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By Martin Hutchinson
Contributing Editor
Money Morning/Money Map Report
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.
News and Related Story Notes:
- Wikipedia:
Malthusian Catastrophe. - Money Morning News Analysis:
Russia's Politics of Isolation Leave it Economically Stranded in a Time of Crisis. - Wikipedia:
Oleg Deripaska. - Money Morning News Analysis:
OPEC Production Cut Up in the Air as Members to Clash Over Oil Prices. - Wikipedia:
Argentina. - The Associated Press:
Argentina seeks to nationalize private pensions. - Wikipedia:
Cristina de Kirchner. - Wikipedia:
Vladimir Putin.
I commend you for this cocktail of economic and political spin. For instance this whining about projected Russian defense spending of more than $ 50 billion and the gloating over their having to inject 100 billion into the banking system (without giving the respective US figures for comparison) are class acts.
Best regards
Dan
I stopped reading your article when you got your "facts" wrong. Russia did NOT invade Georgia. You got it bass ackwards. Georgia was to be our staging are to invade Iran. Hats off to Putin for throwing a wrench in the machinery. The primary backers of Georgia are the U.S. and Israel. You know, the belligerants in the ME. You saved me a lot of time early in your article. Thanx
re: Corey Varner.
you are taking Hutchinson's comment out of context.
the 'pampered' comment was not referring to conditions
on the battlefield and he was not making a comparison
between the 'lifestyle' of a US military person's 'lifestyle'
with that of a civilian who has never served in the military.
he was simply making a comparison with one government's
treatment of their military personnel with that of another
government's treatment of their military personnel.
please read the artlicle again and don't take things out
of context, it's bad karma.
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Martin,
I quit reading as soon as I read your statement about "Russia invading Georgia". Georgia invaded South Ossetia, and only after the US/UK blocked Russian attempts within the UN Security Council to condemn both sides and request a Georgian pullback did the Russians enter Georgia and push the Georgian military back. You may indeed know economics, but your geopolitical grasp is so flawed that I can't take you seriously.
Regards,
J.O.
Mr. J.O., How come you say that Georgia invaded South Ossetia? Even my pupils know that country does not invade its internationally recognized territory. Two Georgian provinces so called South Ossetia and Abkhazia have been invaded by Russia since the Soviet Union collapsed. Back in 1990s, the West firmly believed that Russia would build democracy, and did not realize that Russia's Soviet mentality leaders would not deliver Western style democracy. Russia uses its natural resources and western investment for political power and the country will not be a partner of the West. Today, the West, IMF, World Bank and EU… Read more »
I would not call our soldiers pampered. My son served in eastern Afghanistan and he certainly was not pampered. He would go days without a shower, slept on the ground and many times had only one meal a day.
I wouldn't call how are soldiers are treated "pampered", I call it evolution. I don't think those soldiers serving in the middle east, when it gets to 130 degress day after day, feel pampered. Are you still living the same lifestyle you were 10, 20 or 30 years ago (depending on your age)? Or have you had some upgrades?
All of this is moot as once inflation gears back up again, oil will be over 250 a barrel. Chavez has proven himself to be a buffoon, Argentina always goes down this path, Russia/China will be the new powers. Bye Bye USA.
Chavez rules! he has not zionists telling him what to do! You Americans are so full of yourselves that you don't realize that you are being robbed blind by the banksters.
You deserve the misery that is coming to you! enjoy it, it's going to be a long ride to hell!!!!!!!!!!!!!!!!!!!!!!!!!
Your really stupid comment about Russia invading Georgia is a real insult to the intelligence of all your subscribers, as many other comments have already suggested. It makes me wonder about the reliability of everything else you say in this article, especially with respect to Georgia's somehow being a player in the oil industry. As far as pampered GI's are concerned, it is my impression that Georgia is one of the countries being groomed as a source of cheaper mercenaries that will replace our own troops when we finally are forced to pull our own troops out of Iraq. I… Read more »
Welp, to chime in here along with the others that paid attention as things were happening in Georgia, Russia repelled invading Georgian forces. However, it is important to recognize that Georgian forces made no attempt to hold any ground, nor attacked any military installations. The Georgian attacks were wholly directed at civilian targets: hospitals, schools, and residential neighborhoods. Putin, et al…, wisely realized that the Georgian attack was pure provocation, and the BTC pipeline was plump bait. We have Russia to thank for the plunge in oil prices, as Russian forces did not seize the BTC pipeline, and thus take… Read more »
Seems to me, that the biggest, most corrupt, mother of "Bad Actors" has been omitted from this article. What of George Bush and his thieving band of cronies and the role played by the USA.
In light of the information available out there, you can only have intentionally omitted, misrepresented, twisted, and lied about every available fact.
How incredibly low, hypocritical and cowardly of you, to not recognize and comment on America's leading role in these affairs.
You have shown yourself true to the form of all weasels.
Mr. Hutchinson, you are a complete Ass!
Russia invaded Georgia.Period.Look at its history of invading its vulnerable neighbors. They are bullies and cowards!
And You…. anti-American, anti-west commentors show that nations are not the only Russian poodles in existence.
Lets not forget socialists, Marxists, and anarchists…spawns of immorality, greed, jealousy and misplaced self-hatred.
Some of us hard-working, law-abiding, good people are
awakened to your extremism and are prepared to confront your lies and propaganda in a counter-jihad of rationality, truth and values.
Martin-you and your like are so anti-slavonic its unbeleivable it smacks of one Vice Chancellor in the thirties with his anti Semetic rhetoric- I hear no talk from you about the Chinese in Tibet…….get real……the Georgian president made a woeful blunder when he thought he could do what ever he wanted to the the South Ossetians because he had Nato and the US on his side…….. bad choice Mr Saakashvili you thought the Americans would back you up when you went in to Ossetia beating your chest -but they left you hanging in the breeze eh what?…… Martin in future… Read more »