-Analysis-

MOSCOW — On Aug. 17, 1998, the Russian government announced a default on short-term obligations and a currency devaluation. The financial system was practically destroyed. Ten years later, in 2008, there was another crisis, this time a global one, that hit all the world’s economies, including Russia’s. 

There were both similarities and differences between the two crises — each resulted from internal and external shocks. But we haven’t learned our lessons from them, and there are reasons to be worried that a new economic catastrophe is on the horizon

Although it’s been five years since the last global crisis, it wouldn’t be accurate to say that the world economy is truly healthy. An exterior shock similar to the one that caused the economic collapses in 2008 and 1998 is still possible. In 2008, the epicenter of the crisis was the United States, but today the biggest threat comes from China — and from the fact that the entire developed world still balances on the edge of recession. If, in addition to that, there is a major shock from China, such as a slowdown in growth to just 3%, the world will be faced with another economic meltdown. A slowdown in demand for metals, for example, is already a menacing hint that this could happen.

Ominous signs

Nobody knows whether, or when, the global economy will suffer another body blow, but what is clear is that while Russia was relatively well-prepared for the 2008 crisis, we don’t have the same safety cushion today. Instead of a surplus, we have a deficit, and the non-oil and gas deficit is exceptionally high, with experts predicting that said deficit will be 10.7% of GDP this year. 

In 2007, the country adopted new rules about how income from oil and gas could be spent, and it was meant to be used increasingly for government savings. But the crisis wrecked that plan, as the government tried to spend its way out of its economic problems. Russia not only failed to save its income from the oil and gas industries during the crisis years, but it also emptied its reserve fund. The non-oil and gas deficit rose to 13.5% of GDP. The crisis of 2008-2009 passed, but Russia still didn’t heed the World Bank’s recommendation to keep the non-oil and gas deficit below 4% of GDP. The gold reserves are also less important now than they were in 2008, and the private sector’s international debt level is much higher. 

We are also more vulnerable now to external shocks than we were in 2008 because of domestic factors. We have witnessed economic stagnation this year even with high oil prices. There are also serious weaknesses in the Russian financial system. There has been a boom in credit and debt, which caused a quick rise in family incomes that has now become the expected norm. Consumer debt has now reached 15% of GDP. That’s low compared to other developed countries, but the advantages of having a low level of indebtedness are negated by the high cost of debt service and the fact that most of the debt is borrowed over very short terms. 

In fact, Russians spend 11% of their income paying down debt, more than even the United States, where citizens pay on average 10.5% of their income for debt service, researchers say. This is the case even though household debt is 78% of GDP in the United States, much higher than Russia’s 15%.

If there is a sharp drop in prices for natural resources, a new crisis will be unavoidable. And there were not be many choices: either devalue the ruble or cut government spending. 

On Aug. 14, 1998, President Boris Yeltsin announced, “There will be no devaluation. I am announcing that clearly and firmly.” Three days later, what he promised would not happen in fact did. 

Now the Russian government is saying there will be no recession, though there might be long-term stagnation. You can’t really call that a crisis — it's just a matter of terminology. But it’s important to remember that Russia not only is vulnerable to an outside shock, but also that the vulnerability is growing. At the same time, internal risks are increasing as well, with experts seriously discussing the possibility of a collapse in consumer credit.