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Streetwise Professor

November 18, 2008

Apropos the Ongoing Debate

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

A very nice and spirited interchange going on in the comments.     This article in the Telegraph speaks to many of the issues under discussion.

Regarding the apparent nonchalance of the Russian populace to the ongoing crisis, the Telegraphs says:

Subjected to more than a century of propaganda masquerading as news, Russians often seem to live in a different reality from the rest of us.

And sure enough, at a time when their country is locked in its worst financial crisis in a decade, they are more optimistic about the economy than they have ever been. According to opinion polls, 57 per cent reckon it is flourishing, up from 53 per cent in July.

The survey’s findings are a triumph for the state, proving that the Kremlin has not lost its touch when it comes to manipulating fact. Obeying orders from the top, Russian television has banned the use of words such as “crisis”, “decline” and “devaluation”. Coverage of the mayhem in the country’s stock market, where shares have fallen by 75 per cent since August, is scant.

Instead, just as in Soviet times, Russians are told how bad everything is in the West. The US, Russians are told, is in irreversible decline, while desperate Britons are throwing themselves into the Thames. The Queen, facing imminent penury, has been forced to pawn her diamonds and, according to one tabloid front page, we can no longer afford to bury our dead.

It has fallen to Russia, one television commentator gravely intoned, to come to the rescue of Europe. Russia, another newspaper declared, was set to become the continent’s lender of last resort.

Objectively, there is no possible basis for increased economic optimism, either here in the US, or in Europe, or in Russia.   One may not think that things (and the future) are as bad as I or others have postulated, but it is utterly delusional to think that the Russian economy is doing better now than in July.   Utterly.     As the article says (echoing things I’ve written before–eliciting Timothy’s dissent), this is a testament to the government’s information/propaganda strategy.   It also says something about Russians.   But it is consistent with Timothy’s assertion that most Russians are blithely unconcerned with the financial situation.

That’s where we part company.   I can believe that lulled by a steady drumbeat of nationalist crowing and economic propaganda, they are unconcerned now, but this is not sustainable indefinitely, as propaganda can hide economic reality for only so long.   If things do not improve, or especially if they worsen, (the most likely outcomes in the coming months), the government’s “who you gonna believe, Vlad or your lyin’ eyes?” strategy will fail.   Cognitive dissonance can only be pushed so far.     That’s why (contra Timothy) I consider this to be a very high risk strategy.   If it doesn’t work, the backlash will be intense.

Russians have often been described as possessing two natures–usually inert and passive and supportive of authority, but capable of wild, violent, and anarchic outbursts when disillusioned with that authority.   They are in the inert/passive/supportive phase now.   But will they stay there when the realization dawns that however battered the US is, Russia has suffered far more damage?   I doubt it.

The article also discusses the machinations over the Constitution and the presidency.   In WWMD (“What Would   Machiavelli Do”) (hundreds of posts ago!   whoda thunk?)   I postulated that Putin would find some way to hang onto the formal powers of the presidency.   I was wrong–then.   My post-mortem was that Putin figured that he could maintain sufficient control from the White House that he did not need to take the draconian step of changing the Constitution.   This would have, among other things, cost Putin and Russia diplomatically.

But that decision was made when things were breaking Putin’s–and Russia’s–way.   Commodity prices were high and going higher.   The government was swimming in money, and the perceived leverage derived from its energy resources at a time when the world was panicking about energy supplies.     Those conditions reduced the strains on the country’s political equilibrium.   There were a lot of rents to distribute to keep everybody happy.   This reduced the necessity of taking the potentially controversial step of modifying the supposedly sacrosanct Constitution.

The worm, as they say, has turned.   The energy rents are a thing of the past–and only a hope for the future.   As the article notes (echoing SWP):

The Kremlin has always been heavily factionalised, with rival groups competing for control of Russia’s lucrative energy and metals companies. As Russia’s economy boomed after 1999, Mr Putin was able to maintain a veneer of unity between these factions, many of which acquired their fortunes during the carve-up of state assets in the 1990s, and protected them ruthlessly. But with oil and commodity prices plunging, there are no longer enough spoils to go round.

Russia’s biggest businessmen owe Western banks more than $500 billion, borrowed using stock as collateral. The fall in share prices has triggered a wave of margin calls, prompting many banks to call in their loans. The state has promised $50 billion to rescue the oligarchs as part of a $200 billion bail-out – but not all will be saved.

For Mr Putin, the crisis provides plenty of opportunities that he could take advantage of. Assets that were privatised in the 1990s will again come under the control of the Kremlin and can be palmed out to his closest allies. The oligarchs who are allowed to survive will be bound to him even more closely.

At the same time, the risk of internecine warfare among these powerful individuals is high and could destabilise Russia. There was a whiff of the potential danger last year, when contract killings rose dramatically amid uncertainty over Mr Putin’s future.

Dmitry Oreshkin makes similar points in Monday’s Moscow Times.

Under these circumstances, the diumvirate is a far chancier proposition than it was before.   What’s more, Putin and Mededev pretty much shot their international   image and cred with their excellent Georgian/Ossetian adventure, and Western governments are distracted by other issues, so the diplomatic cost of Constitutional legendermain that magically returns Putin to the presidency is far lower than it would have been in late-2007 or early-2008.

Of course, maybe I’m wrong, and this isn’t a maneuver to return Putin to the presidency sooner rather than later.   If I am, I will have a good deal of company–as virtually nobody other than Kremlin puppets believes otherwise.     At the very least, it is giving Putin an option.   If things continue to go pear shaped, he can swoop in and “save the country.”   If problems ease–well, Medvedev can keep the chair warm for a little while longer.

One thing in the article that caught my eye, and which I found not completely credible, is this:

There is compelling evidence that the crisis has started affecting ordinary people. The middle class has shrunk from 25 per cent of the population to 18 per cent in the past few months alone.

This is a dramatic figure (a greater than 25 percent decline in the “middle class”).   So dramatic that I take it with a grain of salt.   It would be interesting to know the basis for this figure.

In sum, I agree with this article’s assessment (and Oreshkin’s and others’) that there is a substantial risk (not a certainty) of serious political and civil turmoil in Russia as the full effects of the financial crisis set in.   Political machinations and propaganda can buy time, but they can’t change economic realities.   The higher the expectations–and the polling evidence from the article suggests that the expectations have actually become rosier–the greater the disillusionment and anger that will result when those expectations and hopes are dashed.   The delicate political balance in the country, and the prominence of those comfortable with the use of violence, and expert in its use make it vulnerable to large shocks.   And the ongoing world financial crisis, and its dire implications for the prices of natural resources and the economic health of a country acutely dependent on such resources is a very large shock indeed.

For these reasons, the poll evidence cited in the article actually leads me to increase my estimate of the probability of a political crisis and civil unrest.

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1 Comment »

  1. It seems that Mr. Post himself is lulled by a certain drumbeat . . . the same one that lulled Jack Reed. I wonder if his fate will be any different from that of Reed. I think not.

    I must say it’s delightful watching a masterful scholar dismantle the addled nincompoops who scurry like cockroaches at the feet of Vladimir Putin. History will record their nefarious misdeeds and squash them like the insects they are. Unfortunately, it’s quite likely that the whole of Russia including many innocent children will go right down with them.

    Comment by La Russophobe — November 19, 2008 @ 1:52 pm

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