By Renfrey Clarke
MOSCOW — For several months from mid-1997, the message in the mainstream Russian press was unanimous: the bad times were ending. The collapse that had almost halved the size of the country's economy since 1990 had bottomed out. Growth was about to begin.
With events on the world's stock markets in October, much of that confidence crumbled. If US share markets took deep shocks, the Dow Jones Industrial Average dropping by 7% on October 27, the Russian stock market suffered something close to a holocaust.
On one day, October 28, the total value of the companies covered by the Moscow Times Index of 50 leading firms fell by 20%. At one point, this index was down by nearly 30% on its level a few days earlier. The week finished with overall losses of 17.4%.
Pundits were quick to insist that if the stock market let off steam, that was nothing to be gravely concerned about. "We can afford a 10 or a 20% drop without any upheavals", the first deputy prime minister, Anatoly Chubais, was quoted as saying. The "fundamentals" of the Russian economy, commentators argued, were sound.
But investors were clearly unimpressed by the efforts to talk the market back up again. By week's end, anyone with a really big stake in the Russian equity and debt markets was taking time to mull over some grim lessons. Not only was the "stabilisation" in Russia a house of cards, but the favourable international economic conjuncture that had buoyed "reform" since 1992 was close to exhausted.
Amid the humbug on the finance pages, there was one important truth. The events of late October, it was pointed out, showed that Russia was now tied closely into world capitalism.
This was touted as a sign of progress. But what the commentators failed to point out was the way in which Russia has been integrated into the world capitalist system: as a semi-developed supplier of raw or partly processed commodities. The implications of this can be summed up: when Wall Street stumbles, Russia bungee-jumps.
With its economy now heavily dependent on exports of raw and semi-processed goods — primarily oil, gas, metals and timber — Russia loses on two counts.
World prices for such goods are much more volatile than prices in general; consequently, the local economy becomes subject to wild swings between relative prosperity and destitution.
Secondly, the historical trend of world prices for primary products, relative to manufactured goods, is downward. Over time, a country that depends on exports of primary products finds itself having to produce more in order to buy less.
Since the Russian state was reborn at the end of 1991, it has benefited from an exceptionally prolonged commodity price boom.
World metals prices rose dramatically from 1992, and have declined only gradually in recent years; prices for aluminium, of which Russia is a massive exporter, have been high in recent months. Oil prices rose strongly in 1996, and in October that year were 39% above their levels at the end of 1991. These high oil prices were maintained, more or less, in early 1997.
Whatever successes capitalist "reform" in Russia has enjoyed are much more the result of happy accidents in the commodities marketplace than of any strengths of the market system itself.
The prices of raw and semi-processed materials, for obvious reasons, are closely tied to the general business cycle. When an international upturn is replaced by crisis and recession, these prices fall steeply.
And a key sign that a period of upturn is coming to an end is the increasingly erratic and extreme behaviour of stock markets, as speculators who feel less and less confident that the good times will last rush to squeeze a few more drops of profit out of overvalued shares.
Western economic commentators in recent times have floated the idea of "the end of the business cycle", suggesting that improved regulation of share markets has ended the possibility of recessions. These arguments are simply a bait for naive small investors to stay in the market after prudence indicates that they should get out.
There is much better reason to believe that share markets have become less stable during the 1990s, as technological advances have multiplied the speed at which speculators can whisk billions of dollars about the globe.
When signs are mounting that an international recession is due, there are places where savvy investors definitely do not want to leave their money, and one of these places is the Russian stock market. "When things look like turning bad, Russia is the first place investors will get out of", observed a Moscow economic analyst who did not wish to be named.
Nevertheless, Moscow economic journalists in the last days of October were trying to convince their readers that Russia was more attractive than most "emerging markets" as a place to invest during difficult times.
These arguments hung largely on the fact that, in various cases, Russia's key rivals for investment have shaky balance of payments positions. By contrast, official figures show Russia with a strong trade surplus.
Russian trade figures, however, are believed to heavily understate the level of imports; smuggling consumer goods into the country is an enormous industry.
In any case, Russia's trade surplus is most unlikely to survive a significant international downturn. As factories around the world cut their output, demand and prices for Russia's steel, nickel, aluminium and forest products will fall precipitately.
While another international recession is an absolute certainty, there is no special reason to expect it in the next few months; several years separated the stock market crash of October 1987 from the onset of a broad economic downturn. But a widespread sense that recession cannot be far off, and increasingly frequent crises on world stock markets, will cause serious problems for the Russian government from now on.
The main short-term impact on Russia is likely to be associated with increased costs in raising loan funds abroad.
With its tax receipts far below target, and the sell-off of state assets a diminishing resource, the Russian government depends heavily on bond issues to keep its deficit in check. Increasingly, regional and city governments in Russia are turning to the same device.
As confidence in the ability of Russian authorities to pay their debts faltered in late October, the interest rates which the government had to offer in order to place its one-year bonds rose from 17 to almost 23%. If the cost of borrowing remains anywhere near such levels, servicing the state debt will soon present crippling problems.
Rather than stability and growth, the real prospects for Russia are mounting chaos in state finances, further declines in already tiny investment levels and a resumption of the fall in production. Instead of the bad times ending, the good times are running out.