A Russian Bailout? Not On Our Dime

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INVESTOR'S BUSINESS DAILY

Posted 12/23/2008

Financial Crisis: Recession has left many of the world's worst-run economies in roughly the same condition as General Motors. Russia is one of them, and the World Bank thinks they're going to need a bailout. Not so fast.


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Russia is falling apart fast. High oil prices have come and gone. Investment has fled. Industrial output plunged 10.8% in November, and growth is forecast at 3% in 2009.

Calculating that high oil prices would last, its leaders never diversified its economy, so oil at $30 a barrel is going to hurt badly.

Russia's state-linked business goliaths have $160 billion in debts. A $200 billion bailout for cars, aluminum, nickel and others will cut into Russia's $600 billion in reserves. But with foreign capital fleeing, the stock market has lost 75% of its value since September, and the government is burning reserves to prop up share prices, too.

As investors head for the door, the country this month experienced its sixth currency devaluation. Despite a controlled media, rioting has broken out over layoffs and slashed benefits. Even Moscow is seeing street demonstrations, a rarity under Vladimir Putin.

Small wonder that the World Bank sees a bailout in Russia's future: "If oil prices in 2009 and 2010 average $30 a barrel, that would be a nightmare scenario for a global economy," said Zeljko Bogetic, the World Bank's top economist in Russia. "The pressures on the current account and public finances in Russia would quickly rise to a point where the financing constraint would become so sharp that it's possible even to envisage" that Russia may have to be bailed out, as it was by the IMF in 1998 during its last crisis.

Such loans always have strict economic conditions to be met as collateral. If so, Russia should be forced to drop its tariffs, open its economy, restore its flat tax, strengthen property rights, clean up its capricious legal system, attack corruption and privatize its newly nationalized industries. Those are meat and potatoes to the IMF.



It also should be forced to quit harassing opposition parties to restore investor confidence, and end repression of the embattled free press, which is why a distrustful, frustrated, public doesn't believe anything it reads in the news anymore and riots as a result.

But in Russia's case, there's also a big need for something else that no IMF or World Bank bailout program has the wherewithal to impose for bailout loans — political policy reform.

For that reason, a bailout should be rejected, no matter what kind of mess Russia finds itself in.

High oil prices are directly responsible for the bad political track Russia has found itself on, the petro-state dynamics that ultimately drove away foreign investors when oil prices fell.

Depending on high oil prices, Russia stopped pursuing the exports and development strategy that most poor countries use to make themselves rich. Instead it went for the far cruder axiom of "might makes right."

It has baffled the West by its opposition to a missile shield in a Europe menaced by a nuclear Iran, growing ever more obstructionist as oil prices rose, even as the West offered to share the shield with Russia.

It has also ignored all responsible international citizenship by selling weapons — on credit — to the world's weakest and gamiest nations, like Venezuela, Yemen and possibly Iran, making the world a less stable, safe, peaceful place, and certainly a less prosperous one.

It has even used its high oil earnings to finance its brutal invasion of tiny neighboring Georgia last August, thumbing its nose at all international norms for resolution of disputes. Without soaring oil, the assault on Georgia never would have happened.

Russia uses its energy resources as an economic weapon too, cutting off gas shipments to Ukraine and Belarus in the last three years.

That's something not even the most benighted Arab oil states or Venezuela's blowhard President Hugo Chavez have done.

High oil earnings have also encouraged Russia to project its power to places where it has no compelling national interest, like the Caribbean, as it did last month, but also to Burma, Yemen and Syria, almost a repeat of the 1970s era of Soviet expansion.

Expect more of the same. Russia now says it plans to boost military procurement over the next three years by $140 billion and vows to add 70 new strategic nuclear missiles to its arsenal. Bail them out?

Given Russia's record of belligerence and economic hostility to its neighbors and the U.S., the only responsible path now is to let the laws of economics do their work and keep a bailout off the table.

If Russia can live by the oil boom, it can die by the bust.

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