Streetwise Professor

October 31, 2007

Chinese Gasoline Price Controls and the Demand for Oil

Filed under: Commodities,Energy,Politics — The Professor @ 10:04 am

This somewhat goofy article from Slate does contain something of interest:

China’s CPI rose 6.5 percent between August 2006 and August 2007, thanks in part to an 18.2 percent year-over-year increase in the price of food. Beijing has responded in part by telling government officials not to use the word inflation. But it is also taking action. The International Herald Tribune reported that China hasn’t permitted gasoline prices to rise since May 2006, when oil was about $70 per barrel. (Yesterday, oil closed at nearly $94 per barrel.) And in September, China froze prices on certain household staples.

The unanswered question here is how the price control is being managed. I didn’t notice any gas lines in Beijing when I visited there this summer, and haven’t read any stories about shortages. This suggests that refiners’ (e.g., Sinopec, CNPC) purchases of crude are being subsidized, or the refiners are being forced to produce sufficient gasoline to meet demand at the artificially low controlled price. If either is the case, there is some positive feedback going on here that is contributing to the higher world oil price. If either through subsidy or compulsion refiners are satisfying the excessive quantity of gasoline demanded (relative to the efficient quantity) at the artificially low price, the price control is contributing to an increase in the world demand for oil, thereby increasing the world oil price. That is, the price control on gasoline encourages consumption, bumping up world demand for oil, leading to higher prices.

Price controls on gasoline are not uncommon–I have read about such controls being in effect in Iran and Iraq, for instance, and would not be surprised if they were quite common. How these effect the world oil price depends on how the controls are implemented. If they reduce the incentive to refine crude into gasoline, because they are not offset by subsidies to refiners or forcing refiners to incur losses while supplying the excessive quantity demanded at the artificially low price, then these controls tend to reduce demand for crude and restrain prices. If, on the other hand, through subsidy or compulsion refiners are induced to meet the excessive quantity of gasoline demanded at the artificially low price, the price controls perversely increase the demand for crude, and thereby raise prices that consumers in non-price controlled countries pay.

Russian Military Reform in Kommersant

Filed under: Military,Politics,Russia — The Professor @ 8:46 am

Kommersant recently ran an interesting article on the progress–or not–of Russia’s military reform efforts. The overall conclusions of the article are similar to what I’ve written about recently (based on other reports).

clipped from:

Army Reform
Looking back on eight years of the Russian army reform

Kommersant Vlast continues a series of publications to examine the evolution of different aspects of the Russian society in the past eight years. Experts from the Institute for Economies in Transition Vitaly Tsimbal and Vasily Zatsepin give their evaluation on the way the army reform was carried out and what it has achieved.

Vladimir Putin had just assumed presidential powers on December 31, 1999, when he flew to North Caucasus which was raged by hostilities. The move clearly showed support for armed forces as a priority in Mr. Putin’s policies. It is therefore no surprising that the president invited military men to the reception to celebrate his 55th birthday: “I wanted to be today with people who I deeply respect, and I appreciate everything that you and your subordinates did in the recent years to revive the army and Russia.”

Vladimir Putin repeatedly underscored it during his first years in office that the war in Chechnya had shown that Russia’s national security is facing dramatically new challenges. He spoke about international terrorism that got support from abroad and challenged the country’s territorial integrity. Russians were used to the thought that the Soviet army is one of the two strongest armed forces in the world, and its inability to cope with the Chechen crisis was a distressing sight for the society as well as for President Putin. “To give an effective answer to terrorists we had to gather a grouping of no less than 65,000 people while the whole alert and forces were manned with 55,000 and scattered across the country,” the president said in an annual address to the Federal Assembly in 2006. “The army had 1.4 million people, but we had no people able to fight. So that’s why we would send inexperienced lads under bullets.” The army’s structure and condition was unable to deal with current tasks and once again underlined the need of an army reform.

In his report on the army reform to Russian Parliament in 2006 the president outlined recruitment and equipment as two chief areas of the reform. President Putin also spoke about recruitment and equipment at the reception celebrating his birthday. Recruitment is also the acutest issue for the society as it encompasses conscription which affects most Russian families. The equipment are is a priority for generals and military industry.

The transfer to a contract-based army has been discussed since the early 1990s. The idea was supported by the Supreme Council and the Russian president back in 1992. Vladimir Putin was personally considering suggestions on the transfer. The move was directly opposed by the military. In 2003, General Staff Gen. Vasily Smirnov said in an article that the country is in for “a planned gradual increase of a number of contract soldiers in military units on constant alert” but “other military ranks of soldiers, sailors, sergeants and first sergeants are supposed to be replaced by military men who do their military service under conscription.” In other words, conscription should stay for good, according to the generals. A program of manning selected units and the border service by contract soldiers was adopted in 2003 as a compromise with the military. Conscription was preserved in Interior Ministry troops although it was cut down dramatically. It was also agreed to aim to decrease the conscription term to one year on January 1, 2008.

Results of such largely limited transfer to a contract-based army are still contentious. Recruiting contract soldiers for military units is still going slowing and abundant in violations of the soldiers’ rights. The advertised remunerations often turn out to be inadequate. In some cases soldiers are forced to sign contracts with the army. When the program started the Russian army had 155,000 contract soldiers and sergeants. Their number will grow to 244,000 by the end of 2007 against the 280,000 which was planned five years ago.

Re-equipment of the army became the second key area of the army reform that the president outlined back in 2006. The president included the 2007-2015 State Armament Program into the country’s strategic development plan. The blueprint, however, took a lot of time to be drafted and adopted. It was going around different agencies back in November 2005 but the president signed in only one year later. As the program was drafted, the silovikis had to restrain their appetites which initially exceeded the state coffers’ capacity by 7 trillion rubles, the Defense Ministry admitted. The final draft allocated 5 trillion rubles for arms purchases for nine years, 4 trillion of which went to the armed forces and the remaining 1 trillion to other national security agencies. President Putin spoke about new armaments for the army including intercontinental ballistic missiles and missile submarines on October 18 in a live call-in TV show.

However, purchases of most armaments under the program are still fraught with difficulties. For example, eight Topol-M missiles produced by 2006 had to be stored at the factory as the military units had no launch pits for them. In another example, three mobile launchers of the same complex turned out to have no missiles as they were sent to rocket forces last spring. The FSB’s Border Service ordered armored troop-carriers at KamAZ’s factory without any program. The Interior Ministry decided to buy infantry arms from Glock, Ceska Zbrojovka, Heckler & Koch and other companies before it emerged this fall that Russia in the 1990s “lost a technology of tank guns”, which jeopardized the much publicized purchases of new T-90 tanks.

A new fully civilian agency, Rosoboronpostavka, was set up to deal with this kind of issues by a presidential decree earlier this year. The agency will start working in January as it is now being manned by 1,100 military men with adequate experience from all national security agencies. As the process is dragging on, there is a great risk that plans on the state arms order and subsequent contracts with the industry for the next year will be wrecked.

However, ongoing issues complement a fundamental circumstance that questions any plans for the army’s equipment. Purchases of armaments and military hardware have not grown dramatically although the state arms order in the past few years exceeded Russian military exports, and higher spending on defense was declared an achievement of the country’s leadership. But we should note that prices on arms are growing faster than consumer prices. The picture changes in real terms, and if we use a deflator of spending on end-up use of the state management, the nominal growth of military spending will turn out to be a slump.

General indicators of nominal army spending growth hide numerous trends. There are good grounds to say that not very successful implementation of the program in partial transfer to a contract-based army is linked to the fact that money allowances offered to potential contract soldiers have not been raised by a single kopeck during the period. At the same time, spending on “research” in this field has been raised 15 percent. Inflation came to 46 percent over these years.

But the problem is not in the cash-stripped state but rather a growing share capital expenses compared to current expenses. This approach was voiced back in 2000 by the Russian Security Council when it was chaired by incumbent Deputy Prime Minister Sergey Ivanov. The Defense Ministry has been pursuing this policy with references to “the best international experience” for the past six years while Mr. Ivanov was the defense minister. His recent statements as the head of the military and industrial commission have shown that nothing is going to be change here soon.

In real life this approach means, for example, that Russian military pilots fly very little – 12 hours a year in early 2000, 25 hours a years in 2005 and 40 hours a year in 2007 – and military sailors do not spent much time at sea as a ship or submarine spends an average day or two at sea a month. The reason is well-known: there is no fuel, or rather there is a limit on its use. According to the director of the Defense Ministry’s economy and finances service Lyubov Kudelina, the armed forces need 5.6 million metric tons of fuel every year. However, no more than 2.9 million tons is bought annually. The 2008-2010 federal budget guarantees the purchase of 3.2 million tons a year for all national security agencies, which allowed the drafters to claim that this volume will make sure that “pilots are under the norms of annual flying hours”. But this optimism has no grounds as a large part of black oil in this supply is normally spent to heat infrastructure of military camps.

The similar situation is with uniforms. The federal budget has been earmarking to the Defense Ministry 60 to 70 percent of the money needed for uniforms in the past years. In November 2003, Vladimir Putin ordered to ensure the army has all required uniforms, but the situation has not changed. In 2004, the uniform deficit came to 4 billion rubles which equals to the money left unspent in other articles of the national defense section of the budget.

Seven year after the start of the second Chechen war we can say that the counterterrorism operation in North Caucasus, which triggered all army reforms in the 2000s, is finished. As one may judge, the number of militant groups still fighting in Chechnya is scarce. They are not numerous, and FSB and police force eliminate them systematically. Almost all notorious war-lords have been killed. As President Putin promised, conscripts are no longer sent to take part in hostilities.

The president also pushed through a political decision to cut the conscription term to one year. But manning the armed forces with contract soldiers has failed. President Putin said in 2007 that the armed forces were not going to be further decreased apart from the central bureaucratic agencies after some officers and warrant officers retire. In other words, the annual need of new soldiers – both contract and conscripts – will stay at the same 550,000 to 600,000 annual level in the next few years. However, the number of 18-year-olds in Russia will fall from current 1 million to 600,000-750,000 due a drop in birth rates in the 1990s. Considering the current percentage of those fit for the military service, as little as two-thirds of 18-year-olds, or 400,000 to 500,000 people, will be in the army. The risk that the army won’t have enough soldiers is well-grounded. In this critical situation generals may suggest as allegedly the only way-out going back to the two-year conscription but certainly without restoring deferments abolished in 2006. Social and political consequences of this move are impossible to predict.

But this is just one problem in the military field that the country will have to deal with in the years to come. The reform does not come down to recruitment and equipment of the armed forces. Vladimir Putin said in his presidential address in 2006 that back in 2000 “the whole structure of the armed forces was inadequate to the current situation”. But in terms of restricting and drastic modernization of armed forces as an organization nothing significant has been achieved in the past eight years. President Putin has failed to come up with brand new benchmarks for the army reform.

Army Reform: Timeline

2000 The new wording of The Concept of National Security of Russia and The Military Doctrine of Russia are adopted. The State Commission on Army Structuring is abolished.

2002 The 2001-2010 States Armaments Program is drafted. The Foundations of the Russian State Policy in Military Organization through 2010 is adopted. The document orders to draft a federal program of the transfer to a contract-based army to start the transfer from constant alert military units and those on military duty and cut conscription time from two to one year. The president endorses a suggestion to declassify the budget’s defense spending.

2006 The Defense Ministry adopts a plan to create three regional headquarters to replace the existing military districts. Only strategic missiles troops are to be left out of the reform. The 2007-2015 State Armaments Program is passed. Bills are adopted to set conscription period at one year abolishing a number of socially important deferments.

2007 The 2008-2010 budget is adopted classifying spending on defense and national security.

Defense Ministry Knows Better What’s the Main Thing in Russia

Vladimir Putin has repeatedly underscored in his speeches that the army reform is following the right direction.

2000 “The army does its professional and civil debt well. Here comes a question of how officials on different levels respond to the defenders of the Motherland.” (At a session on social welfare of the military)

2001 “We can’t allow a further decline in the quality of strategic and combat training. Otherwise, the army may turn into a military school where they know very well how to fight but can’t.” (At a session at the Defense Ministry)

2002 “One of the priorities is the continuation of the army reform and the transfer to a contract-based army with a shorter conscription term.” (From an address to the Federal Assembly)

2003 “Under the adopted plans, we will keep manning land, airborne and marine forces of constant alert with contract soldiers… The conscription term is to fall to one year in 2008.” (From an address to the Federal Assembly)

2004 “A transparent military economy is a must for the reform.” (From an address to the Federal Assembly)

2005 “By the end of 2015, we are to have 70 percent of the funds spent on the army and fleet’s development and 30 percent on current maintenance.” (An opening address to a session of the Russian military headquarters)

2006 “We must have armed forces able to combat in global, regional – and even if necessary – in several local conflicts at a time. (From an address to the Federal Assembly)

2007 “What is the main thing in life? The Defense Ministry knows better. We will be speaking about love, women, children, family and about Russia’s acutest problem – demography. (From an address to the Federal Assembly)

Vitaly Tsimbal and Vasily Zatsepin

The basic conclusions: the movement to a volunteer military is proceeding in slow motion, if at all, and increases in the prices of defense goods are rising rapidly, meaning that the actual rate of increase in Russian military hardware is smaller than the rate of increase in ruble expenditures on the military. I also found the information regarding the niggardly allocations of fuel for training and operations to be quite illuminating. 40 hours of flight time a year is something of a joke. Fighter jocks can’t attain or retain proficiency on such little time in the cockpit. Such information makes recent stories (which I regard as hype, given the procurement track record) of Russia planning to leapfrog the F-22 and F-35 through development of its own stealthy aircraft appear risible; even if (and it’s a huge, huge if) Russia succeeds in developing planes equal to or better than the Raptor and JSF (and I am sure the security services are doing their best to steal the technology as we speak), the differential in pilot quality will make any putative Russian technological advantage moot. As the American Air Force and Navy Air have proved over the years, superior pilot quality and training trumps modest superiority of opposing aircraft. A Russian pilot in a modestly superior plane but with only 40 hours per year in the cockpit will not beat a US fighter jock with multiples of that flying time.

One more remark about the Russian-Indian effort to develop a rival to the F-35 JSF. India has had a helluva time developing its own indigenous military hardware. Its tank and aircraft programs have been disasters. Over-budget, delayed, and plagued by quality problems. So, this announcement of a joint Russian-Indian program seems to be yet more hype.

Less-Bad News

Filed under: Politics,Russia — The Professor @ 8:23 am

Never let it be said that I only emphasize the negative re Russia. Recent Russian government statistics show that the Russian population is continuing to shrink, but not as rapidly because the death rate is beginning to improve (H/T Johnson’s Russia List):

October 23, 2007
The population of Russia keeps shrinking
Author: Irina Sklyarova

[Russia’s natural population decrease was lower in the first three quarters of 2007 than in the same period of 2006: 356,000 people against 493,000. The first three quarters of 2007 saw 1.045 million births, 1.4 million deaths, 771,000 marriages, and 450,000 divorces.]

Russia’s population is still shrinking. Not even the influx of immigrants (traditional for summer) is alleviating the situation.
The death rate exceeds the birth rate. Still, the mortality rate seems to be slowing down, judging by the report on the socioeconomic situation for the first three quarters of 2007, as compiled and published by the Federal State Statistics Committee (RosStat).

According to the report, Russia’s population stood at 142 million on September 1 (down by 196,000 people, or 0.14%, since
January 1). The influx of immigrants compensated for only 45% of losses. Natural population growth was logged in 18 Russian regions.

Traffic accidents killed 24,000 people, and 29,000 took their own lives. Nearly 14,000 died of alcohol poisoning. All these
figures are below the last year parameters.

Russia’s natural population decrease was lower in the first three quarters of 2007 than in the same period of 2006: 356,000 people against 493,000. The first three quarters of 2007 saw 1.045 million births, 1.4 million deaths, 771,000 marriages, and 450,000 divorces.

I have noted several times that as ill as the low Russian birth rate bodes for the country’s future, the more dangerous problem is the stratospheric death rate, especially among men. The downtick in the mortality rate is therefore encouraging news, though the motor accident, suicide, and alcohol poisoning rates are still appalling.

This article from the WSJ states that the decline in the ethnic Russian population is around 1 million per year. Assuming that this reflects 2006 statistics, given the total decline in the population in the RF of about 500,000, this translates into an increase of about 500,000 non-ethnic Russians from immigration and from higher birth rates in non-ethnic Russian populations. The WSJ article conjectures that this dynamic will aggravate ethnic tensions within Russia:

Meanwhile, the number of Muslims in Russia, from the Caucasus, Central Asia and the Middle East, is surging through immigration and high birth rates. The response of many Russians is racist nationalism, in many cases encouraged by the state. The respected human rights group Memorial has linked Kremlin-supported youth group Nashi, which runs summer camps where white, Orthodox, ethnic Russians are encouraged to breed, to numerous hate crimes.

As ethnic and religious minorities become majorities in a number of key neighborhoods, districts and towns, a counter-nationalist backlash brews. President Putin and his possible successors know this, and the strengthening of central power is part of a bid to prevent the biggest potential combustion of all: the Balkanization of Russia’s over 160 ethnic groups. Yet their clamp down could also exacerbate the tension. Local government restrictions, limiting the number of Muslim vendors at outdoor markets, for example, only serve to deepen minority frustration. Such an explosion in Eurasia would have profound implications for U.S. and European energy security, transnational crime and migration flows across the continent, not to mention the fate of Russia’s poorly secured stockpiles of nuclear materials.

Dunno exactly whether this is the way it will play out, but it definitely deserves watching.

Tu Quoque, European Edition

Filed under: Politics,Russia — The Professor @ 8:02 am

In “How do you say ‘Tu Quoque’ in Russian?” I remarked on Putin’s tendency to respond to any external criticism of Russia with “Tu Quoque” (i.e, “your another”) arguments. In response to European criticism of Russian “sovereign” or “managed” democracy (choose your Orwellian modifier), Putin has announced plans to set up a think tank to critique European democracy:

Putin Says Russia Will Check EU on Rights

President Vladimir Putin told European leaders that he was planning to set up a think tank for freedom and democracy in the very heart of the European Union.

The proposal, which seemed designed to turn the tables on countries that have criticized Russia on human rights and democracy issues, caused some consternation at the EU-Russia summit Friday, when the Kremlin’s top aide flatly denied that the Europeans would be allowed to play any role in the institution.

I actually have mixed emotions about this. I believe that Europe is becoming progressively less democratic, and I support an institution in the heart of Europe making this case. But somehow I doubt that the newly announced Russian think tank will engage in thoughtful critiques of the EU’s increasing democracy deficit, but will instead merely churn out a stream of tendentious research and press releases intended to suggest a moral equivalence between the EU and the RF. That’s the old Soviet way. As troubling as the political evolution of Europe is, with its tendency towards greater centralization, unaccountable bureaucracy, and refusals to consult the electorates on fundamental matters of political organization, all this pales in comparison to what goes on in Russia.

A Monetary Phenomenon, Indeed

Filed under: Politics,Russia — The Professor @ 7:42 am

Russia’s Finance Minister, Alexi Kudrin, endorses the SWP analysis of Russian inflation as primarily a monetary phenomenon, as reported in Kommersant:

Vice Premier, Finance Minister Alexei Kudrin spoke October 26 about the inflation surge in Russia. Despite all previous explanations of the government, he recognized the determinant role of monetary factors coupled with the increase in government’s costs.

The interim data on behavior of consumer price index that Kudrin announced past Friday didn’t match the recent optimism of Economic Development Minister Elvira Nabiullina, who spoke about the local nature of September inflation not long ago, specifying that consumer price index grew 0.8 percent that month. But the index soared 1.3 percent October 1 through 22, Kudrin said, adding it climbed 8.9 percent from the start of this year.

According to Kudrin, the growth in basic inflation (the price index less seasonal prices, the prices controlled by the government) was 1.5 percent to 2 percent in October. “It is the highest indicator that shows the true situation on the market,” Kudrin explained, pointing out that “we have stepped back to the time of two years ago, if it doesn’t happen that the inflation will be even higher.”

So, Russia is back to two-digital inflation, it is clear already. Of interest is that Kudrin directly recognized that not the growth in food prices but rather the monetary factors were the key engine of inflation. The economic policy of the government and the Central Bank of Russia collided with the surge in prices on agrarian market, which didn’t allow to edge the price shock. In inflation growth, Kudrin said, the monetary factors fueled consumer price index by 3.4 percent from the start of this year, while EU had just 0.2 percent. [My emphasis.]

Kudrin seems like a straight shooter–he was very critical, for instance, of the food price freeze initiative. As a result, he seems out of place in the midst of the Kremlin’s constant campaign of economic happy talk.

Kudrin also stated that the RF’s liquidity crunch seemed to be easing, in large part because capital inflows have resumed. Again from Kommersant: “The capital inflow resumed in October, as investors still believe in the course of the government all faults notwithstanding.” Kudrin stated that capital inflows were $6 billion in October, in contrast to the outflows for September and August. This is important because, as reported in the WSJ:

The central bank, meanwhile, has had its room to maneuver crimped by liquidity problems resulting from the U.S. financial crisis. It has been loosening, not tightening, credit in recent weeks, scrambling to stave off instability in the banking sector. Many of Russia’s commercial banks had relied on foreign financing to raise the money they lent to local companies and consumers. But after the U.S. credit crunch started in August, overseas funding for many dried up. The
central bank has pumped billions into the banking system to keep them afloat. Capital inflows appear to have resumed, Russian officials say.

So, absent some further aftershocks in the US and European markets, Russia seems to have survived the credit crunch pretty much unscathed. The inflationary situation is unlikely to be resolved as quickly, however, due to the Russian Central Bank’s predilection to keep the ruble from appreciating, and the government’s pre-election largesse.

October 26, 2007

“New Oprichnina” Revisited

Filed under: Politics,Russia — The Professor @ 10:35 am

From an article by Ion Pacepa in today’s NRO:

The Russians enjoy greater freedom than ever before in the long history of that autocratic empire. But after 2000, when former KGB officers took over the Kremlin, Russia started slipping back into her traditional samoderzhaviye, a form of autocracy traceable to the 14th century’s Ivan the Terrible, in which a feudal lord ruled the country with the help of his personal political police.

Boy, That Was Fast

Filed under: Commodities,Politics,Russia — The Professor @ 9:54 am

I just recently blogged on plans to introduce price controls on food in Russia. I speculated (pun intended) that “I expect that these developments will lead, in turn, as day follows night, to publicity/propaganda campaigns against ‘speculators’ and ‘hoarders.'” From my lips (or fingertips, as it were) to Vlad’s ears–or at least to the ears of the RF’s Federal Anti-Monopoly Service, and in record time too. From a 25 October, 2007 Moscow Times article by Max Delaney (of the Moscow Delaneys?):

In a further sign that authorities are actively cracking down on retailers, the Federal Anti-Monopoly Service announced Tuesday that it had opened up to 40 investigations against traders accused of speculating on food price rises, RIA-Novosti reported.

“The investigations primarily concern the abuse of monopolistic positions in the food goods sector,” said Andrei Tsarikovsky, deputy head of the service.

The service has checked markets selling milk, butter, meat and cheese in the Krasnoyarsk, Tomsk, Perm, Penza, Rostov and Ivanov regions, Tsarikovsky said.

I wonder if the Anti-Monopoly Service reassigned some of its personnel from its investigation of Gazprom in order to carry out these inquiries. Only kidding.

On a more serious note, we can expect much more of this sort of strongarming when the “voluntary” price freeze goes into effect and the elections near. It is exactly these sorts of tactics that will: (a) exacerbate shortages of goods, and (b) stoke corruption. I’ve seen this movie before, and believe me, it doesn’t get any better in the second reel.

Russian Military Procurement Revisited

Filed under: Military,Politics,Russia — The Professor @ 9:00 am

I’ve made a few posts on the disconnect between bold pronouncements about revitalizing the Russian military emanating from the Kremlin, and the reality of the situation. Here’s an extended quote from Komsomolskaya Pravda by Victor Baranets:

On the other hand, it appears that the Russian defense industry is toiling by the sweat of its brow to enhance the military might of other countries – while our own Armed Forces are only getting crumbs in comparison to fat export contracts. This year, the Russian Armed Forces were supposed to take delivery of nine new fighter jets – but they have received only three. They were promised 91 tanks, but only 31 have been delivered. Over the past decade, the Russian authorities have made two attempts at re-armament: special programs were approved in 1996 and 2001. Both programs failed, for the same simple reason: not enough money. A new State Armaments Program for 2007-15 was adopted in 2006, with almost 5 trillion rubles in funding allocated to it: 4 trillion rubles of this will go to the Defense Ministry. That’s equivalent to around $160 billion. So the Defense Ministry will be able to spend $20 billion a year on military hardware! Plus a further $10 billion allocated for buying or upgrading arms, provided by the Defense section of the federal budget. What could the Armed Forces buy for that mount of money? Let’s look at our defense sector’s price list: $2 million for a tank, $450,000 for an infantry fighting vehicle, $17 million for a fighter jet, $8 million for a helicopter, $60 million for an air defense system (S-400), $85 million for a large ASW vessel, $110 million for a diesel-powered submarine, $1.5 billion for a nuclear-powered submarine.

It might appear that the unprecedented funding generosity would produce a rush of new hardware flowing into the Armed Forces. But it turns out that the top brass and the defense industry still haven’t managed to reach agreement on payment rules and procedures. The Defense Ministry isn’t satisfied with the laws of the free market: it demands that tanks ordered in late 2006 at 42 million rubles each should cost exactly the same in late 2007 or early 2008 (though the price has already risen to 57 million rubles). But defense enterprises don’t want to compensate at their own expense for the rising prices of metals, electricity, and labor. Meanwhile, the state can’t order the defense enterprises to operate at a loss – but neither does it want to cover the difference between old and new prices.

That’s why Russian defense enterprises find it far more advantageous to deal with foreign clients, who pay far higher prices for the same products.

This raises the question: so where has all the money previously appropriated gone?

And the next to last paragraph raises another issue. As inflationary pressures continue to mount, the “old” prices that the Defense Ministry insists on paying will fall further and further behind the prices that the firms find profitable. Thus, the problem will likely get worse, not better.

More Putin Watchers Coming Around to the SWP View

Filed under: Politics,Russia — The Professor @ 8:40 am

More and more analysts are jumping on the “Putin will find a way to remain President” bandwagon. Leon Aron in today’s New York Times:

Still, after Mr. Putin’s announcement that he would not be averse to becoming the next prime minister, the prevailing guess is that after the March 2 presidential election Mr. Putin will head the Russian government under a new president.

Yet before the Bush administration and the leading contenders for the White House begin to design a Russia policy based on this, its plausibility has to be examined. In the light of what we know about Mr. Putin and the political and economic system he has forged, he is more likely to find a way to continue in office as President Putin.

To begin, Vladimir Putin has done the opposite of what he publicly said he would do with regard to some major policy issues.

And Itogi (HT, Johnson’s Russia List):

As yet, United Russia is not influential or authoritative enough to ensure policy continuity without Putin in the Kremlin. The significance of the Duma speaker in the present-day state hierarchy is clearly insufficient for a national leader, while the office of prime minister would require Putin to be very, very sure that his formal transfer of power to a temporary succesor wouldn’t last long. And it’s hard to imagine Putin in a subordinate role, with a different president in office; especially since Putin has stated that the president’s powers should not be redistributed in the government’s favor (although this would be a logical move if he planned to become prime minister). He said that this would result in two centers of power, with inevitable competition or even open power-struggles between them – for an example, see Ukraine. One way or another, Putin’s departure – if it happens -might be no more than a relatively brief reshuffle, after which he would reclaim the post of head of state. Otherwise, there’s no point in even discussing any kind of Putin Plan.

And Pavel Baev:

While there is much pose and pretence in Putin’s military build-up, there was still one point off-camera where he verbalized a bit of his real thinking. Russia, according to Putin, will continue to require “manual steering” for another 15-20 years and only then would the institutions be mature enough for “automatic control” (Vremya novostei, October 19). It comes out clearly that Putin intends to keep his hands on the steering wheel, but it is hardly possible to reconcile this intention with the expressed objections against reducing presidential authority and with the proposition that a “modern and capable” person will be elected as the next president in only a few months. Having too many hands on the control levels is always a recipe for disaster, and if these levers are attached to a divided and massively corrupt bureaucratic machine, political disaster might strike with real vengeance. Giving up on a successor and trying in haste to build an arrangement for “collective authoritarianism,” Putin looks like a man without a plan wiggling in a trap he spent eight years building.

Baev doesn’t come out and say that Putin will engineer a way to remain President, but the logical implications of his analysis are clear as day; Putin can’t afford to let go the controls of power, so . . .

Finally, eXile:

In short, Putin is already weakened. That’s why he’s scrambling to strengthen his position and weaken the other clans. Every move he makes from here on out is fraught with danger. If he runs for parliament, appoints his man Zubkov as president, and then becomes the prime minister of a new parliamentary republic–basically following the playbook of Khodorkovsky’s plan to take power–then he’ll subject himself to the uncertainty of whethor or not the new president will really hand over power to Prime Minister Putin. There could be a long tug-of-war and new factions will very likely emerge. He might get some of the power, but not all of it. Jealousies, greed, ambition, and the general mess of transition all mean that Putin could find himself locked in a serious and dangerous battle, if he already isn’t in it.

His other option is the Kazakhstan Scenario. This year, Kazakhstan’s dictator Nursultan Nazarbayev passed laws allowing him to remain in office for life, quashed what little remains of the opposition, and then held elections which turned his parliament into a single-party rubber-stamp committee. He managed this all with the West’s collusion: when Nazarbayev announced legislation making him president for life this past May, U.S. State Department spokesman Sean McCormack called it “a step in the right direction,” leading to outrage among Kazakhstan’s beleaguered pro-democracy movement. When the rigged elections this summer gave him a one-party parliament, the OSCE hailed it as “welcome progress.” Kazakhstan has for the past couple of years been the darling of Dick Cheney and the neocons. Even self-described Russophobe Kim Zigfeld wrote a suspiciously placed article praising Kazakhstan’s leap forward into Western democracy.

In other words, if Putin wants to be a democrat, he should change the constitution, stay in office for life, and make the United Russia party the only party in the Duma. That’s what Nazarbayev advised Putin this past summer. “Worked for me!”

I think it’s fair to say that nobody knows just how Putin will engineer his constitutional workaround, but more and more folks are coming to the realization that the realities of Russian politics make it imperative that he find some way to do so. Moreover, it is also dawning on people that Putin does not view his past public pronouncements–no matter how frequently or forcefully uttered–as constraints on his future behavior. So when trying to predict Putin’s behavior, discount his words–and evaluate his interests. When you do so, I think that you too will hop on the bandwagon.

SWP Quoted on Marketplace

Filed under: Commodities,Derivatives,Energy,Exchanges — The Professor @ 6:25 am

I was quoted on a Marketplace story on the energy market regulation changes I blogged about yesterday. Nice to get the last word.

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