Moscow explosions: a small blip or long-term drag on the Russian economy?
The terrorism behind the Moscow subway explosions could become an economic drag on the Russian economy if it changes perceptions of security risks in Russia; research shows that a sustained low-level terror campaign can raise long-term security concerns and hurt economic growth more than even a very dramatic single event: the 9/11 terror attacks punctured America’s sense of domestic security in a single day, but nevertheless, a year after the attacks, the U.S. economy was growing again; on the other hand, two decades of Basque terrorist activity in Spain — activity which caused far fewer fatalities than 9/11 — created a 10 percent drop in per capita gross domestic product in that area of Spain
The Moscow subway explosions will have a short-term economic impact as Russia’s capital city recovers from the twin suicide bombings. The long-term economic impact of the terrorist bombings depends crucially on what happens next and how the Russian public interprets it.
The Christian Science Monitor’s Laurent Belsie writes that if Russian authorities can prevent further attacks, then Monday’s bombings will probably not cause much of a blip in Russia’s economy. If, however, the explosions mark the beginning of a long and deadly terrorist campaign, that could dampen Russia’s economic growth, research shows.
“There is quite a lot of evidence that terrorist attacks affect economic activity, but in particular ways,” says Alberto Abadie, a public policy professor at Harvard’s Kennedy School of Government. The key is public perception, he adds.
The bombings were timed for maximum impact: during Monday’s morning rush hour at two subway stations in central Moscow.
Belsie writes that by themselves, Monday’s attacks are unlikely to change security perceptions. The Moscow subway system, one of the world’s largest, has been attacked before: four times since 2000. Both subway stations were open again by the evening rush hour, according to news reports.
There also appears to be a law of diminishing returns to these attacks. The 2004 bombing in the Madrid subway, which resulted in 191 fatalities, caused America’s Standard & Poor’s 500 index to fall 1.5 percent that day. When the London subway bombing occurred the following year, the index actually rose a little. On Monday, the S&P was up slightly.
Even Moscow’s stock index — the MICEX — rose on Monday and the ruble stayed stable.
Belsie notes that sometimes, a single dramatic terrorist event can throw economies for a loop. The 9/11 terror attacks punctured America’s sense of domestic security in a single day. Nevertheless, a year after the attacks, the U.S. economy was growing again. For example, five years after the attacks, security concerns in Chicago about the terrorist threat to the city’s skyscrapers was beginning to recede. Office vacancy rates in the immediate vicinity of its three tallest buildings, which had nearly doubled in comparison with other downtown offices, were falling again, according to a study by Professor Abadie and coauthor Sofia Dermisi (see Alberto Abadie and Sofia Dermisi, “Is Terrorism Eroding Agglomeration Economies in Central Business Districts? Lessons from the Office Real Estate Market in Downtown Chicago,” Journal of Urban Economics 64 (2008): 451-63).
The question for Russia is what Monday’s bombings signal: a one-off event or the beginning of a long campaign. Perceptions will play a key role, Abadie says. “What is going to happen … depends on how people are going to interpret it.”
