The next victim of the ruble's decline could be Eurasian integration
By Christopher Hartwell
RUSSIA DIRECT, December 16.
While Russia's Central Bank increased its key interest rate to 17 percent, t
Kazakhstan has had somewhat more prudence, even if its deficit to GDP is higher than Russia, but it too is reliant on oil to keep state coffers full. Thus, fiscal woes have led to the need to resort to monetary and exchange rate machinations, which has in turn exposed fissures in the Eurasian Union relationship.Of course, exchange rate movements have real (if evanescent) consequences for a country, and especially if they have become more tightly integrated. Kazakhstan relies on Russia for 40 percent of its imports, meaning that consistent depreciation from Russia was bound to mean higher relative prices for Kazakh consumers. With Russia and Kazakhstan actually actively seeking to become more tightly bound, these diverging monetary policies create exactly the sort of centrifugal forces that can tear an economic union apart. Unfortunately, coming back to the reliance on oil, the monetary and exchange rate woes that are causing Kazakhstan and Russia to diverge are also part of the fiscal divergence of the two countries. .
Knowing this, it is time for Russia’s economic leadership to tackle the real issues that are harming the Russian economy. Focusing on the exchange rate is a decoy, a mere symptom of a deeper underlying problem. The Kremlin must rein in spending, avoid prestige projects and resist the temptation to focus on a burst of new military spending. Instead, the Kremlin should leave productive resources in the hands of the private sector, improve the business environment, cut red tape, and reduce the size of government.