Russian Government Policy May Not be Right

The global financial crisis has triggered a sudden drop in commodity prices and the once "untouched" Russian economy is now in the brink of a severe recession. Could Russia have been better prepared for the downturn? If yes, what measures could have been taken to soften the economic deterioration?

With its stabilization fund and the world's third-largest foreign currency reserves, Russia seemed prepared for the ongoing financial crisis. However, the country has allowed companies to borrow cheaply abroad in order to finance long term investments and as a result Russia is likely to run a current account deficit this year, the first since 1998. Moreover, ever since the intensifying of the global financial crisis and the lost of the confidence on the government after the war in Georgia, foreign capital is flowing out of Russia.

Russia is also making a big mistake by wasting its reserves in a war to defend the value of the Ruble. In fact, instead of allowing the ruble to devaluate, the government has been using its currency reserves to inject liquidity into a select group of banks allowing them to speculate on the currency market instead of lending money into the real economy. However, Russian banks have reduced their credit lines denominated in Rubles, preferring to lend in Dollars to avoid any further depreciation.

Anna Fedec,
2/11/2009 7:35:22 PM