There are indeed parallels between the financial crises of 1998 and 2015, especially when taking into account the structure of the Russian economy and the nation’s sensitivity to world energy prices.
Currency exchange rates on display at Moscow banks on August 26. Photo: RIA Novosti
For a very different take read: "Is August 2015 really black for Russia?"
Regardless of the superficial analogies, the crisis in the Russian economy in August 2015 is quite different from the ill-fated August of 1998, which is indelibly printed in the minds of many Russians.
Some of the differences are positive. For instance, Russian business and statehood today are coping far better with the currency risks. The country's national debt is negligible, and there is no fear of default. The fact that the government is consciously avoiding building up a large budget deficit indicates that many of the lessons of August 1998 have been learned.
But other, far from trifling differences between the two Augusts are less encouraging. In 1998 Russia was caught in the grip of a crisis sweeping through most developing countries, whereas today it faces recession, ruble devaluation and falling incomes virtually in isolation. And the decline in oil prices (which in 1998 were several times lower than today) is much more painful for the Russian economy this time around.
Falling oil prices triggered both crises, so there are indeed parallels to be drawn between 1998 and 2015. The Russian economy is still non-diversified and critically dependent on exports of hydrocarbons. Both then and now, Russian officials talk long and hard about the need for structural reforms, but do very little to actually improve economic performance.
In particular, Russia's recent rapid ascent in the Doing Business rating by the World Bank has had no effect on bricks-and-mortar businesses. The already meager foreign investment in the country is shrinking drastically. The proverbial "sacred ground" turns out to be far from sacred: investors from abroad are constantly faced with regulatory restrictions, and even big names, such as Auchan, BP or Oriflame, are not immune from problems with Russia's regulators and courts.
The Kremlin's new take on foreign policy has only exacerbated the structural crisis in the economy. The exodus of automobile companies from Russia this year has been followed by the departure of foreign financial institutions and manufacturers of car components. And what can be said about foreign investment when even domestic investors are loath to inject capital? 2015 is the eighth consecutive year to see a net outflow of private capital from Russia.
The Russian government's foreign trade strategy is also failing in practice. The much-vaunted "pivot to the East" has yielded little so far. Contrary to official expectations, the Asian financial markets were no ready replacement for dried-up sources of Western funding; the Russian leadership's pet pipeline projects are on the skids; and trade with China in the first half of this year fell by a third, whereupon the economic problems of both countries do not augur well for recovery.
What's more, the so-called policy of "import substitution" is, according to research published by Moody's, no more than a bluff. That is hardly coincidental: successful import substitution requires modern production facilities, trained manpower and high-quality raw materials. Even in the few cases where these preconditions are met, falling demand and financial constraints are making it virtually impossible to fill market niches liberated by "counter-sanctions."
In reality, "substitution" often means "substandard." Imported cheese is not being replaced by domestic products of similar quality, but by surrogates made of palm oil (unbiased statistics report that imports of this ingredient to Russia are up by a third).
"Counter-sanctions" are costing the country dearly. Russian television savors the not-so-obvious losses of foreign farmers (which are largely compensated for in other markets), but for some reason remains silent on the all-too-obvious losses of blameless domestic businesses, which have built up relations with foreign partners over a period of many years only to see them wrecked.
In turn, ordinary Russians are bearing the brunt of the asymmetric restrictive measures imposed by the Russian government, paying an inflationary premium on food prices while being offered less choice.
Import substitution as an economic strategy belongs to the 18th century, not the 21st. Self-respecting countries these days do not try to produce everything domestically (not only is it inefficient, but also impossible); rather they focus on their competitive advantages, i.e. what they do best.
Despite the huge influx of petrodollars over the past decade, Russia has not managed to carry out effective reforms and diversify its economy through developing competitive areas other than raw materials. On the threshold of new economic uncertainties facing the country, that fact is nothing if not disquieting.