Russia: Vladimir Putin took to the air this week, sitting in the co-pilot’s seat of a water-bombing plane in an effort to fight the fires that are engulfing whole regions of Russia. But, this is unlikely to do much to lift the Russian prime minister’s popularity. As life in the country’s largest cities, including Moscow, has become unbearable, Russians must now brace for the severe consequences the summer inferno will have on the economy.
Forget for a moment that stock and bond trading is down sharply in the last two weeks simply because bankers have stayed home or fled the city. The heatwave and fires have already ravaged crops throughout the country. This will severely impact export revenues, with the added irony that Russia can’t even take advantage of rocketing wheat prices since it has banned exports in order to serve its domestic needs. Furthermore, the near-paralysis of whole regions will lower industrial output. This could add up to an impact of 1 per cent on this year’s GDP, according to HSBC.
The Russian economy had been expected to grow 5-6 per cent this year following the severe slump of 2009, when it shrunk by 8 per cent. The fires will postpone its return to pre-crisis levels. Meanwhile inflation, already at around 7 per cent, will be fuelled by rising food prices, and possibly by the government’s temptation to throw money at the new problems caused by the flames. Moreover, Russia can’t count on the oil price for help.
The country’s main export remains stuck at around $80 a barrel, and with mixed signals coming from the US and Chinese economies, is not expected to rise in the short term.
At some point, foreign investors may take fright. The government’s inability to mount a swift response to the ever-expanding fires has highlighted the flaws in its over-centralised, inefficient and corrupt state apparatus. That problem will remain even after the fires have been doused.