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Russia, Venezuela and Argentina Hit Hardest by Financial Crash

Politics / Emerging Markets Oct 31, 2008 - 08:31 AM GMT

By: Money_Morning

Politics Best Financial Markets Analysis ArticleMartin Hutchinson writes: Four months ago, it appeared that three economic “bad actors” were triumphant in their disregard of economic laws and contempt for the United States: Russia, Venezuela and Argentina. Today, while the iron laws of economics have taken a bite out of all of us, they have taken an especially big chunk out of the economies of these bad actors. Unless most of us, the bad actors will not be quick to recover.


That is good news – for U.S. foreign policy, and for those of us who hope that the more befuddled emerging markets will figure out how to run their economies before Malthusian population pressures overwhelm them.

The world does not need to see bad behavior – political or economic – rewarded.

Let's consider a few of the worst players.

Russia's Tactics Backfire

Russia, first, invaded Georgia in August and appeared ready to use its oil-and-gas wealth to rebuild the Soviet military machine, as well as making Western Europe entirely dependent on the whims of its state controlled energy company OAO Gazprombank .

Gazprom's attempts to control energy supplies to Europe included blocking the Nabucco gas pipeline and striking a deal with Libya, Europe's main non-Russian potential supplier. Russian defense spending, too, has quadrupled since 2001 and was continuing to increase rapidly – by 26% in 2009, to more than $50 billion (bear in mind that Russia gets more bang for its ruble because its soldiers are both cheaper and require less maintenance than pampered US and EU forces).

Not any more. The decline in oil prices, halving in three months, has thoroughly destabilized the Russian economy and wrecked its budget picture. Russia has been forced to promise $100 billion to its banking system, without any certainty that this capital injection will solve its problems. Inflation is running at 16%, and will rise further as Russia's foreign exchange reserves are used to prop up the banks. Oleg Deripaska , Russia's richest oligarch, has been forced to sell assets to meet market calls.

Most pathetically, Belarus , previously Russia's most reliable poodle ruled by a wholly unreconstructed autocrat, is making promises of “reform” – if it can get access to International Monetary Fund (IMF) cash.  The RTS stock index is down by around 75% from its peak in June – that makes the roughly 30% decline in the Standard & Poor's 500 Index seem no more than a gentle correction.

Chavez Feels the Pinch

Russia's the most dangerous of the bad actors, because of its nuclear weapons and belligerent foreign policy attitudes, but it's not the only one to face hard times. Venezuela is also facing the pinch – although this Latin American player found the benefits of $147 oil were so fleeting that even Venezuelan President Hugo Chavez had failed to spend up to his income (though a 26% increase in dollar spending in the 2009 budget shows he means to try). Inflation is 36%, around the level at which it becomes an overwhelming problem, while oil output has been falling since Chavez replaced the senior management of the oil company Petróleos de Venezuela S.A. (PDVSA).

The cash crunch has not yet hit home – Chavez is desperately trying to postpone any hardship until after the Nov. 23 local elections – and the stock market is down only 40% from its January 2007 high – although the nationalization of electricity, telecoms and cement has removed a number of stocks from active trading.

Nationalization also hasn't helped electricity service – the country has suffered three nationwide power blackouts this year. You can expect further bad economic news from Venezuela in early December, after the local elections.

Cry For Argentina

Finally, Argentina , which is dependent on a broad range of commodities, has also run into trouble. Argentina defaulted on its international debt in 2002, before forcing bondholders to accept new bonds worth about 30% of face value. It also seized most of its residents' dollar savings: This country seems to succumb to that particular kind of bad-actor behavior about every 10 years.

However, vice had appeared to be rewarded, with 8% annual growth for Argentina in 2003-2007. Inflation is currently running about 25%, but the government solved that problem by forcing out the head of its statistics bureau and making up new inflation numbers, thereby ripping off holders of its inflation-linked bonds.  With the decline in commodity prices, however, the government of Cristina de Kirchner was running into trouble, since it had $20 billion of debt to repay by the end of 2009, even on its written-down schedule.

The government's solution was simple – it nationalized the $30 billion private pension scheme , set up in 1994 by the previous government – to much IMF and economic reformist applause. So much for pensions privatization – in Argentina, it simply gives the government an additional pot of money to steal. With an additional $30 billion available, the Argentine government can carry on spending for at least another year – at the cost of condemning its middle classes to a penurious old age, since few of us have the foresight to save in more than one pension scheme.

Russia is probably the most seriously affected by the oil-price decline, because its ambitions were most expensive. In Venezuela, trouble hasn't really hit yet – or Chavez is keeping it hidden until after the local elections. In Argentina, meanwhile, the bad-acting government has found yet another way to make the middle class pay for the leadership's misdeeds.

However, if oil prices stay below $70 for the next few months, and commodity prices are likewise subdued, we can be confident that even Russian Prime Minister Vladimir Putin , Hugo Chavez and Cristina Kirchner will suffer a very cold winter indeed.

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

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