Russia. A History

The American banking and mortgage meltdown in the second half of 2008 triggered a global crisis, with severe repercussions for all the globalized states, Russia included. The Russian leadership had no doubts about where to place the blame. As the contagion spread, on 1 October 2008 Putin bluntly declared that ‘everything happening now in the economic and financial sphere began in the United States’, and a month later President Medvedev hammered home the same theme: ‘The US economy … pulled financial markets all around the globe down with it in its fall’, adding that Americans ‘did not listen to the numerous warnings from its partners (including from us)’.

Moscow had good cause for anger and alarm: the crisis had an immediate, devastating impact on the Russian economy. Oil prices plunged: from 147 dollars a barrel in July to less than 40 dollars by the end of the year—a 73 per cent drop. To rescue a falling rouble and failing corporations, the government had to raid the foreign exchange reserves that it had carefully accumulated; the reserves—once the world’s third largest—shrank from 598 billion dollars to 426.5 billion by early January, and dropped to 388 billion a month later (a decrease of 35 per cent). These measures, however, failed to staunch the decline of the rouble, which lost a third of its value against the dollar and returned to its exchange value at the time of the 1998 crisis. The Russian stock exchange nosedived, dropping from a high of 2,488 points in May 2008 to 507 by February 2009 (an 80 per cent decline). The crisis in the financial, banking, and securities sector carried over to the ‘real economy’, bringing a sudden halt to the high growth rate of the GDP. Putin initially projected an overall growth rate of 6 per cent in 2008, but later calculations reduced that to 5.6 per cent—the lowest since 4.7 per cent in 2002 and saved only by the high growth rate in the first half of the year.

The crisis did not spare the oligarchs. Although the magnitude of the crisis evoked images of 1998, this time roles were reversed: in 1998 the oligarchs had bailed out the government, but now the state had to rescue the oligarchs. Authoritative sources reported that the twenty-five richest oligarchs lost 240 billion dollars, that they and individual companies struggled to service the colossal corporate debt (478 billion dollars) amassed in recent years. The case of the aluminium magnate Oleg Deripaska was instructive. His original wealth of 30.5 billion dollars had shrunk to 9.6 billion, with an outstanding debt of 18.6 billion. Oligarchs appealed to the government for emergency loans (Deripaska receiving 4.6 billion dollars, for example) and sought to sell valuable assets to achieve greater liquidity (Roman Abramovich, for example, purportedly seeking a buyer for his English football club, Chelsea).

The financial crisis also had a profound impact on state finances. Instead of the budget surpluses, the precipitous drop in global energy prices—source of more than half of the state revenues—meant a fall in revenues and a ballooning deficit. In early January 2009 the government projected a deficit equal to 3.2 per cent of the GDP, but a month later revised that estimate and projected a deficit of 6.1 to 7.6 per cent; outsiders forecast an even larger deficit (on the order of 8 to 8.5 per cent). Such projections depended, first and foremost, on the price of oil, and as the price of oil dropped below 40 dollars a barrel, Moscow was forced to revise its budget projections (which earlier assumed the price of oil would be twice as high), with the inevitable consequence of still greater deficits.

Despite the global economic crisis (which reduced the demand for Russia’s energy exports) and internal financial problems, the government not only resisted budget cuts but even made plans to increase pensions and unemployment compensation. Those policies helped to sustain high popular approval ratings for both Putin (83 per cent) and Medvedev (78 per cent) in December 2008, four months into the crisis. There was, to be sure, growing concern; those who thought the country was moving in the right direction dropped from 61 to 43 per cent during the same four months. Although the approval ratings showed some slippage, even for Putin, faith in his leadership remained unwavering.