Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog



The Russian economy will come roaring back
Howard Richman, 12/19/2014

Business Week published an assessment of where Russia has been and where it is going. Its analysis of the present was pretty good, but its pessimism about Russia's future was nonsense. Russia will probably come roaring back, as countries almost always do after a currency collapse.

The ruble started falling as a result of European and American sanctions and Russian counter-sanctions. These sanctions got the Russian currency falling in exchange rate. Here´s a first hand account from a commentary on the subject by Daniel Gurevich, one of my students, who was then living in Russia:

But as much as the food sanctions have hurt the West, Russian consumers are taking the brunt of the blow. Stores have not yet run out of some imported foods, but prices for these foods have shot up because of the very limited supply. For example, I have seen the price of my favorite cheese, Finnish dairy producer Valio´s Oltermanni, increase by about 50% in Moscow stores over the course of just a few months. So it is no surprise that many Russians are searching for substitutes. Demand is growing for Russian cheese and sausages, tomatoes and grapes from Uzbekistan, and other foods from Russia and its former republics, as are prices.

Sometimes there is no suitable substitute for imported food. Even then, consumers have found a way to satisfy their needs. Chefs in Moscow´s top restaurants whose recipes call for Italian Parmesan cheese now use "Belarusian" Parmesan. In fact, it is still the same cheese, imported from Italy to Belarus and then illegally re-exported to Russia with a "Made in Belarus" label slapped onto the original manufacturers´ packaging. In the process, the Belarusian cheese smugglers profit by raising the price of the Parmesan by about 20 percent.

The current crisis was precipitated by the falling price of oil. As a result of the falling price of Russian oil exports, there was less demand for rubles that could be used to buy oil. As a result of the falling demand for rubles, the price of the ruble went down in exchange rate, as shown in the graph below:

ForeignExchangeDDownRubles.JPG

When the exchange rate of the ruble started falling rapidly, many people who had rubles, including Russians, tried to sell their rubles and buy dollars, euros, Swiss francs, or other currencies. This caused the ruble to fall even more rapidly. Meanwhile, the purchased currencies rose in exchange rate.

The Russian central bank tried to stop the falling exchange rate by buying rubles with its foreign currency reserves, but that was like trying to stop an avalanche with a snow shovel. They also tried to stop the decline by raising the short-term interest rate in Russia to attract foreign savings. But, again, that wasn´t enough. The ruble would have to fall further before the decline could be stopped.

Soon the ruble will stop falling. The Russian economy will experience inflation this year. The Russian consumer will find imported goods to be more expensive, and will feel poorer. 

What will happen next is that the Russian economy will turn around and Russia will start experiencing rapid economic growth as a result of its low labor costs compared to those in its trading partners (due to the fall in the ruble´s exchange rate), Russian manufacturers and mining companies will be able to make lots of money selling exports and competing with imports.

To make a long story short, Russia´s economy will come roaring back, just as other economies have after a currency collapse in exchange rate. The only exception to this rule are foolish countries, such as Argentina, which react to a currency collapse by adopting policies that prevent recovery -- such as price controls, export restrictions, or excessive money printing. 

Your Name:

Post a Comment:




  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Archive
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015
    Jun 2015
    May 2015
    Apr 2015
    Mar 2015
    Feb 2015
    Jan 2015
    Dec 2014

    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Categories:
    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term

    Economy - Short Term
    Environmental Regulation
    Real Estate Taxation
    Trade
    Miscellaneous

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • TradeReform.org
  • Votersway Blog
  • Watt's Up With That


    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]