Time to Short the Russian Market!

Vladimir Putin declared that Russia is an island of stability.  Really:

Prime Minister Vladimir Putin said Russia’s economy is an “island of stability” amid the turbulence in the global markets and as he seeks another term as president.

“The world’s economy hasn’t calmed from turbulence,” Putin said in a New Year message broadcast on state television. “In this sense Russia is notably an island of stability — in any case for now.”

Gee.  Let me think.  When was the last time that the Russian government promoted the “island of stability” theme?  Think. Think. Think.

Oh, I remember now!  It was 2008, when the US and European financial crises were swelling and then cresting.  Kudrin used the phrase in January, 2008, right when the major cracks were beginning to appear in US and European financial markets.  Putin used the phrase at the Valdai event–in September, 2008. You know, the month of Fannie & Freddie, AIG, and Lehman.

We all know how that worked out.  The “island of stability” turned into a latter-day Atlantis in 2008-2009, and went further underwater than any other major economy.

The reason for that was clear: Russia is a high beta economy, dependent on natural resource exports that are acutely sensitive to world economic activity.  So if Europe or the US have problems, Russian problems will be worse.

Nothing has really changed.  Russia is still dependent on natural resources, particularly oil.  Budget wise, in fact, Russia is even more dependent on oil prices, requiring a price north of $95/bbl, substantially higher than in 2008.

This is not to say that the EU or the US will implode, or that China will.  These are very real possibilities, rather than certainties.  But the point is if these places turn out to be stable, Russia will be economically stable–relatively speaking.  If these points are not economically stable, however, Russian will definitely not be.

Putin’s attempt to distinguish Russsia’s economic fate from that of Europe, or the US, or China, is fundamentally flawed.  Contrary to Putin’s assertions, Russia cannot decouple from the world economy: Russia will not–cannot–be a refuge from world economic storms.  It is actually the worst place to be at that time.  Sort of like standing under a tall tree during a thunderstorm.

But we know that if, heaven forfend, that if another world crisis occurs, that Putin will rage at the injustice of it all, blame the West and the US.  He’s nothing if not predictable.

But it is quite revealing that Putin is apparently so unoriginal that he can only fall back on old propaganda to advance his new campaign, particularly inasmuch as that propaganda was proved to be farcically, tragically wrong.  Perhaps it shows the fundamental economic bankruptcy of Putinism.  He can’t advocate real change because that would be a mortal threat to the natural state, and the boodle that he and the rest of the elite pack away.  So he can only tout stability–stasis.  He has to do so even though that makes him repeat drivel that didn’t survive contact with reality the last time he said it.  He better hope reality doesn’t intrude again.

About Craig Pirrong 228 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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