Inflation, Oil, Georgia, Russia and Predictability
18 December, 2014
The rouble is in a free fall, and size of the Russian economy will shrink significantly. Businesses have borrowed in dollars and can’t pay back, soon they will have difficulty paying salaries. The state has spent billions of dollars buying roubles to support the exchange rate. It hasn’t worked very well and that gives the state less money to spend on other things. Russia imports a great deal and the imports will become more expensive. The rich will become a bit
less rich but they all have big pillows outside of Russia and will find their way. Unfortunately, this will hurt the average Russian citizen and the many immigrants from former Soviet states who live and work there.
But what would cause a huge political upheaval in another country will not in Russia for three main reasons. The first is that it will not influence food and heat too much. A very large portion of food that Russians eat comes from kitchen and dacha gardens. This is good for Russia and great for the environment. Heat comes from gas and Russia has plenty of that. So unlike in Ukraine and in other countries survival is more or less taken care of. The second thing is that
politically there is no opposition, there is no other power to benefit from any discontent. There are no oligarchs in Russia, only rich men who Putin allows to be rich. Russia may not be democratic enough for a terrible economy to matter much politically. I hope I am not being unfair by identifying what I view as a Russian cultural trait, but I think the third reason is that for many in Russia, they take a pride in their ability to withstand difficulty, particularly if they think
it is caused by an external enemy.
In this case, it wasn’t caused by an external enemy. This was mainly caused by a drop in the price of oil and gas that will last for many years. But that is not what they are being told. The Russian public has been told and for the most part was willing to believe that the rest of the world, lead by the United States focuses its foreign policy on encouraging Russian failure. Although not true, for Putin this is a very convenient belief for the people to have, and he’s the one that controls Russian media.
The main reason for the drop in oil and gas prices is a drop in demand from East Asia and the rise of fracking, particularly in the US; pretty simple supply and demand. Half of Russia’s state revenue is from gas and oil revenue and is directly connected to the prices of these commodities. This is very dangerous for an economy because more than anything a strong economy needs predictability. In theory, if a dictatorship is predictable the economy can be strong, at least for
the lifetime of the dictator. Georgia has a tremendous advantage having no oil and gas or other major commodities to become dependent on.
Georgia’s economy is somewhat connected to Russia via export, import, and remittances. And the lari has depreciated recently. But not that much, it hasn’t dropped anything like the rouble. The reason for the drop of the Lari has as much to do with Georgian government spending,
policy, and budget cycles as it has to do with Georgia’s economic connections with Russia. The Lari inflation is a problem, but not a giant one, not one that will last very long, or one that illustrates any structural problems in the Georgian economy like those in Russia.
Few around the world extend sympathies regarding the Russian economy. Few international organizations are thinking of ways to help the way they would if most other countries were having these types of problems. The reason is of course Russia’s invasion and occupation of
Ukraine. This is the first time since WWII that a county has invaded and occupied a neighbor.
That is a lesson to learn for Georgia. The events of 2008 in Georgia created great instability in the region, exactly as the Kremlin wanted them to. In public western leaders sided with the Georgian leadership, but in private they were angry that the Georgian leadership allowed the Kremlin’s plan to work. But now for Georgia, the question is stability is different. Georgia has had a democratic transition - a peaceful, electoral transfer of executive power. Currently the source of potential instability in Georgia comes from the traditions that are being established for treating the opposition after an election. Georgia’s leadership is in jail, some without trial. In five or ten years when a new party comes in, is that how it will work then? If businesses have good relations with the current leadership, will they be punished by the next? It’s an open question but one that is very much on the minds of western political leaders and investors when they look at Georgia. So although the  predictability of the economy of Georgia is much improved because it produces no gas or oil and doesn’t invade its neighbors, it should consider how its actions influence those looking at it’s politics. Investors, in the end, want predictability. Just look at Russia for proof.