RUSSIA NOT AMERICA MAY FACE ECONOMIC MELTDOWN

As the economic recession continues to impact global markets it is Russia and not America that has the most to fear with some experts predicting that Russia, as well as some former Soviet nations, could suffer an economic meltdown.
In order to raise cash for its ailing economy, Russia recently turned to China and offered that country a deal that would have been unthinkable a year ago. In return for $25 billion dollars in loans the Russian government promised to supply China with 300,000 barrels of oil a day for the next 20 years. The loans from China’s Development Bank were earmarked for Russia’s biggest energy companies, which were running out of money because of the major downturn in energy prices. The news that Russia was desperate for cash exposed the fact that since 2001 it has built its economy solely on energy, thereby leaving it exposed to the kind of problems facing all big oil producers, including Saudi Arabia. However, unlike the Saudis, the Russians have not been able to stockpile large reserves of cash because massive sums were wasted on propping up parts of the country’s ailing infrastructure and in efforts to rebuild its military in hopes of regaining its former superpower status.
In 2008, there were warning signs that much of the talk in Russia that the West was responsible for the country’s economic woes was merely propaganda to obscure serious failures in the way the Russian government had been handling its economy. State involvement, allied to endemic corruption, had led to some very bad choices amid a growing slowdown of industrial output. One of the most critical structural problems in the economy, created while Vladimir Putin was president, was a policy of regarding government as preferable to a private sector, thereby curtailing private sector growth and entrepreneurship. Last year, an economic report commissioned by the new Russian president, Dimitry Medvedev, warned that many centers throughout the country were reliant on single industries or companies and there was virtually no protection of private property.
The scale of the problems facing Russia may well become more apparent in the months ahead as areas outside of Moscow begin to feel the impact of central government ineptitude. Recently, there was evidence of unrest when people marched through Vladivostok, calling for Vladimir Putin to resign as prime minister. The very fact such a demonstration took place raised eyebrows in the corridors of power in Moscow and it may yet prove to have been the signal that there is more social discontent on the horizon.
While no one doubts the massive impact the credit crisis has had on the U.S., the fact is dollar is getting stronger against other currencies, including the Euro, and, at the same time, China is continuing to regard U.S. Federal bonds as the safest bet for its vast reserves of cash. So, despite the considerable damage to Wall Street it did not experience the same financial hurt as Russia’s stock market when the credit crisis began. Russia’s market lost 70% of its net worth overnight. That shocked investors worldwide because Russia had been flush with cash for eight years while oil prices were high. However, it had failed to use that cash to diversify its economy and it had also spent unwisely. There was also a mistaken belief outside of Russia that its major energy companies like Gazprom were in the black when it fact they were deeply in the red, having used their wealth to build new pipelines and expand output. Those companies had been certain they had no need to worry because crude oil was like liquid gold and they had lots of it. That was fine while prices remained at $100 a barrel and more. Now, it is a judgment, which has come back to haunt them hence their urgent need to ask China to bail them out.
Much of this is lost on leading Russians like Igor Panarin, a senior figure in the Foreign Ministry, who numbers Putin as a close friend. He has depicted America as the bogeyman responsible for the world recession. It is a view that feeds directly into the philosophy of Putin who has blamed Washington for creating an economic firestorm. Much to the delight of Kremlin figures, who would like to divert attention from their country’s plight, Panarin told the Russian media last November the U.S. would collapse by 2010. In February, he repeated the prediction while addressing professors and diplomats at the Foreign Ministry’s school for diplomats of which he is the Dean.
By his calculations, the U.S. will fracture into six independent regions with Alaska returning to the Russian fold. In his view, America is suffering a moral decline and the evidence is there in its increasing gay and prison populations. They are, he contends, signs of a growing social upheaval that will accelerate the end of America as we know it. His reference to gays and criminals could well have been taken from the Chinese Communist Party’s propaganda playbook that likes to use similar arguments to convince the Chinese people that America is in moral decline. Panarin further contends that Russia and China will emerge as partners after America’s collapse and establish a global currency to replace the dollar. All of this is of course wishful thinking and is far removed from reality. In essence, it is a seminal part of a strategy to disguise the truth about Russia’s economic peril. It is also a familiar fantasy of the communist old guard, which argued after the collapse of the Soviet Union that Russia would rise like a Phoenix from the ashes and merge with China to dominate the world. It is worth noting that Panarin has been predicting America’s collapse for two decades. Even now, he cannot wrap his head around the fact that America is economically stronger than Russia.
The deepening crisis in Russia is matched by an even worsening crisis in many former Soviet nations such as Latvia, Hungary, Bulgaria and Rumania, which have been receiving EU aid for years but are now asking for a massive bailout. In Brussels, there is a reluctance to grant large handouts to countries where corruption ensures that money often ends up in the wrong hands. More significantly, big EU players like Greece, Spain and Britain are in dire need of financial help and they are not prepared to see the funds they want earmarked for them to be diverted to the East. Hungary has warned that if the EU does not move swiftly to prop up central banks in many Eastern European nations they will collapse thereby undermining the EU and creating what Hungarians have called a new “Iron Curtain.”
Some experts worry that, as the global crisis gets worsens, there could be a reshaping of the map of Eastern Europe as former Soviet states turn away from Brussels and look to the Russian Bear and China for assistance.