By Christopher Weafer
Eighteen years ago I arrived in Moscow. I had every intention of staying one, maybe two years before returning to Bangkok, from where the push of the Asian financial crisis and the pull of Troika Dialog persuaded me to leave a comfortable existence in a city where you could actually see the sun all year round for a âMoscow adventureâ. Today I am a fully paid up member of that group of foreigners who have found themselves addicted to the Russia soap-opera. As with all good soap operas you always want to see what happens in the next season.
For all of the past eighteen years I have lived in the same neighbourhood of Moscow. My first apartment had a view of the north-east section of Patriarshiye Prudy, the spot where, in Bulgakovâs The Master and Margarita, the Devil appeared to the literary critic Berlioz and where the latter subsequently lost his head under a tram. Many an hour was wasted watching tourists risk their life for a photo staging that scene. Also for many of those eighteen years my journey to work has involved walking past the statue of Nikolai Gogol, set in the small courtyard of the house at the junction of Nikitsky Boulevard and Novy Arbat, where Gogol lived his last four years and where he died.
Those familiar with the statue know it to be of a very depressed looking Gogol. It was originally placed at Gogolevsky Boulevard, beside the Cathedral. It is reported that people were stunned into silence when the statue was unveiled in 1909 because instead of the dignified image of the literary genius they were used to, they saw, as one commentator wrote at the time, âa heartsick figure muffled in the raincoat and grieving on the verge of despair.â During Stalinâs reign the statue became such a symbol of national despair that it was eventually removed from sight in 1951. Several years later the statue was placed in its current location. One of the features of the statue is that, like a painting, the eyes appear to follow you as you walk around it. Not so much an admonishment to âstay off the grassâ â more a âyouâre doomedâ look.
For many years I would walk past the statue and think that Gogol would have hated modern Moscow. The city had become vibrant, full of (relatively) cheerful people with growing optimism. These days it seems as if Gogol is saying âI told you so.â The city with which he was more comfortable has returned.
I am not going to run though all of the reasons for economic gloom nor the depressing scenarios so beloved of Russiaâs critics. There can hardly be anybody living and working in Russia who is not familiar, and equally fed up with, the long list of problems. I will simply reflect on the fact that the economy performed relatively better in 2015 than had been expected (the good news) but also that the trend in the current quarter, and probably in the next quarter, remains downward (the bad news). The stark reality is that conditions for most people and most businesses are much more likely to get worse than to improve until the autumn.
The two key conditions for arresting the decline and creating conditions for recovery are a) a rally in the price of Brent to $40 per barrel or higher, and b) an easing, if not removal, of financial sector sanctions. The other sanctions donât matter. Until one, if not both, of those conditions are met the government will remain in damage limitation mode while avoiding, if not culling, investment programmes. There is a lot of increasingly credible discussion about creating new economic drivers in the economy and boosting industries outside of extractive industries, for example in agriculture and food production. But, being realistic about it, given the scale of what needs to be done, it will be many years before the results of any investment made today can start to improve the top line in the economy.
Meantime there are basically only two issues to pay attention to in terms of what will determine how long the economy remains in the current slump and how long it will be before optimism returns and passers-by can again dismiss Gogolâs restored smugness.
By far the greatest determinant of the roubleâs exchange rate is the oil price. The Central Bank stopped using itâs reserves to try and support the rouble in early 2015 and since then the correlation between the rouble and oil has mostly been very close. For the rouble to rally oil must recover. For that to happen there needs to be a reduction in supply. Saudi Arabia has made it clear that it is prepared to continue toughening out current conditions and will not cut supply. Instead it is waiting for the low oil price to cut into the output from its nemesis, the US shale industry. That is only happening slowly so far but it is reasonable to assume that an oil price average close to $30 per barrel will force more of the high cost producers to shut down in the coming months. A reduction in US shale output is, therefore, one of the key requirements for creating conditions to allow the oil price, and the rouble, to recover. It is always possible that OPECâs resolve will crack or that Iranian sanctions will be re-imposed or that some other unexpected event will cut supply. But, for now, where the rouble trades against other currencies depends mostly on what happens to US shale production.
The second issue is political stability in Kiev. Since the start of this year there has been greater engagement between Russia and both the US (in particular) and the EU with a view to progressing Minsk-II. It seems more and more that the critical factor may be President Poroshenkoâs ability to get the necessary legislation passed by an increasingly fractious and hostile Rada. Another, seemingly inevitable, political upheaval in Kiev will delay the process past the next sanctions review in July. The question may then be whether the US and EU will give Moscow credit for effort or whether sanctions will be extended into 2017? Damage limitation will remain the priority policy for the Kremlin until the Finance Ministry and the countryâs big corporations can again access international capital markets at competitive rates. That implies a continuation of muddle-through economics at best.
Demonic figures have long been a regular feature of Russian geo-politics and Russian literature. Apart from Bulgakovâs Master and Margarita, Gogol used this theme in Petersburg Stories, Dostoevsky in the Brothers Karamazov and Lermontov in The Demon. It is fitting somehow that the devil should also have had a role in Gogolâs death. Gogol blamed the devil for forcing him to burn the only manuscript of the second part of Dead Souls in February 1852, in the house next to where the statue sits today. He was so distraught at what he called the devilâs practical joke that he refused all food and water from that day and died nine days later. That was the trouble with Gogol; he took such events and comments far too personally. We can only hope that those in the big red house down the street are more pragmatic.