Alexei Polukhin
By Alexei Polukhin
Source: Западные санкции сломали старую экономическую модель. Может, и к лучшему?

Translated by Eugene


Russia has become a two-time holder of “junk” or, put it milder, speculative sovereign rating after Moody’s — the second member of the global “big three” of rating agencies – followed Standard & Poor’s in revising the credit standing of our country.

While in the first instance the reaction of the Russian financial authorities has been relatively low-key, this time the rhetoric of the usually cautious Ministry of Finance began to approach the rudeness of the Ministry of Foreign Affairs. Anton Siluanov said the decision of the rating agency was “absolutely negative” and “politicized.” Even the former Finance Minister Alexei Kudrin, representing the opposition camp, said that he cannot understand Moody’s actions based on current economic indicators.

Indeed, there are nuances that allow one to call Moody’s decision hasty and aggressive. Firstly, the previous downgrade was announced on January 17, and most experts expected the next move only in the second quarter. Secondly, as the Russian Finance Ministry pointed out in its press release, from the beginning of February the ruble strengthened by 11% and oil by healthy 23%, while on the geopolitical front the escalation was replaced by the hope of easing, albeit timid. Thus, objectively, the things have improved a little bit from where they stood one and a half months ago, but the rating agency decided to ignore these changes. Instead, they preferred to base their prediction on the hypothesis that as the Ukrainian crisis will deepen, the Russian authorities can “make decisions that would directly or indirectly prevent timely servicing of the external debt.”

Well, of course they can. They can also introduce foreign exchange controls, and the death penalty for speculation in cash dollars. Over the last year the Russian authorities have shown that there are no limits for their actions. But precisely in the area of ​​fiscal policy, which should be analyzed by rating agencies, there were no dramatic changes for the worse (with the exception of attacks on international payment systems, which, as far as I know, were initiated by the State Duma and successfully repelled). On the contrary, the financial authorities remained demonstrably true to liberal principles, and there were no objective reasons to suspect them of a sharp turn to autarky.

Besides, as noted by the same Ministry of Finance, Moody’s experts used wild macroeconomic assumptions, contradicting not just Russian authorities, but also the IMF, and other rating agencies. For example, Moody’s forecasts of more than $220 billion capital outflows, or 22% inflation in 2015 looked really radical. This does not mean, of course, that they are evidently false, but rating agencies rarely take major decisions on the basis of worst-case scenarios. Thus there was a clear political component in the Moody’s actions.

Perhaps in this case it was not so much about Russia’s policies, as about the US and its closest allies who are aiming, quite clearly, at weakening Russian economy. Nobody doubts that it is a long-term trend, neither in Moody’s, nor in the Russian Ministry of Economic Development. The other day, the Ministry published a macroeconomic forecast, revised beyond recognition, which was based on the “hypothesis” that sanctions will be in effect for all of 2015, although in theory they can be eliminated or mitigated in March.

However, the thesis that each new wave of sanctions will be more and more effective, should not be taken as an axiom. For example, the downgrade by two agencies should have led to a massive sell out of Russian assets, because many institutional investors simply do not have the right to keep their money in papers that are not investment grade. But in fact, this sale has already taken place. Rather, it’s time to buy fundamentally undervalued securities of large and profitable Russian companies. Indeed, the “junk rating” supposed to put a barrier to the inflow of foreign capitals, but this inflow has been absent for the past six months already, so the situation is not worsening. Yes, the “junk rating” is a deadly shot at the Western credits for real sectors of the Russian economy, which is now forced to switch to the domestic financial diet: it is known that the banking system was recapitalized to the tune of one trillion rubles, and this amount can be increased.

That is, the sanctions and related actions, such as the last-minute review of the credit rating, indicated dismantling of the current economic model, which can be described by the formula “raw materials in exchange for capital.” Russia is being forcibly taken off the “oil needle”, which is also fair to call the “credit needle.” Rating agencies are based on the thesis that our economy would not survive such a metamorphosis, primarily because the government would not be able to respond adequately to such calls. Though, they haven’t convinced anyone yet.

At the same time, the adaptive capacity of the Russian economy in the new environment remains unknown. In addition to fatty and bulging cons, the current economic situation provides some pros as well. Russian assets are cheap and therefore attractive, the devaluation led to a sharp drop in costs (for example, the dollar cost of oil production in old fields has approached low numbers characteristic to the “Arab” petroleum), foreign currency debts of the corporate sector will inevitably decline (possibly through the mechanisms of defaults, but it does change the heart of the matter), and, on the other hand, inefficient budget expenditures, excluding defense, will be cut.

But these are the exact steps that Western experts, including representatives of rating agencies, always urged us to take: cost reduction, effective management of the corporate and budget finances. Though, all this was supposed to occur through the development of institutions, the fight against corruption and institutional reform. Maybe the sanctions were imposed just to help us?

The Essential Saker IV: Messianic Narcissism's Agony by a Thousand Cuts
The Essential Saker III: Chronicling The Tragedy, Farce And Collapse of the Empire in the Era of Mr MAGA