Once oil prices stop rising, Russia's growth story will be over...
LAST WEEK'S re-election of Vladimir Putin as Russian president means even more crony capitalism in Russia. With Putin in power nothing will change, writes Martin Hutchinson for Money Morning.
In fact, it's laughable that Russia is still even considered among the group of the world's most glamorous emerging markets - otherwise known as the "BRICs".
The truth is Russian prosperity will last only as long as the price of oil keeps rising by 25% a year, and not one second longer.
Of course, that hasn't stopped one of Russia's boosters, Moscow broker Prosperity Capital Management from claiming that Russia is the third fastest growing economy in the world.
But since Russian growth is only expected to be 3.2% in 2012, according to The Economist, Prosperity's definition of the word "world" is a little suspect.
Presumably Prosperity is only including the wealthy countries, most of which are much richer than Russia and should be expected to grow more slowly.
The Economist actually ranks Russia 18th of the 58 countries it surveys, based on projected 2012 growth rate.
That looks reasonably impressive, until you realize that this modest growth is being achieved in a period of sharply rising oil prices. Oil is Russia's largest export.
After all, one of the countries that beat Russia, with a 4.2% growth rate, is Venezuela. Needless to say, few people outside Hugo Chavez' immediate family would claim that country was economically well run.
Apart from corruption and cronyism, Russia's main problem is its state budget, which depends crucially on oil revenues and hence on the oil price.
Before 2008, its budget was balanced at an oil price of around $90 per barrel, already up from a break-even of $30 per barrel earlier in the decade. Now according to the Finance Ministry as reported in Atlantic Monthly, today the oil price must be $117 per barrel for Russia to balance its budget.
In reality, since Putin announced $260 billion of spending programs during the election, plus a defense program totaling $763 billion, the oil price needed for balancing next year's budget is likely to be around $140 a barrel, rising continually thereafter.
Needless to say, the rest of the world is likely to be tipped into recession by any oil price that will make Russian budget managers happy.
In terms of oil, Russia is playing a game that will never add up.
Russia needs to diversify from energy into high-skill industries; after all it has a relatively well-educated workforce.
However, at present it's going the other way. Energy exports have risen since 2000 from 45% to 69% of exports, while at the same time equipment and machinery exports have declined.
As well as this imbalance in the economy, Russia suffers badly from its corruption. Russia ranked an appalling 143rd on Transparency International's 2011 Corruption Perceptions Index, along with such trustworthy stalwarts as Nigeria and Belarus and well below Syria and Nicaragua.
It's a long-standing problem, but in 2001 Russia ranked 79th, and in 2005 90th which while not good were considerably more respectable.
While two other BRICs, India and China, can manage economic growth with fairly high corruption levels, Russia is currently well beyond the levels compatible with prosperity - except for the oligarchs extorting from the system.
Meanwhile, Russians themselves are voting, if not with their feet then with their rubles. Capital flight from Russia totaled $38 billion in the fourth quarter of 2011, and there is no sign of it slowing. There is one comfort: Even if Putin wants it to (which he may well) Russia cannot become the global threat the old USSR was; its economic position is far too weak.
Whereas President Reagan had to undertake a very expensive defense buildup to defeat the USSR, taming Russia today is much simpler and cheaper: fire Ben Bernanke, and maybe free up offshore oil drilling and onshore oil fracking.
Once Bernanke is gone, and interest rates revert to a more normal level of around 5%, say 2% above today's inflation rate of 3% or so (they may have to go higher if we delay) there will no longer be the cheap-money-driven upward pressure on commodity and energy prices.
If interest rates are allowed to move naturally, the price of oil will decline, because with $100 oil over the last few years, we have found gigantic new sources, especially through the development of fracking technology to extract oil and gas from shale.
In a very few years, possibly even within months, the re-imposition of normal interest rates would cause the oil price to decline to $50-60 a barrel, just enough to allow the most efficient tar sands and shale extraction companies to run at a profit.
And a bunch of very unpleasant regimes, notably those of Hugo Chavez and Vladimir Putin, will be left gasping for money, as their state budgets careen into bankruptcy.
Suddenly, $763 billion defense budgets will become completely unaffordable.
If Putin is not thrown out he will have to learn real economics, and allow the superbly educated Russian entrepreneurs (the real ones, not the billionaire crooks) to create engineering export giants.
Once that's done, Russia will be a much happier and more stable society, and most of its oligarchs would be left only with their Swiss bank accounts.
At that point, and only at that point, will Russia be worth investing in.
Today, Russia remains a threat to the world, and a source of endless criminal activity. Putin's election changes nothing.
How Russia is still one of the BRICs is mystery to me.
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