Mikhail Fridman was right. Russia’s economic problems don’t stem from its inability to juggle its numbers — they’ve been juggling like it was the Moscow Circus. And they don’t even stem from the oil prices or the European sanctions, although those don’t help. Russia’s problems are systemic.
Let’s examine the facts.
Russia’s ruble reached a 2015 low against the U.S. dollar on Friday. This was the same Friday when the Central Bank of Russia cut its key interest rate to 15 percent, after raising it 17 percent a month ago, pushing the ruble to 71.78 versus the dollar.
“Start listening more to what President Vladimir Putin’s aides say about monetary policy and less to central bankers, ” Bloomberg News suggested.
Only nine days ago, the country’s central bank chief Elvira Nabiullina said there was no chance she would cut rates, after inflation reached a five-year high of about 13 percent.
However, according to Bloomberg, a week earlier, President Vladimir Putin’s economic aide Andrey Belousov was pushing a rate reduction, to boost the economy.
The central bank was pushing up interest rates to bolster the ruble, which had been plummeting against all the other world currencies, including some islands where they use leaves as money. It has lost something like 50 percent of its value in one year.
Except those high rates pushed the banks to a financial crisis, dragging Russia’s industry down with them.
Nabiullina said on Friday that her move was aimed at “balancing the goals of subduing inflation and restoring economic growth.”
But raising or cutting rates is still the equivalent of rearranging the seats on the deck of the Titanic, which can’t stop the ever growing iceberg. Russia’s economy depends on the price of oil, and the price of oil is never going back to where it used to be.
Then there’s the European sanctions, which also don’t seem to be going away any time soon. Not unless Putin is going to reverse his course in the Ukraine, and that, too, ain’t happening.
Mikhail Fridman, a leading member of the new class of Russian tycoons, suggests that the only way to fix the Russian economy is not with new tricks, but with old fashioned, honest to goodness capitalism.
In his recent opinion piece in the Financial Times, Fridman wrote:
It was no accident that the countries that led the innovation were liberal market economies with strong property rights, while the countries that wished to thwart these efforts were resentful of competition and riddled with monopolists. They treated private property as a concession that could easily be taken away.
Political systems based on the distribution of rent demoralise people. Political regimes based on free competition motivate people. It is because of free initiative and competition that humanity can overcome bottlenecks.
The reason America has led the way in the production of shale oil and gas is not that it has a lot of shale — many other countries have a similar geology. It is that America has a lot of economic freedom.
In other words, as long as outside forces allowed for Russia’s prosperity, no one seemed to notice that it’s not an thriving, industrial country with the kind of system that encourages innovation. But as soon as things went kablooey, we could all see Russia for what it really is: a very big, third-world country.
And you can’t change that with rate cuts.