Russia in recent weeks has used its apparent financial clout both to knock an American back out of Kyrgyzstan and to solidify its relationship with Kazakhstan. But recent economic data suggests that when it comes to assistance to Central Asian states, the Kremlin may be running a geopolitical Ponzi scheme -- guaranteeing returns that it will not be able to produce.
So far in 2009, Moscow has gone about lavishing money on its international friends as if the heady days of high energy prices still existed, and the global financial crunch had never hit. Even the Kremlin's old friend Cuba has been the beneficiary of largesse, receiving $354 million in credits recently.
Two of the highest profile outlays involve Kyrgyzstan and Kazakhstan. In early February, Bishkek initiated the process of closing down the American air base at Manas following Moscow's announcement that it would give Kyrgyzstan $2.1 billion in aid. [For background see the Eurasia Insight archive]. More recently, Russian officials announced that a Kremlin-controlled bank would provide $3 billion to Kazakhstan, a large part of which would be used to modernize a coal-fired power plant. [For background see the Eurasia Insight archive].
The Kremlin has been behaving like a big spender, even though Russia is among the countries hardest hit by the global financial crunch. [For background see the Eurasia Insight archive]. And the news just keeps getting grimmer for Moscow. Indeed, Russian government officials recently reported that the state budget is starting to groan under the weight of the country's economic burdens.
Russia's dependence on energy exports to generate income is the central problem. For 2009, state planners had put together a budget based on an oil price of $95 per barrel. But on February 26, the price of Russian oil was lingering at about half that level. Adding to the pressure on the budget, state revenue is projected to be 42 percent less than the government had predicted it would be. At the same time, Finance Minister Alexei Kudrin said state expenditures will be substantially higher in 2009 than envisioned, due to increasing outlays to stabilize the shaky economy.
Right now, according to Economic Development Minister Elvira Nabiullina, Russia is projected to experience a 2.2 percent decline in GDP. But that projection could turn out to be a drastic underestimation, depending in large part on energy prices.
Initial figures for 2009 are turning out to be worse than the government anticipated. For instance, the government projected the overall decline in industrial production for 2009 to be 7.4 percent, and the annual inflation rate to check in at 14 percent. But in January, the government reported a 19.9 percent drop in industrial production for the month compared with the total for December 2008.
What should be the most worrisome sign for the Kremlin is that its cash-reserve fund is evaporating at an alarming rate. Thanks in large part to several years of sky-high energy prices, Moscow put away 4.7 trillion rubles for rainy-day contingencies. Amid the deluge that is the current financial crisis, the Kremlin expects to burn through 2.7 trillion rubles of the reserve fund in 2009. The fund will run dry in 2010 if Moscow keeps spending at the current pace.
Under the barrage of bad economic news, Russia has seen its creditworthiness sink. For example, the cost of insuring against a Russian default on its debts has risen to an all-time high, the Financial Times reported February 23. Moscow has about $500 billion in debts coming due in 2009.
Although the economic indicators make a convincing argument for fiscal restraint, the attitude of Russia's paramount leader, Vladimir Putin, appears to be: "Damn the torpedoes, full speed ahead." Nothing demonstrates Putin's outlook better than his recent comments on military spending. Over the next three years, Russia has committed $4 trillion rubles to modernizing Russia's armed forces. Those modernization programs will proceed, Putin insisted, regardless of Russia's fiscal woes.
While the Kremlin seems to be having problems realigning its capabilities with the new economic reality, Russia's population appears to be growing increasingly disgruntled. In one recent survey conducted by the All-Russian Center for the Study of Public Opinion, 49 percent of respondents said the Russian government should curtail its assistance commitments to foreign states during the financial crisis, and should instead devote a greater share of state funds to alleviating the crisis-related hardships being endured by Russian citizens.
Central Asian leaders, in particular Kyrgyz President Kurmanbek Bakiyev, who are making bets today that Russia will come to the financial rescue, may end up being sorely disappointed. Moscow's ability to finance long-term projects, such as the construction of hydro-power plants in Central Asia, will be severely tested in the coming years. Russia's days as a creditor nation may well be numbered. Those Central Asian leaders who banked on Russian help could end up being left to hold an empty bag.