Streetwise Professor

August 11, 2010

Real Change is Hard. Propaganda is Easy.

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:40 pm

Russia has ambitions of turning Moscow into a world financial center.  Proving that old habits die hard, rather than do the heavy lifting that would be required to achieve that objective–e.g., eliminating raiding, strengthening property rights, improving disclosure and transparency, bolstering minority shareholder protections, etc. (the list is very long)–the economic development ministry is recommending the Potemkin approach.  Or, to characterize it a little differently, a Soviet propaganda approach.  Literally:

According to a copy of the proposal [from the ministry] seen by Vedomosti newspaper, the economic development ministry believes Russia should create a multi-lingual internet portal to showcase Russia’s “history of success”. [What history is being referred to exactly?  Could be a pretty small website.]  The resulting campaign should draw not just upon global examples, but Russia’s previous propaganda efforts during the Soviet era, the proposal states.  [Emphasis added.]

After all, propaganda is easy; it might gull a few suckers who can be fleeced; and it does not require the implementation of reforms that would constrain the ability of the insiders to tunnel out vast sums.

To get an idea of how the game is rigged in favor of the insiders, consider the following story about the bidding process for the last large undeveloped oil property in the country:

Russia has finally set a date to auction off its last unalloted big oilfields, but analyst say the terms it set out for a potential buyer make the deposit difficult to use and develop.

. . . .

But analysts believe that the terms of the ownership, including obligations to sell 15 percent of produced crude through the oil exchange and to refine 42 percent of crude produced, can spook off the potential buyers.

“The proposed terms complicate the project significantly…. Crude exports will primarily go through the Northern Sea route, while the bulk of the refining complex is located in the European part of Russia.,” VTB Capital analysts said in a note on Wednesday.

“With additional transportation costs implied, as well as the lack of exchange trading for crude oil, the economics of the project could suffer as a result of the conditions which have been imposed.

Uralsib analysts believe that due to these conditions, Russia‘s largest oil producer, state-owned Rosneft, is a frontrunner in the tug-of-war for the fields. [Emphasis added.]

The conditions are heavily tilted to favor Rosneft.  I’m shocked! Shocked!

Russia has a choice.  It can continue to operate a system that funnels rents to the powerful.  It can create a system that protects investors and limits the pervasive corruption, rent seeking, and favoritism in order to attract investment.  It can’t do both.  All the neo-Soviet propaganda in the world can’t change that.  Any fool that falls for the propaganda deserves to lose everything–and probably will.

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  3. Moscow is already a country within a country. It doesn’t need to be yet another centre of something or other. It may work in a country the size of UK, but not Russia. The financial and political capitals should be different cities.

    Comment by So? — August 12, 2010 @ 8:12 am

  4. SWP: Nice link from the WSJ!

    Russia has another choice, it can have the KGB or it can have a successful future. It can’t have both.

    Comment by La Russophobe — August 12, 2010 @ 8:22 pm

  5. Thanks, LR. And the KGB thing is the essence of the system that funnels rents to the powerful.

    The ProfessorComment by The Professor — August 12, 2010 @ 8:39 pm

  6. Again, no allowance for cultural differences.

    Propaganda has neutral to positive connotations in Russian (e.g. “propagandizing” the benefits of non-smoking is an uncontroversial phrase), but has a decidedly negative one in the Anglosphere.

    The cultural quirks of the latter shouldn’t be directly applied to the former.

    Comment by Sublime Oblivion — August 14, 2010 @ 2:52 am

  7. “Again, no allowance for cultural differences.”

    Isn’t that what the racist regime in South Africa said to the divestment movement?

    Comment by La Russophobe — August 14, 2010 @ 6:37 am

  8. no chance until there is a rule of law on Coase principles. China has no chance either. Shanghai will not replace Hong Kong anytime soon. The sheer mass of indigenous wealth will make it look like a center. But Hong Kong and Singapore will reign in the short run.

    Comment by Jeffrey Carter — August 14, 2010 @ 8:33 am

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