Wednesday, March 25, 2009

Russia Distinguished

As global economic disruptions have caused a collapse in oil prices, Russia has been exposed as having fooled itself into thinking that the past eight years of prosperity was the result of brilliant economic planning. With that veneer now stripped away, the reality is that Russia merely accessed many partially depleted Soviet-era oil wells, and watched gleefully as oil prices continued to rise. At the same time, one could question whether Vladimir Putin's immense popularity(until recently) was merely a reflection of ever increasing Russian living standards, enabled by oil wealth.

The above reality, we feel, is relevant when assessing the recent Chinese calls for a "global currency", and the supposed international support it is receiving for such calls. Cited by the media as supposedly pertinent to the Chinese comments is the fact that Russia also voiced these World Currency concerns just a week ago. First of all, we would dismiss the idea that any group of countries are about to unite under the noble and common goal of creating a global currency for the purpose of global stability. Clearly, the Governments of the world are only concerned about stability within their Specific country, and each has a specific reason to advocate a global currency. The Chinese are obviously upset that they have ignored the old adage "Don't put all your eggs in one basket", in addition to the fact that they see now as an opportunity to wield an increasing amount of influence concerning the restructuring of the global financial system. Russia however, is a different story.

Russia's situation is simple math. Where spending and oil revenue used to both equal 4X, revenue has now declined to 1.5X, but spending has remained the same. The country did have 7.5X saved, but has has to spend 2.5X to finance its deficits and support the flimsy ruble. Assuming oil prices remain relatively range bound(or don't fall further) the Russians will either have to cut Government spending significantly, or they will go bankrupt. The country is already allowing some of its smaller state supported entities default on their debt, and we don't think investors will lend money to the Motherland.

We believe that the above reality is already quite well known in the upper levels of Russian government, and that steep cuts to government spending are being planned. The Kremlin understands that the populus will not take kindly to sudden cuts in levels of service, and thus has decided to use the oldest trick in the book: the external enemy. We expect that anti-American/dollar rhetoric will emanate from the Kremlin at levels commensurate to that Government's inability to provide for its own citizens. The final stage, however, could very well involve Russia once again lashing out at a neighboring country, a la the Georgian incident.
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