Putin Interventions Will Slow the Russian Economy

As the oil price falls, Russian President Vladimir Putin has issued a number of directives aimed at the economic sector, none of them good.

It is always best, when there are changes in an economy, to allow markets to adjust to the new situation and limit, or even better, reverse government meddling in the economy.

Putin does not appear to be consistently applying such a hands off approach.

He has, for example, ordered a freeze on vodka prices. As any first year college student of economics knows, price controls only lead to shortages and the development of black markets. Not good.

Under the watchful eye of Putin, the Bank of Russia also has bailed out a mid-sized bank for about $500 million to save it from bankruptcy. The central bank, headed by Elvira Nabiullina, a close confidant of Putin,  has announced it will provide a 30-billion ruble loan to help the Trust Bank to continue operating as normal. Again, not good. The quickest way to turn around an economy that suffers from the misallocation  of capital, which is what a problem bank is indicative of,  is to allow the liquidation of such bad banksand  investments, not to prop up such banks, and investments, by throwing good money after bad.

Nabiullina seems to understand this point, as I pointed out in an earlier post. The Russian people should hope that this bailout is some kind of an outlier event that resulted because of unique pressures, but that is unlikely to be repeated. Though it does seem that more propping up, of various sorts, will take place. In a statement published on Wednesday, the Bank of Russia said it would lend dollars and euros to banks putting up foreign currency loans to big exporters as collateral. This is another interventionist move that certainly has limits, since the Russian central bank does not have an unlimited amount of foreign reserves to do such lending. All this is doing is shrinking the reserves backing the ruble, not a good thing at any time, but certainly not a good thing when the ruble is crashing on foreign exchange markets.

The moves by Putin still do not seem to be as dramatic as what occurred in the United States by the US government, in the aftermath of the 2008 financial crisis, but the Putin moves are certainly going in the wrong direction.

The more interventionist Putin gets, the worse it will be for the Russian economy in the long run. The Russian people should hope that Elvira can talk some sense into him.

Reprinted with permission from Economic Policy Journal.

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