Paul Krugman Shows How Putin's Burst Economic Bubble Is the Essence of Crony Capitalism
Vladimir Putin's macho act has been admired by the likes of Pat Buchanan and Rudy Giuliani. “That is what you call a leader,” Rudy Giuliani, the former New York mayor, said after Putin invaded the Ukraine, unilaterally and without any public debate.
Alas, "swaggering strongman" Putin is hitting a bit of a snag, writes Paul Krugman in his column today. "Mr. Putin never had the resources to back his swagger," Krugman says. "Russia has an economy roughly the same size as Brazil’s. And, as we’re now seeing, it’s highly vulnerable to financial crisis — a vulnerability that has a lot to do with the nature of the Putin regime."
The global plunge in oil prices has not helped, but it does not explain the bottom dropping out of the ruble. So what's going on?
Actually, it’s not a puzzle — and this is, in fact, a movie currency-crisis aficionados like yours truly have seen many times before: Argentina 2002, Indonesia 1998, Mexico 1995, Chile 1982, the list goes on. The kind of crisis Russia now faces is what you get when bad things happen to an economy made vulnerable by large-scale borrowing from abroad — specifically, large-scale borrowing by the private sector, with the debts denominated in foreign currency, not the currency of the debtor country.
In that situation, an adverse shock like a fall in exports can start a vicious downward spiral. When the nation’s currency falls, the balance sheets of local businesses — which have assets in rubles (or pesos or rupiah) but debts in dollars or euros — implode. This, in turn, inflicts severe damage on the domestic economy, undermining confidence and depressing the currency even more. And Russia fits the standard playbook.
Except for one thing. Usually, the way a country ends up with a lot of foreign debt is by running trade deficits, using borrowed funds to pay for imports. But Russia hasn’t run trade deficits. On the contrary, it has consistently run large trade surpluses, thanks to high oil prices.
The question is, where did the money go?
The money left the country, and took lavish trips abroad. It went to the most expensive neighborhoods in London and New York, where Russian oligarchs purchased luxury real estate trophies that they seldom inhabit. Krugman explains how they got the money: "Putin’s Russia is an extreme version of crony capitalism, indeed, a kleptocracy in which loyalists get to skim off vast sums for their personal use. It all looked sustainable as long as oil prices stayed high. But now the bubble has burst, and the very corruption that sustained the Putin regime has left Russia in dire straits."
The usual solution to this mess would include loans from the International Monetary Fund and demands for reform, but Putin won't go for that and will make his country muddle through on its own, "among other things with rules to prevent capital from fleeing the country — a classic case of locking the barn door after the oligarch is gone."
How does it end? The standard response of a country in Russia’s situation is an International Monetary Fund program that includes emergency loans and forbearance from creditors in return for reform. Obviously that’s not going to happen here, and Russia will try to muddle through on its own,
It’s quite a comedown for Mr. Putin. And his swaggering strongman act helped set the stage for the disaster. A more open, accountable regime — one that wouldn’t have impressed Mr. Giuliani so much — would have been less corrupt, would probably have run up less debt, and would have been better placed to ride out falling oil prices. Macho posturing, it turns out, makes for bad economies.