- The Washington Times - Tuesday, November 25, 2008

MOSCOW

Russians are cutting back on personal spending and trading rubles for dollars as the collapse of world oil prices cripples an economy that just months ago soared on the strength of record prices for its petroleum exports.

Even vodka sales are down.

Economists are especially worried by the mounting flight of capital and increased dollarization of the economy — something that last happened a decade ago when the government defaulted on its foreign debts.

“Some of my friends have converted all their savings into dollars, leaving just 500 rubles to pay the phone bill in their account,” said an administrative assistant at a bank, who asked that only her first name, Olga, be used because she was not authorized to speak to the press.

“I’ve been telling my friends for months to buy dollars while they were cheap, but some of them just wouldn’t listen,” she said.

A recent World Bank report documented the extent to which the decline of oil prices from a high near $150 a barrel to about $50 is wreaking havoc on the Russian government’s budget and depleting its foreign-currency reserves.

Russian reserves stood at $596.5 billion at their peak at the end of July. By the end of October, the figure had dropped by $100 billion.

Like other emerging markets, Russia has depended heavily on foreign capital. Even before the international financial crisis took hold, the August war in the Caucasus and heavy-handed Russian government treatment of Mechel, a large Russian mining and metals producer, led investors to take their money to safer ground.

The continuing outflow of money and tight credit by foreign lenders has put a strain on Russia’s banking sector. Lending to both corporate and retail clients has all but stopped as banks hoard cash owing to the increased risk of nonpayment of loans or a run on deposits.

In addition, Russian stock exchanges have declined by two-thirds since the spring. They stay open just long enough to register dramatic declines before authorities intervene to stop daily trading, frustrating local and foreign investors alike.

Russian authorities have cut requirements for bank reserves and made $50 billion available to refinance corporate debt as part of a $244 billion economic-rescue package.

Arkady Dvorkovich, a special assistant to Russian President Dmitry Medvedev, told reporters last week that the government intends to continue large-scale spending on public housing and other infrastructure projects.

“The government is keeping a close eye on where their money is going,” said Julia Tsepliaeva, chief economist at Merrill Lynch in Moscow. “The most important question for Russia will be getting capital back into the economy.”

Mr. Medvedev has also told the head of Russia’s natural-gas monopoly, Gazprom, to collect a $2.4 billion debt it says Ukraine owes for gas deliveries.

Ukraine, whose economy has been severely affected by the crisis, recently received a $16.4 billion bailout from the International Monetary Fund.

In addition to collecting such debts, economists say Russia may be forced to sell off some of its U.S. Treasury securities, estimated to be worth $75 billion.

“I suspect that the central bank may need to sell Treasuries since it will need to use its dollar reserve holdings, but this will likely be gradual and certainly not done for political reasons,” said Nataliya Orlova, chief economist at Alfa-Bank in Moscow.

The situation has gotten so severe that some people are even cutting back on vodka.

“People are having to save money, including on drinks, and this is connected to the impact of the financial crisis on people’s disposable incomes,” Pavel Shapkin, president of the National Alcohol Association told the Reuters news agency.

He said stockpiles of Russia’s national drink were six times higher at the start of November than a year ago.

Even though a plastic half-liter of vodka costs as little as $1.80, more Russians are cutting back or turning to bootleg vodka. Reuters reported a 6 percent increase in deaths in Russia from rotgut vodka compared with a year ago.

The dramatically lower oil price and the likelihood that Russia will continue to bleed its foreign reserves well into 2009 could impact Russia’s rocky relations with the West.

“I don’t think that you can separate low oil prices from the overall crisis,” said Thomas Graham, a Russia specialist on the White House National Security Council from 2004 to 2007. “Russia will have fewer resources to pursue its goals.”

However, Mr. Graham added that Russia will remain stronger than its neighbors and “this will lead to continued growth in Russian influence there.”

Some Russians seem relatively unaffected by the crisis.

Inna, an information-technology specialist whose husband is a machinist for the Moscow subway system, said she and her husband do not have a lot of extra income to buy foreign currency, and they use what they do have to buy tangible things, such as the big-screen TV they purchased last month.

“Our friends and family have weathered tough times in the past, and we’ll live through these difficulties as well,” she said.

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