Russia Remains Calm Before Financial Storm

Government leaders, businesses and citizens are beginning to understand that the economic growth of recent years is ending. But where are the signs that the boom is over? Few Russians have panicked over the stock market's collapse. Even if state-controlled television hadn't sugarcoated the country's problems by avoiding the words "crisis" or "collapse" in their coverage of the stock market (except when referring to the United States), people's reactions would probably be about the same. After all, there is no direct correlation between the fall in stock prices and their standard of living -- at least not yet.

Moreover, the panic caused by bank failures in the West has not reached Russia. There is a good reason for this: The Central Bank has plenty of reserves to deal with the country's liquidity crunch -- at least for the short term. In addition, there have been no major layoffs in the banking sector or other fields.

Nonetheless, it appears that the healthy economic growth that Russia has enjoyed for the past seven years will soon come to an end. The Kremlin's efforts to stimulate the economy by increasing government spending will only create an illusion of growth, which means that when this temporary windfall wears off, there will be a sharp economic decline.

There are several reasons why Russia's economic downturn is inevitable. First, the main driving forces behind the Putin-era boom -- high oil prices and a devalued ruble after the devastating government default in 1998 -- are a thing of the past.

Second, the business model of using a company's existing assets as collateral to purchase new assets on credit only works in a boom economy, but it fails during periods of ordinary or reduced growth. And we are not even speaking about financial traders who use leveraged funds to finance their investments. The entire life cycle of our metallurgical empires -- the demise of which we are now witnessing -- fits perfectly into this simple model.

Third, the looming recession is a normal cyclical phenomenon in a capitalist economy. Periods of rapid growth, extensive lending and a burst of business activity are always followed by a contraction sooner or later, during which inefficient and unprofitable businesses fail, national leaders are replaced and people spend their savings. Russia's new capitalism had not yet witnessed such a decline, but it will come eventually

How will Russia fare after the imminent downturn? That depends in part on the flexibility of the political system, but generally speaking, it should be able to weather the storm. Recovery is also part of a normal economic cycle.

Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for Vedomosti.