Last week the price of crude oil went on a bender, shedding 15% of its value before recovering slightly late in the week.

Unsurprisngly, by last Wednesday, the day after Barack Obama left Russia, the RTS dollar-denominated stock index lost nearly 4% of its value and plunged below the important 900 point psychological barrier, closing at 889.

The MICEX ruble-denominated index was doing the same. The RTS has now lost 300 points or one-quarter of its mid-June value, itself a gigantic dropoff of two-thirds from its high a year and a half ago. It confirmed once again that the Russian economy is helplessly enslaved by a crude oil price set by foreigners with no regard for Russian interests. The ruble’s value fell in lock step right along with the price of oil, almost as if it had no value indendent of crude (which is in fact the case).

The repercussions in the wider economy were predictable and plain to see.

The John Deere company announced that because of draconian new protective tarriffs implemented by the Kremlin, its sales in Russia have plummted by half. Both GM and Ford announced they were shutting down production for months. It’s certainly not that Russian’s aren’t crazy about American products, since Pepsico has just announced it is building the world’s biggest soda bottling plant in Russia. It’s just that the Kremlin’s crazed, self-destructive polices regarding big-ticket items are wrecking any possiblity for foreign investment. Russians seem unable to understand that their market is so hollow and one-dimensional that no normal firm like Deere can expect reasonable profits except when the oil market is surging, and that makes Russia a gambling casino in the best-case scenario. It doesn’t take much more bad news to make any sane investor run for the hills, and right now Russia needs foreign investment desperately.

On the other hand, the picture for Russian exports is even more bleak. Russia is on pace to post a stunning loss of nearly $200 billion in export revenues this year, nearly a 50% drop from 2008. So, as is usually the case with Russia, the protective tarriffs had no appreciable affect other than to wipe out foreign investment even as exports still collapsed.

And macroeconomic indicators continue to plummet as well. The Kremlin revised its budget forecast last week to increase the projected 2010 budget deficit from 5% to 6.5%, a massive expansion of 30% indicating the Kremlin knows there won’t be appreciable growth in 2010 and budget revenues will continue to fall. Its budget reserves will exhaust, and Russia will be forced into the Soviet pattern of massive borrowing and accrual of foreign debt, creating a double whammy of dependence on both foreign capital and foreign energy prices. Meanwhile, Putin goes merrily on biting the foreign hands that are feeding him in the most crazed fashion imaginable.

The Kremlin is in full-on panic mode. A few weeks ago, it said it would not enter the WTO except as part of a coalition of former Soviet states. Then last week, it suddenly changed its mind yet again and announced it might be interested in single admission, even though it still is not remotely close to establishing such credentials. The utter cluelessness of the Putin Kremlin was perhaps best emphasized, however by the report that Russia had shot down at least three of its own jets during the war with Georgia last August. That news could hardly suprise anyone since Russia’s command-and-control system was so wretched during that war that officers were reduced to communicating with each other on the battlefield by personal cell phone.

But the Kremlin was plumbing new depths. In a really crazy moment, Medvedev told the G-8 that it was impossible to regulate oil prices and the price should be regulated at $70-$80 per barrel. He was babbling incoherent gibberish because he has absolutely no clue what to do as he watches his country’s economy collapse just like the USSR’s did not so very long ago. And to be fair, neither Medvedev nor Putin have the remotest qualifications to address such a crisis (or indeed to avoid causing it), so the blame really belongs with their bosses.

And that would be the people of Russia themselves.

URL: http://larussophobe.wordpress.com/2009/07/10/editorial-the-russian-economy-continues-its-freefall/