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Russian Crisis Acquires New Dimension

Posted By Yevgeny Volk On December 22, 2008 @ 2:49 pm In Ongoing Priorities | Comments Disabled

Russian motorists rally (Photo by Valery Sharifulin/Newscom)

The crisis in Russia is revealing new features proving it is quite unlike the global downturn. Last week saw numerous actions protesting a hike in import duties on foreign cars that were staged in an array of Russian provinces. The government had passed a decision to the effect to protect domestic carmakers. This dealt a massive blow to many provinces. The truth is that auto making is localized in Russia’s European area, and shipping cars to Siberia and the Far East racks up their sales price, especially at the backdrop of cheaper and higher-quality Japanese cars. The most massive protests took place in Vladivostok where Japanese cars are prevalent.

The protests were quite vocal: their participants blocked traffic on the city’s main thoroughfares and attempted to capture the airport. They did not confine themselves to economic demands but called for the government to step down. Similar protests were staged in other cities, Moscow inclusive.

Prime Minister Vladimir Putin has taken unprecedented steps to assuage those protesting duty hikes on foreign cars. He offered to pay Russian Railways out of the federal budget to cover the costs of shipping the cars to the Far East. This measure would hit the taxpayer’s pocket hard but is no guarantee consumers would choose cheaper Russian Ladas over Japanese Toyotas. Protests are unlikely to end any time soon.

Small wonder, the government instructed law enforcers to crack down on protesters. The riot police unit Zubr (Russian for Bison) based in the Moscow Province was rushed to Vladivostok. This Interior Ministry’s elite unit is reported to have been established on the chance of a color revolution in Russia. It looks like Putin is seriously concerned over the rising tide of protest and seeks to nip it in the bud to prevent it engulfing the entire country.

The decision to cut oil production to arrest the further drop in crude prices is one in an array of the government’s moves to combat the crisis. Deputy Prime Minister Igor Sechin unveiled it at OPEC’s Algeria Summit. Moscow is stepping up its coordination with this oil cartel. While OPEC has agreed to a 2-million-bpd cut as of January 1, Russia is going to cut its crude output by 0.5 million bpd. Thus far, Moscow is unprepared to commit itself to joining forces with OPEC, choosing to play independently instead.

Russian oil majors are disaffected with the government’s oil production tax policy. Thus far, the Russian Cabinet has been unwilling to offer clear-cut guarantees that it would approve tax breaks for oilmen any time soon. But the oil companies are demanding immediate cuts on oil export duty and in natural resources tax for the next two years. It looks like the Cabinet members do not believe the oil–price fall will be protracted, and expect a favorable oil world market situation to promptly make its comeback.

Irrespective of the government’s efforts, a dramatic plunge in industrial output is ongoing in Russia. Last November saw the 8.7% drop in production, while December is to witness a 19% slide. The scope of the present economic downturn tops that of the 1998-1999. The production of coke, cellulose, mineral fertilizers, ferrous metals and output in some areas of mechanical engineering and machine-tool manufacturing has suffered the most serious losses of nearly 30 percent. The government’s measures to support these industries have been unsuccessful, so far.


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