February 22nd, 2009

What countries will be the first to recover from the economic downturn (or hurt least from it)? I would say countries with small amounts of debt of any sort (public/private/consumer), countries with governments that lower taxes and cut military spending instead of throwing tax-payers money away and countries with broad and fairly independent economies - that is, countries that can supply themselves with pretty much all they need and who have a well-balanced exchange of goods with a wide variety of countries.

The description above fits pretty well for Russia, and I would argue that it is the exact opposite of the situation for the US and many west-european countries. Modern Russia has only existed for twenty years, they had a huge economic crisis in the country in the late 90's and they actually balanced their first budget in 2000 since the break-up of the Soviet Union. In the late 90's Russia saw inflation of almost up to 100%, which has since decreased, but is still fairly high at around 10%. These high inflation-rates has kept the interest-rates high all through the 00's and therefore hindered a boom of consumer-debt like the one we had in the west. The strong growth of Russia in the last nine years has been the main factor for the high inflation, which now seems to be slowing down - of course with the growth, but the growth is still estimated to be positive in 2009 although estimates vary from 1-6%.
There seems to be a persistent viewpoint that Russia is dependent on high oil prices, well the truth is that the high oil-prices has given the Russian government a pretty good surplus of income - much of which has been saved and now makes up a foreign reserve of about $400bn. Even with these lower oil-prices the Russian federal budget might very well still be postitive; and certainly, the lower prices of natural resources will greatly decrease income for many Russians as well as the government - but it isn't necessarily the end of the world (or the end of Russia). The main driver for Russia's growth has been domestic demand and oil and gas contribute only about 5% of the Russian GDP.

Almost all of the federal debt in Russia has been paid off today and stands at only about $13bn. Consumer credit is basically nothing to worry about, as I mentioned earlier. Private debt (we're talking foreign debt here...) is however a slight problem and is something that has been heard about alot lately - perhaps mostly in the form of 'the rouble has lost much of its value...' (because foreigners want out). The debt-load stands at around $425bn and the governement has so far helped by paying $73bn off the earlier debt-level. If you consider the willingness of the government to help out the private sector by buying their foreign debt, it seems that this problem might not be so great after all, since the Russian government actually has a reserve matching almost exactly this foreign debt in the private sector. Besides, not all foreign money is going out of the country and these companies are not in bad shape because they are unable to make money - they're in bad shape because they can't pay up large sums of money in such a short time.

If we make a little comparison with the US here... the private debt in the US today stands at about $30 trillion, that is about 75 times the Russian foreign debt. Of course the Russian GDP is only $1,7 trillion while the US GDP is at 14,3 trillion, but the difference is pretty striking; if Russia were to match the private debt of the US, it would have to be somewhere around $3.5 trillion! I guess I don't have to make a comparison of the public debt here? As I said, Russia $13bn - United States north of $10 trillion...

But what about the export-import situation? Well, Russia today has a positive export and a healthy level of trade with mostly european and asian countries. Considering that Russia still has a surplus in its trade, it would seem reasonable that it wouldn't be so hurt by its exports falling, as it can still keep imports up - athough these would also shrink. In 2007 exports were $365bn and imports were $260bn. So, that is a pretty big part of the economy, but in a very good position to withstand drops in exports. I guess we're all very familiar with the situation in the US, heavy imports from China and lots of out-sourced jobs to countries like India. Russia can pretty much produce anything it needs and whatever it can't produce, it can easily import because of its large exports. The US on the other hand doesn't produce everything at home and has a huge deficit in its trade-balance, so maybe one day the people in the US will be unable to get stuff from China, if the chinese realize that they're really getting nothing but pieces of paper from their "trade-partner".

Politically, as I hinted in the beginning - Russia has lowered taxes to help people and has also decided to cut military spending. The US has given away trillions of dollars to incompetent and corrupt bankers and is trying to force the american public to keep borrowing money, although they've already borrowed way too much, and also overlooking the fact that this is also the cause of the economic trouble in the first place.

Ok, that post got kind of big, but I hope you learned something - I certainly did, and I think that if I haven't missed some big piece of information, then Russia is a great place to invest today and in the years ahead, especially since the russian stock-markets are down to dooms-day levels.

PS. I forgot to mention the stabilization fund, which stands at about $150bn and is actually meant as a buffer for fluctuations in natural resource prices, so I guess this strengthens the case further.

This post from 1997 is hilarious, if you compare it with the situation in the US today:
http://www.heritage.org/research/russiaandeurasia/em481.cfm