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MOSCOW AFTER THE FAT COWS HAVE ALREADY BEEN EATEN


While the Russians enjoyed themselves during the New Year and Christmas holidays, the world economy was developing in its own quite unexpected way. The oil prices dropped and the Moscow housing market stabilized.

The first piece of news must cause anxiety within the nation whose prosperity depends on oil exports. The second was greeted with a sigh of relief not only by the Muscovites who are tired of escalating real estate prices, but also by the citizens of other Russian cities where the housing prices have also been rising as if the regions were trying to catch up with the capital.

Experts in real estate make vague predictions saying that “the prices will either leap again or fall or stay unchanged”. Meanwhile, the economic situation in the world is drastically changing.

Within the last three years we have been told al least twice that the current economic growth in Russia will slow down soon. But both in 2001 and in 2004 after a short halt the economic growth continued due to rise in oil prices. As a result, in comparison with $30 for barrel that seemed too expensive in 2000, the sum of $58 for barrel now seems to be a considerable drop in price.

Nothing lasts forever. Expensiveness of the oil resources forced many Western countries to move towards economy based on higher energy efficiency that finally resulted in deterioration in demand. The threat of the ecological crisis and global warming make the need for energy efficiency even stronger. But though “the world free from oil dependency” exists so far only in the dreams of the specialists in energy security and gurus of the green movement, it’s clear that in the near future the demand for oil won’t increase.

On the other hand, the oil prices were high not only due to growing demand, but because of the financial situation in the world. During 1990s national banks of the majority of the Western states, USA in the first place, fought inflation through rigorous credit control believing that inflation stemmed only from immoderate spending at the state level. As a result, nominal cost of the money didn’t change, while its real purchasing power was constantly decreasing. The situation was similar to the crisis that happened in the Soviet Union under Leonid Brezhnev’s rule, when the disproportion between the inflationary potential of economy and state-set prices caused deficit in a number of goods. In the USA this policy caused credit boom that spread to other national economies.

As a result, while formerly astronomical debts were typical only of developing countries, in 1990s the middle class and many businesses in the Western democracies, including big corporations, fell into the credit trap. Everyone could borrow money, but as cumulated liabilities increased the most trustworthy companies could borrow incredibly huge sums. Just in the same logic liabilities of the Russian companies have been increasing during the last three years.

Change in the world oil prices provoked surge in inflation that was formerly curbed and restrained. Despite the difference in the economic and financial policies, the result was just the same as back in 1970s: oil prices climbed – the dollar slumped – inflation increased.

The world economy won’t any longer be a locomotive for the Russian economy. Does it mean that our economy will inevitably collapse? This is not self-evident. It is more likely that the overheated economy will start to show modest growth rates and even stagnate. There is still internal potential for development that could last for some period regardless of the world oil prices. Investment projects that have been initiated earlier won’t be closed down at that very moment.

But this is not a catastrophe yet. What may cause it is that the Russian political and economic elite got used to living large. Unrestrained ambitions of corporations and bureaucrats turn all in all into expansion projects launched mostly abroad. These projects seemed to be the only way of putting to use the petrodollars that came in abundance to banking accounts in 2003-2006. But in the long run it may turn out that the money spent on these international projects was simply buried.

The problems of the Russian state are not due to specific features of the Russian economy – it is the general trend that influences the internal situation. But Russia can face the specific consequences of this general tendency.

For only in Russia in 2008 there will be elections of the head of state who along with the presidential post will obtain powers of a tsar. And in Russia we have the ruling elites that are ready to sell their country, but at the same time can’t veil their imperial aggression (which is nevertheless based on their inferiority complex).

It is possible to survive seven years of lean cows. But how shall we live with shepherds that during the years of fat cows ate the entire herd with a light heart?

Boris Kagarlitsky is a Director of The Institute for Globalization Studies

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