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30.04.08
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The Gentle Impact Of The U.S. Recession
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By Felix Goryunov
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Recession has come to the United States of America. A couple of months ago, there were still doubts that the downturn in the economy, which began last autumn, would turn out to be a long-term phenomenon. The prevalent view among businessmen and economists now is that the recession will last until 2009 or longer, as more financial and real economy sectors are engulfed by the crisis. Unlike growing prices for gasoline and food, most general economy and industry indicators point downwards.
Although the slowdown in the economy is only starting to bite, both corporate and Main Street America are greatly concerned about the future. Americans have begun cutting down on car mileage and on grocery bills. Even middle-class families are eating more in than out. Factory output is declining, despite devaluation of the dollar compared with other currencies, making U.S. exports more competitive. Personnel layoffs have become more common not only in manufacturing, but also in service industries.
Some economists are likening the current downturn to the 1973-75 stagflation, caused by the quadrupling of oil prices by OPEC and enormous Vietnam war spending. Others say that it would sooner be a 1981-82-type recession, accompanied by rising commodity prices. Impressed by the scale of the problems confronting the United States, some alarmists even forebode a long economic meltdown, similar to the Great Depression of the 1930s.
The least susceptible
The American malaise is contaminating Europe and Japan, whose exports are dependent on the U.S. market demands. More expensive international credit and volatility on the global equity markets also depress their economic growth. The Standard & Poors (S&P) rating agency estimates that the degree of this volatility is now comparable to the ups and downs share prices underwent at the New York stock exchange during the Great Depression. The emerging economies of Asia, Latin America, and Eastern Europe are less threatened by the slump, because their exports to America, as well as dependence on American capital inflows, have diminished in recent years.
Among 18 European emerging-market economies, Russia is the least susceptible to this problem, S&P reported in March. International Trade Statistics provided by the WTO state that Russia’s share in world trade in 2006 was 2.5 percent, and the country ranked 13th among leading world exporters. Russia’s overall dependence on trade and capital exchange with the United States is marginal, save some specific markets and businesses. In 2006, the United States accounted for just three percent of Russia’s exports, and for a similar share in the total flow of foreign investment. In the Soviet times, America was Russia’s major supplier of grains and cattle fodder.
Today, Russians consume about a quarter of all U.S. exports of chicken meat. If the current appreciation of food prices makes American chickens less competitive, these imports can soon be replaced by domestic production, or by imports from elsewhere. As to a few rare metals bought by the U.S. aerospace and other high-tech industries, the volume of their American imports would hardly be impaired by the slump. Neither does Russia depend on American private direct investment, although in some sectors (crude oil and metals, food, and a few manufacturing industries), the U.S. multinationals hold significant stakes.
More important for Russia is the spill-over effect of the U.S. recession on the world economy and on money flows. Besides the global credit crunch, created by the subprime mortgage rates debacle and dearer loans, Russian corporate equity prices proved likewise sensitive to turmoil on world markets. International portfolio investors account for about two thirds of the corporate shares traded on Russian exchanges, and often withdraw funds to close their positions in other markets. While by international standards, Russia’s sovereign debt is minimal (about $40 billion), Russian companies and banks borrowed heavily abroad in recent years, and thus increased the country’s total liability to about $450 billion. Though this sum constitutes 35 percent of Russia’s gross domestic product (GDP), this level of international indebtedness is also considered low, especially in view of the country’s healthy external balances.
The latter are the main safeguards against international menaces. Russia can boast sustainable surpluses in merchandise trade and in current accounts, as well as the third largest currency reserves in the world (over $500 billion). So far, there have been no challenges to the stability of Russia’s national currency. Despite the fact that this currency was recently made convertible, and that the government expresses its ambition to make the ruble a reserve currency from time to time, it is hardly possible in the foreseeable future. The ruble accounts for only 0.8 percent of the average daily global foreign-exchange turnover, compared with 86 percent for the dollar and 37 percent for the euro.
Divergent trends
In view of the unfolding global downturn, Russia’s robust and sustainable economic performance is even more significant. During the last eight years, the country’s economic growth has been accelerating, and reached an eight percent annual growth rate in 2007. Russia is now recognized as a global growth engine which may help, together with other BRIC members, to free the world economy from its former overdependence on the United States. This new role would only become more significant, because Russia’s capitalist system is still underdeveloped, and there is a lot of room for expansion. The country is set to speed up technological restructuring and innovation, and the government is funding programs of infrastructure development, as well as upgrading human resources.
The current consumer buying spree made Russia into the most attractive country in Europe for exporters and investors. Although on many counts, this spree is a symptom of the Dutch disease (when the windfall of revenues from oil makes the economy less competitive), it contrasts sharply with the contagious spending clamp down among American consumers. Simply put, the U.S. economy and public mood are going down, while Russia’s are heading up. These divergent economic trends encourage some of Russia’s top politicians to claim that the country’s markets are “islands of stability in the ocean of financial turmoil.” Since the turmoil does affect Russian economic performance, albeit not as painfully as in other places, it would be more appropriate to say that its impact is gentle.
Only few of the current challenges Russia is faced with are directly related to the recession overseas. The most integral one is persistent inflation, which is partly an aftershock of the global food crisis. This year’s consumer price inflation is estimated to be no less than 10 percent and in some regions and for some goods it can be even higher. In Russian Far East regions, local administrations that have to import grain are considering introducing bread rationing schemes, somewhat similar to American food stamps for low income families.
Consumer inflation is also fueled by higher energy, utilities, and transport rates, set by the state monopolies, as well as by regular increases in wages, not justified by better labor productivity. Whereas the United States is now seriously concerned with growing unemployment, Russia’s economy faces white and blue-collar labor shortages.
Grapes and safety-nets
If Russian policy-makers do not draw lessons from the current American woes, the economy could fall in a similar trap in the future. Russia has already been following many similar patterns of economic development – acceleration of the manufacturing of consumer durables with a lead in the automotive industry, mortgage-funded housing construction, expansion of consumer finance and credit card payments, etc. Though the buy-now-pay-later marketing system is yet in its inchoate stage, Russia has begun building a consumption-driven economy, with all of its delights and despairs. But the social safety-nets that can, at least partly, protect the Russian society from the negative effects of the downturns in business cycles are only in the making. Thus, the current U.S. recession may also serve as a lesson in social policy for the young Russian capitalism.
The social impact of the American recession is yet to be felt when it hits the bottom next year, or later. However, it can be said today that its consequences would hardly be akin to the suffering of millions of American families some 70 years ago, so masterfully depicted in “The Grapes of Wrath” by John Steinbeck. The most crucial consequence of the Great Depression was Franklin Roosevelt’s “New Deal,” that saved America from a proletarian revolt by creating social insurance guarantees for the poor. The legacy of the New Deal is operative till this day, and protects millions of American working families from recession-driven calamities.
The United States can boast the world’s largest system of social safety nets, with impressive budget allocations. In 2007, the spending on permanent social assistance programs accounted for 25.6 percent ($1.7 trillion) of the total U.S. federal government expenditures. Contemporary safety nets embrace social insurance, Medicare and Medicaid, and other health related assistance, unemployment, welfare and education benefits. President Dmitry Medvedev’s social programs, designed to improve public health care, education, and pension systems, which were started three years ago, as well as his desire to address the widening gap between the rich and the poor, are steps in the same direction.
Another significant factor cushioning the recession’s blows is the American war machine, which accounts for a substantial share of the total industrial production, now running at full throttle. The U.S. defense spending, the next largest after the social security budget outlay, provides lump sums to weapons and other military procurement businesses, as well as jobs in many defense-related industries along with well-paid employment for servicemen. Thus, the wars in Iraq and in Afghanistan stopped further deterioration of economic performance.
This is a sphere where Moscow can teach Washington how to learn the lessons of history. Soviet defeat in Afghanistan became such a lesson for Russia’s elite. American defeat in Vietnam did not soften the belligerence of U.S. policies. They are based mostly on artificial instigation of tensions, instead of capitalizing on opportunities arising from the absence of ideological rifts between the United States and Russia.
Better than usual
What is sometimes missed in the media coverage of “the new cold war” between East and West is the fact that despite current tensions, it is not just business as usual. Now, East-West business is a lot better than usual with every passing year. Being a growth engine in the global economy, Russia can absorb Western goods, capital and qualified labor that cannot be productively employed because of the recession.
A survey of American companies carried out by the Ernst & Young consulting company from October 2006 to February 2007 discovered that 89 percent of the companies projected continued growth in sales, and 79 percent intended to make investments through 2008. The profitability of 79 percent of the surveyed companies in 2001-2005 was on or above target. The survey also recorded that 90 percent of American companies operating in Russia believe that continued commercial engagement with Russia is positive for American business. The Association of European Businesses in Russia claims that EU company CEOs in Russia think the same.
Felix Goryunov is a Russian economic journalist who has been observing the world economy for over 30 years. |
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