Russians play down crisis as economy falters

By CATRINA STEWART, Associated Press Writer Catrina Stewart, Associated Press Writer

MOSCOW – Russians know better than most what a crisis feels like. They survived the breakup of the Soviet Union and the ensuing shortages, and they lived through the devastating financial collapse of 1998.

But as the country again hurtles toward economic hardship after an eight-year boom, many Russians — including the ruling politicians — appear relatively sanguine about the future.

"They don't talk about it much on TV, but we feel it. We hear about job cuts, salary cuts. Several of our friends have had their wages held back," said Maria Doroshkina, a shopper in her early 20s at Moscow's giant Evropeisky mall. "But how can it be any worse than the last crisis?"

Russia's economy is spiraling downhill much faster than many expected just a few weeks ago. Companies have slashed up to a fifth of their staff, economists have drastically cut their growth forecasts, there are concerns of a steep currency devaluation and oil prices are in the doldrums — no good thing for an economy based on energy exports.

As the economy buckles, speculation is rising over how the country's leadership — which has so far played down the crisis — will weather the storm.

During his eight-year presidency, Vladimir Putin rode a wave of popularity as the country prospered on soaring oil profits and flexed its military muscle. But as the signs of his successes crumble around him, Putin, now prime minister, is heading for his toughest popularity test yet.

Initially quick to respond, the government pledged billions of dollars to rescue stricken corporate borrowers, as the country found itself in the midst of the worst financial crisis it had witnessed in a decade.

It soon emerged, however, that the money was not getting through to the real economy. It has become tricky to get credit, a situation which has spawned side businesses such as debt collection agencies and pawn shops as companies and people seek to raise cash.

"If money does not get out of the banks into the economy, we are looking at a very destructive period," said Chris Weafer, chief strategist at Moscow-based Uralsib bank. "Not only will we have major negative growth, but we will also have shortages and a higher rate of unemployment, and more companies mothballing their activity."

Russia is, of course, not the only to be hurt by the global financial crisis. But it has been particularly hard hit because of its dependence on commodity prices, while the markets crisis has exposed the weaknesses of its financial system.

And yet Russia's leaders have consistently underplayed the depth of the crisis. The Kremlin has warned the media against scaremongering and blamed Russia's woes on irresponsible lending practices in the United States.

"People do understand. Intuitively they feel it and see it. But they don't necessarily understand the size and scale of the problem," said Sam Greene, scholar-in-residence at Carnegie Moscow Center. "They hear from the leadership that things are more or less OK, and they assume the problem is not as widespread as it is."

The Kremlin's message stood up when oil prices remained high. But Urals oil is under $50 a barrel — far below the $70 level which Russia uses as a benchmark when balancing its budget.

Slowly, the administration has been forced to change its rhetoric to accept the facts.

It no longer denies there's a crisis, but still government officials' comments simply focus on how Russia might emerge stronger from the difficulties. It also no longer rules out a devaluation of the ruble — which the government has spent billions of dollars to keep from collapsing. It now says it is considering a gradual depreciation.

At least part of that appears motivated by a desire to avoid spreading panic and reneging on earlier promises.

"The government actually cares about the trust built up with the population," said Clemens Grafe, chief economist at UBS. "It makes it difficult to move the ruble because they always said it was stable."

As president, Putin took credit for the boom years and restored a sense of national pride, key to understanding his domestic popularity. He passed the mantle in May to his protege Dmitry Medvedev, but most people still see Putin as the man in charge.

While polls show Russians are growing more concerned about their economic future, this has had little impact on the leadership's popularity. Putin remains the most popular figure in Russia, followed closely by Medvedev.

While Russians typically expect someone — usually the prime minister — to take the blame when things go wrong, Putin seems secure, so far at least.

At the same time, there is growing pressure from the Communist party, a minority in parliament, for the removal of Finance Minister Alexei Kudrin. Respected abroad for his fiscal prudence, at home he has played a delicate game, precariously balancing Russia's economic needs against competing and sometimes vested interests.

The Communists have some support among Russia's elderly and poor. Putin was quick to dismiss their call, but fell short of ruling out such a move in the future. He said "now" is not the time to dwell on the mistakes made.

But whatever the political rhetoric, evidence is stacking up to suggest economic problems are becoming ever more serious.

Russia has burnt a hole in its vast international reserves by shoring up the flagging ruble and providing support to the weakened banking system and the economy. Its stock markets have lost more than two-thirds of their value.

Only when October numbers came out were economists able to get a handle on the extent of the crisis. A dismal set of statistics revealed that industrial production grew by just 0.6 percent from a year earlier and retail sales grew at their slowest rate in two years. Wage arrears rose by 33 percent, while unemployment rose to a seven-month high of 6.1 percent. The Federal Labor Service said that companies plan to lay off around 200,000 staff over December and January, while the real figure is expected to be much higher.

And if oil remains at $50, Goldman Sachs says Russia could see zero growth next year.

For a country that was until recently experiencing growth of more than 8 percent, that's a shock that even politicians' rhetoric will be unable to soften.

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