Why Russians fear August
(Business New Europe – bne.eu – Chris Weafer of Macro-Advisory – July 10, 2015)
As we all know only too well, winters are long and cold in Russia while summers are relatively short but quite pleasant. Once Easter has passed, people start marking the calendar until they can throw off their winter armour and re-open their dachas. August is the main vacation month and should, therefore, be the most eagerly anticipated month of the year.
But, as with many issues in Russia, all is not what it seems even when it comes to what should be the most carefree of the 12 months. In fact people approach August with almost a sense of dread. It is a case of “if something bad is going to happen it is more likely to happen in August”. History certainly confirms that to be less of a paranoia and more a precedent-based reality.
In recent memory there have been a number of accidents and disasters which are firmly rooted in people’s memory and which add to the August phobia. These are some of those episodes:
In August 1998 Russia defaulted on its domestic debt. That led to a complete collapse in the capital markets and the RTS equity index reaching an all-time low of 38.5 on October 5th. Foreign investors exited Russia in 1998 and, apart from trading funds, did not return until 2004. It piled misery onto an already depressed economy and left a legacy of fear about ruble volatility and suspicion about banks for many years.
August can also be an accident-filled month, such as in August 2000 when there were a number of serious accidents including the sinking of the Kursk submarine and a fatal fire in Moscow’s landmark Ostankino TV tower. In August 2006, 170 people died in an airplane crash on a flight from the Black Sea resort of Anapa to St. Petersburg. In August 2005 the first case of bird (avian) flu was reported and while thankfully that did not develop as had been feared, it did lead to a sense of heightened concern for the month. In August 2009 one of the country’s largest hydro-power stations suffered a catastrophic explosion in which 75 people died.
August is also associated with various acts of terrorism. In August 2004 the country was rocked with a series of terrorist actions including a car bombing in Moscow and the destruction of two passenger aircraft. A thoroughly miserable and fear-filled month was rounded off with one of the biggest tragedies to hit post-war Russia when terrorists took over the school in Beslan in southern Russia with such tragic consequences.
Even when such serious tragedies are avoided the weather can often be less of a positive contributor to the vacation season and pile on its share of misery. In August 2002 widespread fires raged in the peatlands around Moscow and blanketed the city in a nasty and health-damaging haze. August 2013 brought very destructive flooding to much of Russia’s Far East, which led to both expensive economic disruption and loss of life. The worst weather-related disruption, however, came in August 2010 when large swathes of the country were hit with high temperatures and forest fires. That combination contributed to drought conditions across much of the farming belt and led to a big drop in the year’s harvest.
August surprises are not only confined to domestic events as events in 2008 and again last year proved. The Russia-Georgian war took place in August 2008 and, along with the rapidly declining oil price, led to an acceleration in capital flight and a loss of investment. The oil price decline was the more important of these events but the war headlines certainly added to the negative pressure.
August 2014 saw the step-up in western sanctions against Russia and, in particular, the damaging block on access to western debt and credits. Later that month Moscow retaliated with a ban on some food items from the EU and other western countries and that directly contributed to the high level of inflation, especially food price inflation, through the winter months. Here again the ratcheting up of sanctions took place just as the oil price started to roll over very sharply, in late August, so it is impossible to allocate the damage between sanctions and oil price weakness. Both have certainly hurt.
Apart from accidents and terrorism August is also a month when events with a significant and lasting legacy can take place. Most notable was the first appearance of Vladimir Putin in a high-profile political role when he was appointed prime minister in August 1999. That was the month when we saw the precursor of the second Chechnya War. On August 2nd the Islamic International Brigade (IIB) invaded the neighboring Russian republic of Dagestan, in support of the Shura of Dagestan separatist rebels. The war ended with a Russian victory and the retreat of the IIB. The following month the apartment block bombings in Moscow were blamed on the IIB and the war formally started.
Even in relatively quiet Augusts, of which there have been very few over the past fifteen years, there is always something noteworthy or just odd. In August 2001 the North Korean leader, Kim Jong IL, visited Moscow. But because of his fear of flying he rode his private train across Russia and caused havoc to passenger services. Such was the frustration of the inconvenienced people that when the train arrived at a Moscow station there were multiple bullet holes clearly visible on the side of the train. In August 2007 a group of nationalist politicians paid for a mini-sub to take them to the floor of the Arctic where they planted a Russian flag in support of the country’s claim to sovereignty over the Lomonosov Ridge.
Rounding off the sequence of memorable events which have had a lasting impact on the country and the economy, in August 2012 Russia was finally admitted into the World Trade Organisation (WTO) after almost 19 years of negotiations. In August 2003 BP-TNK was created and apart from being the biggest foreign investment in Russia at that point it also created a great deal of continuing controversy until it was finally acquired by Rosneft in 2013. In August 2011 the so-called Golden Welds were made to the Nordstream gas pipeline and that marked the completion of the first major new gas pipe into Europe which by-passed Ukraine and Belarus.
Not wishing to leave you with the impression that the August syndrome only started in 1998, Russia’s history is filled with events which had a significant legacy impact on the country. The effect dates back to, e.g. August 1530 when Tsar Ivan the Terrible was born in August that year. In the last century Russia entered World War I in August 1914 and declared war on Japan in August 1945 which, technically, still continues. The Molotov-Ribbentrop Pact was signed in August 1939 and the start of the construction of the Berlin Wall was in August 1961. Soviet troops entered Prague in August 1968 and, in August 1991, there as an attempted coup against Gorbachev by those looking to prevent the ending of the Soviet Union.
It is tempting to blame the relaxed mood and high temperatures for the spate of accidents and, possibly, the distraction of holidays as to why political and terrorist actions take place so often in August. But that is probably not valid given the sheer diversity of notable events which have occurred in this particular month.
And it is also wrong to point at these events as all negative. The various accidents led to long overdue changes and safety improvements and, after the 2009 dam explosion, a national debate over the poor state of the country’s infrastructure. The drought of August 2010 led to the awareness of Russia’s vulnerability in such basic areas as food production and is the origin of the import substitution debate which received such a major boost after last year’s sanctions.
Finally, to reinforce the message that sometimes August events can have a positive legacy and can create an opportunity; consider this: if you had invested $10,000 in Sberbank shares during the default of 1998 and sold them 10 years later you would have pocketed a profit well in excess of $1mn. Be lucky.
[featured image is file photo]