Hubris has been a source of woe for many powers throughout history. Just in the last decade, hubris induced the United States to get bogged down in Iraq, and now it looks like it's pushing Russia into a financial disaster.
Intent on gaining political leverage over Washington, Moscow pumped roughly $100 billion in the ill-fated mortgage giants Fannie Mae and Freddie Mac. Now it appears the investment has backfired with disastrous financial effects for Russian officials. Overall, Russia's losses during the ongoing global economic crisis have been so extensive as to raise questions about the Kremlin's ability to pursue its goal of restoring its economic dominance over Central Asia and the Caucasus.
Over the past decade, skyrocketing energy prices have filled Russia's coffers with profits. That, in turn, encouraged Russian political supremo Vladimir Putin to engage in an aggressive campaign to restore Russian influence around the world, in particular in the formerly Soviet states of Central Asia and the Caucasus. [For background see the Eurasia Insight archive]. But the heady days of easy profits from energy sales seem to have come to an end -- at least for the time being. And the Russian government now must scramble to maintain an ambitious economic and political agenda with rapidly dwindling means.
Sensing that his legacy is in danger, Putin vowed on November 20 that the government would "do everything" to "prevent a repeat" of previous economic collapses, most notably the implosion that accompanied the collapse of the Soviet Union in 1991.
Russia has been among the hardest hit among the developing economies during the recent financial turmoil. The country's hard-currency and gold reserves have plummeted from about $600 billion in August 2008 to $475 billion in just three months later. Standard & Poor's and Fitch Ratings have downgraded Russia from stable to negative on October 23 and November 10 respectively, due mostly to the rapid decrease in reserves.
In September and October alone, Russia's Central Bank spent $57.5 billion on shoring up the Russian currency, the ruble, which still lost about 7 percent of its value against the US dollar. It seems fairly certain that the bank will likely have to continue spending lavishly in order to keep the floor from collapsing under the ruble. Russians, whose trust in national currency has evaporated with alarming speed, has taken once again to hoarding dollars. In September, according to Central Bank figures, Russians bought about $6 billion in US dollars, and the pace of purchases has accelerated since then.
The banking sector is also requiring a massive cash infusion -- to the tune of $120 billion. That's an eye-popping sum considering Russia's overall GDP in 2007 was $2.1 trillion, according to a CIA estimate. And on November 20, Putin said that the government would need to spend $50 billion to keep Russia's defense sector afloat, the RIA Novosti news agency reported.
In an attempt to avert panic, Arkady Dvorkovich, an aide to Russian President Dmitry Medvedev, announced that the government was considering guaranteeing all bank deposits of legal entities. Presently, only individual deposits are protected by the government. As of August 2008, according to Russia's Central Bank, the deposits of legal entities stood at roughly 7 billion rubbles, or about $260 billion.
Russia's investment in Fannie Mae and Freddie Mac suggest that the Kremlin let geopolitical ambitions cloud its fiscal thinking. Some experts in Moscow suggest that Russia, in betting heavily on the US mortgage giants, was hoping to replicate China's investment pattern. Beijing's status as a major holder of US government-backed securities is seen as something that limits Washington's policy options concerning China and Taiwan. Moscow by striving to enhance its position as a creditor to the United States was similarly looking to increase its political leverage -- something that could have potentially proven useful in the ongoing competition over Caspian Basin energy exports. [For background see the Eurasia insight archive].
The Central Bank has confessed that it had about $100 billion invested in Fannie Mae and Freddie Mac at the beginning of 2008. Almost 11 months later, Russia's position stands at $20.9 billion. In the wake of the collapse of both entities, the Central Bank has not revealed how much the state has lost, but experts say the loss can't be less than $25 billion.
Political analysts say it will not be easy for Russia to pull out of its downward spiral as long as the price of energy remains at current levels, or lower. The cost of a barrel of Urals crude is now below $50, after hitting $140 per barrel during the summer.
Gazprom, the Kremlin's key cash cow, has seen its value tumble by roughly 50 percent -- from $185 billion to $92 billion -- in just two months. At the beginning of 2008, its value stood at over $350 billion. Comparatively speaking, one of Gazprom's competitors, ExxonMobil, seems to be doing fine, with its shares selling at $73.25 on September 2008 and $73.14 on November 19. Elsewhere in the Russian energy sector, Rosneft has lost half of its value. Most companies traded in Russia have lost about three quarters of their values since the beginning of 2008.
The economic crisis as severely eroded public confidence in the government. Putin and Medvedev in recent days have rolled out a variety of government handouts designed to stabilize the government's public opinion rating, including slashing taxes and promises of increased state salaries, pensions and unemployment payments.
Investors and savers do not seem to share the Kremlin's confidence about the country's ability to withstand the crisis. Although unwilling to say so publicly, many are voting with their wallets. Capital flight is again surging. In September, Russia experienced a net outflow of about $26 billion in assets out of the country, and the following month the net figure nearly doubled to $50 billion.
