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The Russian business confidence index has risen to zero for the first time since 2012, when the index briefly went positive for seven months in a row for the first time ever.
Business confidence has been recovering after being knocked off its feet last year by the coronacrisis, falling to a low of -7.3 in the autumn of 2020, still not as low in the previous two years, when it fell to -8.
Russian business confidence is very seasonal, with the owners of businesses always being more depressed in the autumn and the most optimistic in the spring and early summer months, when the index typically rises to -1 or -2.
Last year was an exception, when even in the summer months the best the index did was to rise to -4.7. The autumn fall in confidence was offset last year as the first vaccines appeared in November, inspiring optimism that the pandemic would be over in the first half of this year, as appears to be the case.
However, the bounce back in optimism is unusually strong and April’s null result is the first time the confidence index has broken into positive territory for a decade. Prior to that, the index got well above zero at the height of the noughties boom in 2006 and 2007 to peak at an all-time high of +7 in 2007.
Those two years saw a reversal of over a decade of capital flight as Russian businessmen for the first time ever believed in the future of their own country and some $350bn of funds returned from offshore havens as Russians started to invest in the domestic economy. The global financial crisis in 2008 put paid to that optimism and the same amount of money flowed out of Russia that year as the confidence index crashed to its all-time low of -20.
The mood amongst businesspeople is certainly very buoyant as the Russian business confidence survey run by Rosstat every month has turned positive for the first time in eight years, and for the second time ever. The index was at zero in April, after it was knocked off its feet by last year’s coronacrisis. However, it fell to a low of -7.3 in November, which is less than the -8 of the previous two years, its fall having been offset to an extent by the appearance of the first vaccines to counter the coronavirus (COVID-19) pandemic. The only other time the index has been positive was during the height of the noughties boom in 2006 and 2007, before the 2008 crisis knocked the index back to its all-time low of -20.
Some have argued that Russia’s economy has just started a new super cycle that will be fed by the boom in commodity prices currently under way. The price of iron is at a nine-year high and copper prices are at an all-time high and expected to stay there, driven by the rising demand generated by electronic gadgets and electric cars. Oil prices have also recovered and are comfortably over $60 a barrel – well above the budget’s breakeven price of $42 – which is also producing cash to prime the pump. All the conditions are in place to drive growth, but the Russian government is still grappling with raising investment levels into its 12 national projects, which is the policy vehicle that is supposed to drive the next round of long-term growth.
The consumer confidence index, which reflects the aggregate consumer expectations of the population, in the first quarter of 2021 compared to the fourth quarter of 2020 increased by percentage points (pp) and amounted to -21% in the first quarter – its best result in a year – but is only measured quarterly and has not been updated for May. So far, consumer confidence in the first quarter still remains worse than the pre-coronavirus levels, which reached a maximum of 16% in 2019 and -17% in 2018. Given the population’s very high expectations for prices to rise that are at least double the actual rate of inflation, it appears the population remains significantly more pessimistic about the future than business people.
The tragedy of 2008
April’s confidence result was last seen in the halcyon days of the late noughties boom that ended in a tragedy that has coloured the Kremlin’s thinking ever since.
It is hard to exaggerate the extent of the tragedy that the global finance crisis wrought on Russia and the long-term consequences it has had on the business thinking and the government’s policy making ever since.
Russia was booming in those days, with GDP growth running at 6% to 8%, and there was even talk of “overheating” at the time. Russia bounced back from the Asian crisis in 1997 that caused the Russian financial meltdown a year later in August 1998.
Two years of misery followed until Russian President Vladimir Putin took over as president in 2000, in the same week as IKEA opened its first store in Moscow. Oil prices had fallen to a low of $18.25 per barrel in November 1998, effectively bankrupting the government, but during Putin’s first year they began to recover.
It's widely said that the prosperity that followed Putin’s election was gifted to him by rise of oil prices, but it actually took years for oil prices to climb. By the end of December 2000 oil had recovered to $41, but in 2001 they dived again to $30 by December 2001.
Yet the economy bounced back from the 1998 crisis and grew 10% in 1999 – a record that has yet to be beaten – and continued to expand in the following years, largely because the crisis killed off the “virtual economy” that was run on barter and everyone switched back to using a much more fairly valued ruble to settle bills instead.
An economic recovery was well underway by 2002 when oil prices began their inexorable climb to their peak of $170.80 in June 2008. But despite the torrent of petrodollars pouring into the Kremlin’s coffers, the population didn't feel especially confident of the future. The trauma of the chaos during the Yeltsin years, the hyperinflation and the instability of the ruble kept them nervous, although the quality of life was improving steadily during between 2000 and 2006.
The point is probably best illustrated by the capital flight that continued throughout those six years. As bne IntelliNews described in the feature “Capital flight figures to make your eyes water” Russia lost $53bn in capital flight during the first six years of Putin’s rule. All in all, $156.4bn left between 1994, when the Central Bank of Russia (CBR) started tracking capital flight, and the end of 2005.
And then something changed in 2006. That was the year that capital flight reversed and $43.7bn returned home, almost as much as had left in the previous six years. The next year in 2007 another $87.8bn came back, bringing the total for those two years alone to almost as much as had left the country since 1994.
Many factors went into the change of mentality but probably the most significant was the stability of the currency. Russia’s most famous DJ at the time, Ivan Salmaksov, told this correspondent that he had just been offered to host and produce a youth TV segment called “7-Ya” (a play on words in Russia that means both “seven times me” and “family”) on ORT (now the First Channel, Russia’s biggest TV station, but was also toying with the idea of going to New York for a year to see another market at work. “What’s changed is things are starting to look better,” Salmaksov said. “The ruble has been at RUB6 to the dollar for two years.”
People were starting to build careers. There was opportunity in nearly every walk of life. Money was abundant for projects and incomes were rising by 10% a year as the Kremlin had adopted a policy of using the petrodollars to close the gap between public and private sector wages. The future looked increasingly predictable.
The change is also visible in the business confidence survey. It had been negative for most of the six years of the boom, and started January 2006 at -2, but by February it rose, like this April, to zero before rising again in the summer to 3. There was the traditional seasonal fall that winter but the following year it climbed again even further to a high of 7 – its highest level ever – in July 2007. And it remained elevated throughout most of 2008 as well until September 2008, when Bear Sterns collapsed. By January 2009 confidence slumped to -20 – its lowest level ever – and all of the $156bn that had come home in the last two years left again in a matter of months.
And there is the problem. It took six years of rapidly improving prosperity for Russian business people to start believing their country had a future and it was worth investing into growing their businesses, so they started to bring money stashed abroad in offshore havens like Cyprus.
Those hopes were cruelly and spectacularly crushed yet again. The entire population remains to this day traumatised and mistrustful. It was not just the oligarchs that were hurt in the collapse of 2008. The Cypriot banking crisis in 2012-2013 showed that most of the money held in Nicosia was Russian middle-class money, not oligarchs’. Regular Russians simply didn't trust their own banks and currency and kept what they could elsewhere.
The government was also in shock. Another factor fuelling the boom in 2007 was the fact that inflation fell into single digits for the first time since the collapse of the Soviet Union. Putin immediately announced a $1 trillion investment programme into infrastructure – more than twice as much as the RUB27 trillion national projects programme currently in place. The Kremlin intended to use its petrodollar windfall to totally transform the country with economic multiplying infrastructure investments.
Those plans were quickly ditched. The Ministry of Finance had built up a war chest of almost $600bn, but a little less than half of that was spent in the following years to bail out the economy. Putin has just completed building his fiscal fortress and the Central Bank of Russia (CBR) has obtained its “comfort level” of $500bn in foreign exchange reserves last year, which have more recently risen to just under $600bn again.
While the fiscal fortress is mostly seen as a strategic financial weapon as it makes Russia largely impervious to the Western sanctions imposed on it since the 2014 annexation of Crimea, the idea for the need for a fiscal fortress was born in the aftermath of the 2008 crisis. The government’s policy-making since then has been pervaded by “never again” thinking. It is the reason that CBR governor Elvira Nabiullina is hailed as the “most conservative central banker in the world”, as she was already working in the former Finance Minister and Audit Chamber head Alexei Kudrin team and had a ringside seat to the shocking aftermath of the 2008 crisis.
The return of confidence in the future by Russian business people is more than welcome but with their history it will take several years of stable growth and fading geopolitical tensions before they start to bring their money home again. In the meantime, the onus will be on the government to make the necessary investments to transform the economy. And that will make a big difference, but investment rates continue to run below the 25% increase called for in the plan and it won’t exceed them until the domestic businesspeople start to participate. The government is fully aware of this and the investment plans explicitly calls for measures to improve the domestic investment climate; it's going to take a lot to convince sceptical business people that “this time it’s different.”