The scale of capital outflows leaves the Russian government in a quandary. The central bank has already raised interest rates by 150 basis points to prevent a collapse of the rouble, but this is choking the economy.
“If rates stay this high for another two or three months, there will be serious trouble,” said Mr Pawlowski. “There is no free-lunch. You can defend your currency, but if you do that you wreck your economy,” said Mr Pawlowski.
While Russia’s reserves of $494bn are enough to defend the rouble, the central bank cannot easily deploy this money in a recession since foreign exchange intervention entails monetary tightening. The money supply collapsed in 2009 when it ran down reserves by almost $200bn to slow the slide of the currency.
Yet it is risky for the authorities to let the rouble keep falling since Russian banks and companies owe $650bn in foreign currencies, of which an estimated $155bn must be refinanced over the twelve months.
The rouble has already fallen 11pc this year. It is becoming ever harder for struggling Russian companies to repay dollar debts.
That interesting thing being that if you’re going to have an open market economy then you’ve actually got to have an open market economy.
Sure, you can have an autarkic and not very market economy which allows you to get up to pretty much whatever you want to. Much as Tony Benn (and to some extent today, Ritchie) argued for. But if you want to get that foreign capital, that trade, that makes everyone so much richer then you’ve got to keep playing by those open and free market rules. There really is a choice here but it’s an either or choice.
What you don’t get to do is take advantage of the foreign capital and the trade and then start playing silly buggers with any part of the overall system.
Worth noting that much of the left’s hatred of things like the Washington Consensus is exactly because it is making very much the same point. Yup, you do indeed give up many of the opportunities for social engineering by opening up the economy. It’s worth it because of the wealth that is then generated: the left, perhaps implicitly, insisting that the social engineering is far more important than any mere wealth creation.