Prepare for a bumpy ride

06 October 2008
The Kremlin's self-confidence stems from the country's stable economic growth for seven straight years, but it is to be seen if there is a strategy to rescue the economy in the time of crisis.
When some analysts began discussing an upcoming drop in real estate prices last spring, most economists reacted with open contempt. "How can you speak of a drop when prices are climbing daily?" they asked. In the past six weeks, however, circumstances have changed so drastically that the only questions now being asked are: "How severe will the crash be?" and "How long will the real estate crisis last?" Even a decision by some real estate agencies and builders to give corporate buyers discounts of up to 40 percent has not been sufficient to revive the market. For almost 10 years, investors have found that speculating on real estate is almost as profitable as exporting oil, gas and weapons. But all good things must come to an end. Since demand is plummeting, the attempts by sellers to keep prices steady will turn the real estate crash into a larger catastrophe. The longer that sellers try to prevent the inevitable, the worse the ultimate consequences will be for them. The problem goes much beyond the real estate market. At first glance, however, it would seem that the economy is keeping its head above water, particularly if you consider how other countries have suffered much worse in the global economic crisis. But, in reality, the country's "stability" is quite shaky, and the sharp stock market drops in recent weeks are a vivid testament to this. True, the number of Russians who own stocks is quite small, but a major downturn in the real estate market could be the trigger that sets off a widespread economic collapse, and this will be felt by every Russian. The Kremlin's self-confidence stems from the country's stable economic growth for seven straight years, the building of a huge currency reserve -- the third-largest in the world -- and a rise in real wages. But it is one thing to captain a ship during fair weather -- that is, during a period of high oil prices -- and quite another to bring it through a storm. In March, politicians celebrated the successful transfer of Kremlin authority, and they did it all without violating the Constitution. Unfortunately, holding a position of authority in Russia is like being the head of an explosives factory. The financial rewards are high, but they are countered by the high risk that the whole place could be blown up in smoke with only one match. To be sure, Prime Minister Vladimir Putin and President Dmitry Medvedev have a strong grip on authority because they enjoy popular support. The question is whether that support will continue during a severe economic crisis and whether the Kremlin has the financial tools and know-how to weather the storm. Recent experience in the United States has shown that when the economy gets bad enough, the only way out is though government intervention and bailouts. But state aid is a double-edged sword. The government cannot save everybody. What will be the reaction of those who weren't lucky enough to find a place on the lifeboat? Will they quietly go down with the ship or will they mutiny? To get through the crisis, the Kremlin needs to have a thorough strategy that offers concrete measures to rescue the economy, but this is woefully lacking. This means that we will have to drive over every pothole and deal with each unpleasant surprise in a chaotic, ad hoc fashion. Those who only yesterday appeared to be the victors could easily and quickly become the hapless victims of uncontrollable circumstances. But they were the ones who were so hungry for power and glory. The higher they stood, the harder they will fall. And this fall will be particularly painful.
Boris Kagarlitsky, a fellow of the Transnational Institute, is a Director of the Institute of Globalization and Social Movements, Moscow. His latest book is Empire of the Periphery: Russia and the World System (2008)