A promising economic start to a new decade

The past decade has been a roller-coaster ride for the Russian economy. From the depths of its 1998 financial crisis, which tested the proverbial patience of the Russian people, to the credit-fed boom of 2007 to the seeming meltdown of the economy just a year ago to its still seemingly unbelievable rebound as we start the new year, one learns to expect the unexpected when it comes to Russia. This zigzag pattern was not a spontaneous occurrence, nor does it have to continue.

The key has been and will continue to be government policy. And for all the criticism that can be heaped on the authorities who could have done more or could have acted sooner, they do deserve some credit for reasonably good economic management. It didn't have to turn out as well as it has.

In economics, it is rare to be able to conduct a controlled experiment in order to explore alternative hypotheses. But we do have history as a guide even if no two cases are exactly alike. In the run-up to the crisis, Russia, relative to spendthrift countries like Spain, Ireland or Ukraine, was running huge budget surpluses - thus, withdrawing stimulus that would have otherwise amplified the private sector's euphoria with a veritable explosion of aggregate demand. It also saved the oil windfall for the most part so that it had a comfortable cushion to soften the blow when the global crisis erupted in late 2008. Other countries like Bulgaria, Hungary and Serbia that had no choice but to turn to the International Monetary Fund for support surely wished that they had Russia's self-insured financial mattress to help survive the crisis.

Moreover, once the crisis emanating from the United States hit Russia, the policy response was adequate. Although too much public money was no doubt wasted on undeserving corporate bailouts, the brave decision was to devalue the ruble. This was not inevitable nor politically palatable. The ministeps to depreciate the currency between Nov. 11, 2008, and Jan. 22, 2009, took courage in view of both public opinion and powerful vested interests that owed considerable foreign currency denominated debt. The cushion of reserves meant that Russia had the luxury to soften the blow through a gradual adjustment that allowed time for worried residents and companies to switch into dollars and preserve their nest eggs or repay debt. Contrast this to poor Latvia, which hangs on to the overvalued lat while the real economy is ravaged with deflation.

At the outset of the new decade, Russia's economy is coming back. Even after what was spent to soften the impact of the devaluation, the country still has roughly $450 billion in reserves - the third highest in the world after China and Japan. The RTS rose by almost 129 percent last year, more than markets in Brazil or China. For the first time in  more than a generation, the population did not decline last year, and the inflation rate fell to 8.8 percent, the lowest since the emergence of Russia as an independent country in 1992. Despite the additional emergency crisis spending and revenue decline, the budget deficit was maintained at an estimated 6 percent of gross domestic product, which was readily financed without borrowing by drawing on the oil stabilization fund. And after its initial plunge in the first quarter of 2009, real GDP and industrial production have subsequently grown on a month-on-month basis. Year-on-year numbers will soon turn positive, and GDP is likely to grow by 5 percent or more in 2010.

Such results did not happen of their own accord. Whatever the faults of the Russian government in many areas, its handling of macroeconomic policy has been laudable. The international environment is filled with traps that have ensnared the sophisticated, such as Britain and Denmark, and the incautious, such as Iceland. Monetary and fiscal policies have been executed with alacrity, at least relative to many others.

The outcome is that Russia is well poised to recover even in the context of a feeble global economy and should be able to display impressive performance among the emerging market economies over the next couple of years. Good luck is not the main explanation. Of course, Russia is a country richly endowed with natural resources, but so are Venezuela and Nigeria.

Indeed, the critical point is that Russia - perhaps having learned the hard way about the folly of unmanageable debt in 1998 and guided by an economic team led by Finance Minister Alexei Kudrin and Central Bank Chairman Sergei Ignatyev seasoned by that ordeal - has avoided the pitfall of debt that has engulfed countries from the United States to the United Arab Emirates in a colossal balance sheet crisis. Highly indebted countries could face years of stagnation while paying down their debt burdens. It is likely that the future will be all about balance sheet deleveraging in the advanced economies, whereas most of the emerging market world will be largely unscathed by the scourge of debt - with the exception of a number of smaller, more distressed economies such as some on the fringe of Europe.

For Russia, as one of the larger, low-debt, resource-rich emerging market countries, its time may be at hand. Whether this opportunity is seized or squandered will depend on two key elements: government policy and the external environment.

As in the past, Russia - unlike China - is too small to have a major impact on the global economy. Oil prices may well not remain in the current $80 per barrel range, and the dollar is subject to contradictory pressures as are the global markets in which Russia is enmeshed. Whatever it is, the external situation will be a given.

So the real issue is whether government policy can continue its reasonable job in riding herd on the crisis and confront what may lie ahead. Prospects are promising. With interest rates set to decline further and money supply and deposit growth in banks continuing to recover, banks are likely to start expanding credit in a "normal" economy where real interest rates are positive for the first time in years.

Large speculative capital inflows, as in many emerging markets, could present a challenge to avoid a monetary and credit surge. Lower nominal interest rates could help, and with stronger banks the Central Bank could use other steps to make foreign borrowing more expensive for Russian banks and companies. A tighter budget will also contribute to macroeconomic stability.

Post-Soviet Russia is not even a generation old. Some lessons have been learned the hard way since Yegor Gaidar launched Russia onto the path of a globalized market economy. Hopefully, those lessons will not be readily forgotten. A future fraught with uncertainty and volatility would be a challenge to any government, but in this new decade, where debt burdens could well be the decisive issue in determining the well-being of countries, Russia is well-placed.