12
THE STRONGMAN AND HIS FRIENDS
Weathering the global financial crisis
Vladimir Putin once remarked that he was ‘tired of foreign policy’ and glad to be prime minister rather than president. But in September 2008, just four months into the new job, he had to deal with an economic and financial crisis for which he was ill prepared. Eight years earlier he had received intensive tuition in economics from his team of bright young reformers. But little in Putin’s experience prepared him for the tornado that was about to hit his country.
Immediately prior to the global financial crash, things were looking good. Buoyed by record-high oil prices, the Russian economy had grown by an average of 7 per cent a year between 1999 and 2008. The Stabilisation Fund, set up to provide a cushion if oil prices should drop, was huge, and had been split into a Reserve Fund, with $140 billion, and a National Welfare Fund, with $30 billion, the latter mainly earmarked to solve the looming pension crisis. Only in February 2008 Putin had been boasting that ‘the main thing we have achieved is stability’. But Russian business had borrowed heavily from Western banks, and those were about to start crashing.
Luckily Putin still had his team of experts, who had watched America’s subprime crisis gathering, and were only too aware that the tsunami would soon engulf Russia. The day after Lehman Brothers went bankrupt on 15 September, Putin’s economics team gathered at the office of his deputy prime minister, Igor Shuvalov. They included President Medvedev’s economic adviser, Arkady Dvorkovich, and the finance minister, Alexei Kudrin, who would later be named ‘Finance Minister of the Year’ by Euromoney magazine. ‘When we realised that everyone in the market could go bankrupt overnight, we knew we had to do something,’ he recalls. ‘We came up with a plan to provide a line of credit for 295 businesses. They’d get special rights to credit from banks.’1 Those 295 companies represented 80 per cent of the country’s income.
The plan was to offer loans through two state-owned banks, Vneshekonombank and Sberbank. The latter was headed by the architect of Putin’s early reforms, German Gref. He was hesitant: ‘I said that I was willing to do this but only with state guarantees, because I had the money of our shareholders. I had to answer to them if the risks were too high.’2
The team came up with a scheme whereby the Central Bank would guarantee the loans. ‘We spent two days and nights here in Sberbank,’ Gref recalls. ‘We sifted through all the papers working out who owed what to whom. My staff didn’t sleep for two days.’
In the end the Central Bank spent about $200 billion, about a third of its cash reserves, keeping the economy afloat. Most of this was used to recapitalise banks, buy up plunging shares and support the declining rouble. $50 billion was disbursed to the 295 key businesses, so that they could repay hard currency loans from foreign lenders. The beneficiaries included private oligarchs such as Oleg Deripaska ($4.5 billion) and Roman Abramovich ($1.8 billion), but also state companies such as Rosneft ($4.6 billion) and Russian Technologies ($7 billion). At 13 per cent of GDP, it was the biggest bail-out package in the G8, dwarfing even the huge US stimulus package of $787 billion or 5.5 per cent of US GDP.
The strategy worked. Within a couple of years almost all of the loans were repaid, as Russia swung out of the recession in rather better shape than some Western countries. GDP fell during the crisis by 8 per cent, more than any other economy in the G20, but within a year growth had recovered to plus 5 per cent.
Sergei Guriev, a respected economist with whom President Obama had a meeting on his first visit to Moscow, says the government’s response to the crisis was ‘resolute and effective’. ‘The Russian financial system came out of the acute financial crisis virtually unscathed, and unemployment remained under control. The government prevented the collapse of the banking system. Moreover, the crisis did not result in major nationalisations of private companies. The government could have nationalised all banks and companies in financial distress under the banner of fighting the crisis, but it did not.’3
Nonetheless, in the year of recession, thousands of Russian banks and businesses collapsed. Foreign investors began to flee, wiping a trillion dollars off the value of the Russian stock exchange.
Putin himself refused to accept that the crisis revealed any structural shortcomings in Russia’s economy. He blamed it all on American recklessness and saw it as yet more proof of the iniquity of American hegemony. ‘Everything that is happening in the economic and financial sphere has started in the United States. This is a real crisis that all of us are facing. And what is really sad is that we see an inability to take appropriate decisions. This is no longer irresponsibility on the part of some individuals, but irresponsibility of the whole system, which as you know had pretensions to (global) leadership.’
He went to the Davos World Economic Forum in January to deliver this message, but like Medvedev’s homily on world security after the invasion of Georgia, no one was much interested in Putin’s recipes for the world economy. It was, after all, only days since Russia had frozen Europeans in their homes by cutting their gas supplies.
The crisis hit Russia differently from the more established Western economies. It exposed the dependency of the country on its oil exports, as the price plummeted from $145 to $35 a barrel. Russia produces almost no manufactured goods for export – neither electronics nor clothes nor machinery – to provide more stable revenues. The crisis also laid bare the calamitous state of much of Russia’s industrial base, inherited from the Soviet planned economy. The Soviets had created industrial zones on a scale unknown in the West – so-called ‘mono-cities’, where literally everything revolved around and depended upon a single enormous engineering plant. If you didn’t actually work at the factory, or one of its subsidiaries or supply units, you were employed by the local government or the schools or health system, or in the shops that fed the workers. If the central plant – be it a car factory or aluminium plant or steel works – stopped producing, then the entire network built around it would also collapse. Soviet planners did not envisage economic downturns. Now the mono-cities they built, even if they had passed into private hands, were hopelessly vulnerable to the vicissitudes of Wall Street.
One such mono-city was at Pikalyovo, near St Petersburg. It grew up around a cement works, now a complex of three intertwined factories, one of which was owned by one of Russia’s richest men, Oleg Deripaska. The economic crisis caused thousands to be laid off with no pay at the beginning of 2009. When the factory could not pay its bills to the local heating and power station, supplies of hot water and heating to the entire town were cut. The population, facing a huge social crisis, took matters into their own hands. Protestors blocked the main highway leading to St Petersburg, causing a 400-kilometre tailback of vehicles, just as Vladimir Putin was visiting his home town – inaugurating, of all things, a shiny new Nissan car assembly plant. Now there was a full-blown crisis. At a meeting with the factory owners and government ministers in Pikalyovo on 4 June, Putin read the riot act. He ordered unpaid wages – more than 41 million roubles – to be paid that day, and lectured the owners: ‘You made thousands of people hostages to your ambition, incompetence and greed. It’s absolutely unacceptable!’ Suddenly the hallowed precepts of the market economy were forgotten as Putin seemed to threaten a state takeover: ‘If the owners can’t come to an agreement by themselves then no matter what, this complex will be restarted one way or another. But if you can’t come to an agreement, then we’ll do it without you.’