky: We Are All – Fill in the Blank.

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