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Friday, 3 October 2014

Russia’s rubble reflected in the Ruble

At this moment, the political situation between Ukraine and Russia seems fairly “stable”.

That is in spite of some legal fireworks about which of these two countries abused the human rights most, the enduring occupation of Crimea and the violence in the Donbass region flaring up on occasions, like a smouldering forest fire.

Nevertheless, things are relatively quiet now and the situation in the Ukraine slowly vanishes from everybody’s retina: even in The Netherlands, in spite of the brutal attack on the Malaysian Airlines airplane MH17, which claimed so many Dutch and other casualties.

Ukraine has become the ‘moral victor’ of the battle with Russia and it is now heavily pre-sorting to an EU-membership within five to ten years. [By the way, the EU itself is behaving like an all-American prom queen: kissing and smooching with the school’s quarterback – Ukraine – was much fun, but that is all what will happen at the moment.]

Russia, on the other hand, has undoubtedly become the political victor of this battle. Putin managed to get his country back on the map as a superpower with a vengeance. For the time being, he reinforced his political position as undisputed leader of his country and, in spite of the very inconvenient political and economic sanctions, he disclosed the EU, the USA and the NATO as toothless dogs: “all barkin’, but no bitin’”.

Yet, the financial markets might finish off after all, what the Western political powers could not achieve during the first nine months of this year.  Their method: reflecting Russia's rubble in the rate of the Ruble.

Since I visited Russia for the first time (in 2002), the Ruble has been a fairly stable currency, with exchange rates roughly between 35 to 45 per €1 and 25 to 33 per $1, except for the time of the Georgian crisis, when the Ruble plummeted rapidly. 

It seems that this period of relative stability has now come to an end, now that the Ruble is heavily flirting with the 40 per $1 mark and beyond.

Ten year exchange rate of the Russian Ruble against the USD
Data courtesy of
Click to enlarge

People could argue that the same happened in the time after the Russo-Georgian war for South Ossetia – like I mentioned in the previous paragraph – and that the exchange rate of the Ruble normalized again after that particular war. 

I argue, based on this picture, that the Ruble never really returned to pre-war levels. Besides that: one war could still be a unfortunate coindicence, but two wars(?) within ten years seems to point at 'a certain problem with aggression'!

This could become a real problem for Putin eventually: in the almost 13 years since my first visit, I saw a Russian middle-class emerge in the large cities and I saw normal, middle-class people abandon their old Lada’s and Volga’s and buy new and second-hand European, Korean and Japanese cars and even an astray American car.

The same happened with their household appliances: a Japanese/Korean television, a western stove and a German or Italian washing machine, at reasonable prices, came suddenly into the grasp of these middle class people at the expense of the former Russian brands.

You might understand that the Russian middle class could become very disappointed, when these daily luxuries suddenly become impossibly dear (+25% and more), due to a further plummeting Ruble.

The same is true for the daily groceries: this particular group of middle-class Russian people got used to more western-oriented supermarkets with a wide assortment of trustworthy, western brands, instead of the post-Soviet shopping bunkers (see the following image).

Narodni Universam in St-Petersburg
a typical post-Soviet supermarket
Photo by: Ernst Labruyère
Click to enlarge
Shops, which sell Dutch and French cheese, recognizable meat and fish, as well as European dairy, cereal products and vegetables, of which the quality is beyond any doubt.

While the economic sanctions against Russia might not last forever – and perhaps not even longer than a few months from now –  it will remain the question whether the Ruble will recover to pre-Ukraine crisis levels soon. 

I truly doubt that, to be frank.

If the current economic wars between Russia and the rest of the world have proven one thing beyond any reasonable doubt, in my humble opinion, it is this: Russia is a two-topic economy; based upon exports of commodities, oil (derivatives) and minerals, as well as weapon exports.

Russia totally lacks a really viable industrial and commercial services structure, except for the aforementioned oil and weapons industry. All other industrial and commercial areas seem blatantly underdeveloped to these eyes.

The country lacks: 

  • a viable digital and "real world" infrastructure; 
  • a viable safety net for the people in the rural areas;
  • a viable legal system, which offers equality and justice for all; 
  • and a viable tradition of honesty and incorruptibility.
If I had to put things in a summary, I would say: 
  • the ‘rich’ stole the national possessions and treasuries from the ‘poor’;
  • some poor people try to steal from the government and the other poor;
  • and the government steals from everybody.
When the Western world manages to largely abandon the Russian gas exports, through a unified approach to energy, the whole Russian economy may implode like a leaking tyre. This is something that I would regret dearly, to be frank, as it would have grave repercussions for our family and friends, who still live in Russia.

Litterally all building activities, all new shopping centres, the whole established middle-class consumption and the whole emergence of this Russian middle-class in the first place, have been based upon oil and gas dollars.

In other words, Russia suffers heavily from an extreme form of the Dutch Disease, with some local flavours.:

Currently, Russia suffers from the phenomena, formerly known as the ‘Dutch Disease’: due to the enormous exploration of oil, natural gas, diamonds, gold and minerals, the country has been flooded with money.

This money enabled the Russian government to let the economy grow at a large rate, by throwing money around and totally refurbishing the most important cities of Moscow and St-Petersburg: miracles were ‘ready while you wait’ and the impossible took only a little bit longer, as the oil and gas paid all bills. The last fifteen years saw the emergence of a true middle-class in these most important cities: people that made an honest buck and became able to buy some luxury and leave their moderate past behind them.

Residential and Commercial Real Estate in Moscow and St-Petersburg skyrocketed, homeowners became rich on paper and supermarkets appeared at every corner of the street, during the last ten years. Millions of Lada and Volga cars got replaced by more expensive cars of Western brands.

At the same time, the rich Russians excelled in conspicuous consumerism and  ‘showing off with their luxury’ at an unprecedented scale, making Rodeo Drive in Beverly Hills look like ‘da hood’.  

And now the plummeting Ruble might set this whole middle class back in time to the year 1999, when Russia was licking its wounds from the Russian currency crisis. 

However, now this happens with the extra handicap, that the whole dead-cert flow of oil and gas dollars might slowly dry out in the not-so-distant future, when political things don't change soon dramatically.

At this very moment, president Vladimir Putin is still riding the waves of vigilant nationalism and misplaced proudness in Russia, with respect to Crimea and the Donbass region.

Nevertheless, his own ‘best before’ time may come soon, when the Russian middle class has to abolish all the things that they started to love so dearly over the last twelve years, because they can’t afford it anymore.

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