Streetwise Professor

May 27, 2010

Maintaining Equilibrium in the Natural State

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:50 pm

Roman Abramovich has been one of the favored oligarchs in Putin’s Russia.  But not even Abramovich is untouchable.  The Russian Federal Anti-Monopoly Service has announced an investigation of Abramovich’s Evraz steel company for “high monopoly-like pricing.” Steel consuming firms, notably car maker Avtovaz, railcar and tank manufacturer Uralvagonzavod, and Russian Railways have bridled at recent price rises.  Uralvagonzavod head Oleg Siyenko had taken his complaints to Igor Sechin. Siyenko has also called for export duties on steel (which would increase domestic supplies, thereby reducing prices). This follows FAS support for an export duty on potash due to price rises by Uralkali and Silvinit.

Such government interventions–which almost certainly require Putin’s consent, especially where somebody like Abramovich is involved–are an integral part of the operation of the natural state.  The natural state restricts competition and access in order to provide streams of rents to the rich and powerful, in order to purchase their support for the political order.  (Khodorkovsky’s great strategic error was to use his rents to challenge the status quo.)

This equilibrium is upset if the distribution of rents becomes too skewed.*  In the present instance, a recovering world commodity market has boosted demand for steel and potash.  At the same time, Russian domestic consuming industries have not benefited because they are not competitive internationally and are still suffering from the after effects of the economic crisis.  These shocks have unbalanced the distribution of rents, threatening the equilibrium in the natural state.  Matters are particularly delicate because Avtovaz and other big metal bashers are major employers; their continued financial troubles could threaten the delicate social order, already somewhat unsettled due to the Raspadskaya mine explosion (Raspadskaya being another Abramovich property).

So the government intervenes to maintain the balance and preserve the equilibrium.  This is the way the natural state works.

The use of export duties is particularly interesting.  As the steel and potash examples demonstrate, shocks to world commodity prices are a primary source of threats to the natural state equilibrium.  Some Russian raw material and semi-processed product industries are internationally competitive, and their fortunes wax and wane with the global economy.  (The energy industry is of course in this category, and is subject to export duties that are adjusted regularly, although this is in part done for fiscal reasons since these duties are a major source of government revenue.) In contrast, Russian material consumers are almost entirely dependent on the domestic market.  Thus, global demand shocks that help the raw material firms can have very adverse effects on the domestic consumers, requiring a reset to maintain balance.

This raises questions about whether Russia can really join the World Trade Organization.  WTO membership would constrain its ability to respond to global shocks so as to maintain the political equilibrium.  The natural state cannot tolerate truly open markets as these markets are destabilizing to the status quo.  Russia has indicated its intention to rejoin WTO talks, and Medvedev has expressed hope that the US will support its candidacy.  But given past Russian diffidence about the WTO, and Putin’s dalliance with a trade union of Russia, Belarus, and Kazakhstan, there is considerable doubt as to whether when push comes to shove the country will accede to the constraints that the WTO is likely to impose.

* Sam Peltzman’s famous article presenting a formal theory of regulation is useful in understanding these dynamics.  In Peltzman’s model, skewed profits under competitive conditions lead to regulation as politicians by political support through redistribution.

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  1. Speaking of Avtovaz, here’s one of the most horrifying news reports out of Russia that we’ve seen in quite some time:

    Comment by La Russophobe — May 28, 2010 @ 5:27 am

  2. Ah yes. Chinese who run slave labor camps with 800,000 inhabitants some of whom commit suicide in the IPhone factories deserve to be in the WTO, while those evil Russkies don’t. I love the hypocrisy here. What ‘constraints’ exactly has the WTO put on the Chinese? They didn’t like it when the Russians shut down Cherkizovsky market, what was that about respect for intellectual property and human rights? Oh I forgot, Russia doesn’t own $2 trillion in U.S. debt. End of discussion.

    Comment by Mr. X — May 30, 2010 @ 12:15 pm

  3. Mr. X–if you think I’m some kind of Sinophile, you’re more clueless than I thought. No hypocrisy here. BTW, WTO has nothing to do with human rights, for better or worse–just the way it is. And yes, it is pretty toothless when it comes to IP as well, although there are nagging disputes between the US and China on that issue, $2 trillion in debt notwithstanding. (That debt, BTW, makes the US and China co-dependents, with all the dysfunction that implies.) But WTO does make it more difficult for member countries to utilize import and export taxes of the type that Russia jiggers with to do its rent balancing, which is essential to maintaining the natural state.

    The ProfessorComment by The Professor — May 30, 2010 @ 2:16 pm

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