Russia Enters Its Lost Decade

Oil may be up, but Russia, strangely, is down. Commodities prices, on which Russia's economy is ever dependent, have been rising for the past several months, leading some economists to predict a return to 3 percent growth (from the current negative-10 percent) by next year, and even higher figures in the future. But a closer look at the situation shows that Russia has most of the necessary ingredients for a longer period of stagnation. First and foremost, its banking sector is among the most beleaguered in the world. Official figures show that bad debts will be a whopping 12 percent of the total loans this year—but outside analysts like London-based Capital Economics put the number closer to 20 percent, and predict that more than 250 banks will ultimately fail.

This, coupled with an unstable ruble, makes it difficult for the Central Bank to cut interest rates in order to stimulate the economy. Meanwhile, the deficit is ballooning, and despite all the talk of structural reforms, red tape and corruption are actually worsening, according to the NGO Transparency International. Russia did save oil dosh for a rainy day. But it has spent down the majority of that money propping up the ruble and bailing out failing businesses, and its leaders didn't invest seriously in any other industry. That leaves Russia in the usual position of being completely dependent on energy prices—which have been more volatile in the past 12 months than in many years past. Many energy analysts believe it's quite likely that oil could fall back to $50 a barrel by 2010. If that happens, Capital says it could take as many as six years for real GDP to creep back to peak 2008 levels—nearly a Japanese-style lost decade.