Streetwise Professor

February 8, 2011

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Filed under: Commodities,Economics,Politics,Russia — The Professor @ 10:14 am

This article from John Helmer’s Dances With Bears provides a fascinating case study on the operation of the Russian natural state.  He describes how the government, in the forbidding form of Oleg Sechin, guides (to put it euphemistically) negotiations between consumers and producers of metals:

Deputy Prime Minister Igor Sechin, who supervises the Russian metals and mining sector, convened a meeting with the federal government’s industry administrators and price regulators, along with representatives of the steel and carmakers. Mordashov attended for Severstal, along with Igor Komarov, chief executive of AvtoVAZ, Russia’s largest carmaker. Others attending included the two other domestic auto sheet suppliers, Magnitogorsk and Novolipetsk, and other automakers — GAZ, Sollers, and Kamaz, which builds mostly trucks, buses, and utility vehicles.

Sechin listened to the applications, and then issued his orders. Steelmaker Severstal was told to reopen negotiations with AvtoVAZ over the former’s proposed 30% price hike for auto steel supplies. The Federal Antimonopoly Service (FAS), which had earlier ruled that the Severstal price was in line with raw material cost growth and international price benchmarks, was also ordered to reopen its inquiry with different comparative criteria.

That last touch, with Sechin directing the FAS to get its mind right and revise its methodology in order to generate the politically approved results, is priceless (no pun intended).

Note too how the government is more than willing to use tax and trade policies in order to manipulate domestic prices in order to achieve the desired allocation of rents between consumers and producers;

The cane wasn’t mentioned or waved about. But Sechin didn’t need to remind everyone in the room that the government is considering a tax or duty on exports of steel, maybe iron-ore too, unless the producers curb their appetites and make an agreement on a new domestic price.

Documents leaked fron the federal Ministry of Economic Development, and published in a Moscow newspaper on January 27, reveal that two options for the export duty level have been proposed — one fixed at 10% for steel and 30% for iron-ore; and one a sliding scale tied to international prices for these commodities. The more the Russian exporters try to capitalize on rising international steel and iron-ore prices, the bigger the margin the Kremlin plans to take from them as their cargoes leave the port, possibly to add as cost and sale price subsidies to the carmakers.

According to Vladimir Zhukov, steel analyst for Nomura in Moscow, “we have been told that the prime cause for the government thinking in this direction is an attempt to help the domestic car industry which struggles to achieve decent profitability levels (if any profitability at all).”

Zhukov’s report for Nomura’s clients suggests that rises in coking coal, scrap and iron-ore are likely to engender a steel price rise over the year of about 15%. Zhukov adds that “we understand from industry sources that Russian auto manufacturers are already buying galvanized steel (the main steel product supplied to car manufacturers) at some 10-15% discount to Europeans (approximately $850/t vs $930-1000/t). Therefore, introducing export duties on steel will widen this discount even further.”

States like Russia use state power to fine-tune the allocation of wealth between different individuals, firms, and sectors.  (Yes, this happens in the US too, but the process is quite different; in particular, it is fenced in with a variety of political and legal constraints that make Sechin-like interventions impossible.)  This is a linchpin of a broader strategy to maintain political equilibrium.  Creative destruction is an anathema there: these efforts to maintain stability are antithetical to economic dynamism and innovation.  Hence, the actual operations of the government undermine the soaring rhetoric about modernization.

The process Helmer describes also provides an illustration of a point I’ve made several times before.  Namely, that the Russian government relies heavily on  export and import taxes as a means to manipulate rent distribution for political purposes.  This is incompatible with WTO obligations, meaning that when Russia joins the organization it is almost certain to be involved in chronic conflicts with it.  (For corporate analogies, just look at the ongoing warfare between AAR and BP over TNK-BP, and between Telenor and Vimpelcom.)

And speaking of broad strategies to maintain political equilibrium, another element in this strategy is information control.  Along those lines, Russia has denied entry to Guardian reporter Luke Harding, a consistent critic of Putin specifically and the Russian government generally.  The beat goes on.

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  1. Yes, this happens in the US too, but the process is quite different; in particular, it is fenced in with a variety of political and legal constraints that make Sechin-like interventions impossible.

    Translation: In Russia, the state dictates to corporations. In the US, corporations dictate to the state.

    Namely, that the Russian government relies heavily on export and import taxes as a means to manipulate rent distribution for political purposes.

    What Sechin is doing here sounds like straightforward mercantilism.

    Along those lines, Russia has denied entry to Guardian reporter Luke Harding, a consistent critic of Putin specifically and the Russian government generally.

    And the Guardian paper for which he works – that heroic bastion of free comment – censored me and dozens of others for pointing out that Luke Harding is a shameless plagiarizer and anti-Russia propagandist. #LOL #doublestandards

    Comment by Sublime Oblivion — February 8, 2011 @ 2:13 pm

  2. No Sublime Retard, they censored you for your stupidity.

    As for Luke Harding being a “propagandist”, look in the mirror retard, at least he was actually in Russia, and not some vile little turncoat as yourself.

    Once again, why do you live in the US if Russia is such a paradise and paragon of virtue?

    BTW, his description of the “brutal Russian invasion of Georgia” was quite correct, as borne out by the Russian governments campaign of ethnic cleansing as documented by the IFFC report, which found that every Russian action in 2008 was illegal and in direct violation of international law.

    Comment by Andrew — February 9, 2011 @ 12:03 am


    Comment by boba — February 9, 2011 @ 9:17 am

  4. Say it ain’t so, S/O! Slamming your comrades in the Guardian. You’re a leftist except when the leftists slam Putin/Russia.

    Was Harding barred entry for plagiarism? That would be a first. When are they going to bar Putin from entering the country? After all, he plagiarized his “doctoral” dissertation.

    You need to work on your translation skills.

    And mercantilism isn’t exactly what Sechin is doing. He’s not trying to increase exports and reduce imports simultaneously (which, btw, is quite a trick because they balance out over time) like mercantilists want to. He’s trying to reduce the domestic prices of raw materials (ore) and intermediate goods (steel) by reducing exports, in order to benefit domestic manufacturers, most notably the auto companies, specifically Avtovaz.

    Mercantilism is contrary to the intent of WTO, and even though what Sechin is doing is not mercantilism, it is also contrary to WTO rules.

    The ProfessorComment by The Professor — February 9, 2011 @ 11:33 am

  5. Clumsy Russian PR will make even a hack like Harding look good. They are their own worst enemy.

    Comment by So? — February 11, 2011 @ 4:50 pm

  6. SWP:

    Russia’s “natural state” is distrust and corruption, highlighted by the fact that Russians choose to be ruled by a proud KGB spy. This article

    makes the very insightful and powerful point that Russians pay through the nose for this natural state. Interest rates on transactions of every kind have to be much higher when nobody can trust anybody, and as a result Russians pay far more for everything than the rest of the world. A good example is IKEA:

    Russia is headed, just like the USSR, for national collapse.

    Comment by La Russophobe — February 12, 2011 @ 8:13 am

  7. SO?:

    Undoubtedly you are too ape-like to realize it, but your remark about Harding is laughable unless you can point to a journalist who writes critically about Russia and Putin who you respect. You can’t. So the fact that you characterize Harding as a “hack” is utterly meaningless, because you believe ALL JOURNALISTS who dare to write critically about Putin and Russia are hacks. You are hilariously biased, and your apparent belief that anyone could take your statements seriously is indicative of hallucination.

    Mind telling us: When was the last time Russia banned a pro-Russia journalist from its shores? Can you, stupid little boy, tell us that?

    Comment by La Russophobe — February 12, 2011 @ 8:16 am

  8. You really ought to read that link above (a hotbed of “critics of the regime”, if there ever was one). Your beloved Latynina takes Harding the Hack to the cleaners. You, OTOH, are living up to your “????? 3.14???” image.

    Comment by So? — February 12, 2011 @ 6:18 pm

  9. So?,
    is that the Latynina of the “oscilloscope arrow” fame you are talking about? That’s one hell of an analytical resource you got there.

    Comment by Ivan — February 13, 2011 @ 3:28 am

  10. Disowning your own hero over a poor metaphor? Really? How convenient. I guess you are not a Republican then.

    Comment by So? — February 13, 2011 @ 3:21 pm

  11. SO? —

    You seem to clearly be drunk and, predictably, ignore the point of our comment and our questions.

    But let’s leave that aside. Are you saying that you now admit everything Latynina has said about Vladimir Putin is true? That you admit now she’s a great journalist? Fantastic! Welcome to the russophobe side, we are glad to have you!

    Comment by La Russophobe — February 13, 2011 @ 5:10 pm

  12. Putin is the best friend of the West (Germany, especially) in Russia.

    Comment by So? — February 13, 2011 @ 6:25 pm

  13. For further entertainment, I recommend the following old article by LR in which she writes her own wishful history, in which the Nazis won and the Soviets lost:

    EDITORIAL: Russia Lost the “Great Patriotic War”

    She even invented a new major WWII battle: “the battle of Ryazan””:

    Who won the battle of Ryazan in Russia during World War II, which Russians crazily refer to as “The Great Patriotic War”? Was it the Germans, who lost 500,000 soldiers, or was it the Russians, who lost a million?

    Neither. There was never ant such thing as “the battle of Ryazan”. Germans never came close enough to Ryazan.

    However, there was the Battle of Berlin, LR. Look it up:

    The Battle of Berlin, designated the Berlin Strategic Offensive Operation by the Soviet Union, was the final major offensive of the European Theatre of World War II. Before the battle was over, German Führer Adolf Hitler and a number of his followers committed suicide. The city’s defenders finally surrendered on 2 May. However, fighting continued to the north-west, west and south-west of the city until the end of the war in Europe on 8 May (9 May in the Soviet Union) as German units fought westward so that they could surrender to the Western Allies rather than to the Soviets.


    If, as you claim, you have some people on your staff, who are familiar with Russia and have spent a lot of time there, wouldn’t they have corrected your ignorance from May 2009 by now, LR? Clearly, you are lying when you claim that you have hired somebody to explain the Russian history and culture to you, LR. Your blog is as ignorant as ever.

    If you, like any normal person who can count, say it was Russia which lost these battles and which, indeed, lost the “GPW” in its entirety, then you’d better be careful where you say it.

    True. In most of the world, a person, who claims that Germany defeated USSR in WWII and killed 1 million Red Army soldiers in non-existent battles like “the battle of Ryazan”, may have to undergo a psychiatric evaluation at the near-by hospital. I have encountered lots of revisionists of history, who claim that Holocaust never took place, but few have gone so far as to claim that Germany defeated USSR. Here is one of those few who share your fantasy life, LR:
    If the Nazis won

    Comment by Ostap Bender — February 14, 2011 @ 12:18 am

  14. Kim Zigfeld (aka La Russophobe) wrote: “SO? – You seem to clearly be drunk and, predictably, ignore the point of our comment and our questions.

    Why do you refer to yourself in plural, Kim? Mark Twain’s famous quote goes like this:

    Only kings, presidents, editors, and people with tapeworms have the right to use the editorial “we”.

    When I read your own blog and constantly see you refer to yourself in plural, I attribute that to your being the editor of your own blog. But you also refer to yourself in plural at other people’s blogs. And since I doubt that you are either the US President or the British royalty, the only remaining explanation is that you have tapeworms. Which brings up the natural question: which of your articles/posts are written by you, which – by your tapeworms, and which are the product of the fruitful cooperation between you and your intestinal parasites?

    Comment by Ostap Bender — February 14, 2011 @ 12:48 am

  15. So?,

    My? Hero? Be careful what you are smoking: no way stuff that strong can be safe.

    The metaphor is not poor – it is actually a very good metaphor for the usual depth Latynina researches the topics she writes about. I think the reason is that it does not really matter, as her quasi-oppositionist writings are just a filler between targeted disinformation bits supplied by plain-clothed tovarishchi.

    Comment by Ivan — February 14, 2011 @ 1:51 am

  16. Ostap, there was severe fighting in Ryazan Oblast in WW2 when it was captured by German forces during operation Barbarossa, it was recaptured by Soviet troops in December.

    Comment by Andrew — February 15, 2011 @ 5:53 am


    The judge’s own assistant in the Khodorkovsky case admits the verdict was rigged and phoned-in.

    Vladimir Putin’s closest international friend is on trial for child prostitution and graft.

    The “natural state” of Russia is pandemic corruption with no hint of justice anywhere in sight. Russia is going down, fast.

    Comment by La Russophobe — February 15, 2011 @ 7:04 am

  18. The city of Ryazan was bombed, but never captured.

    Comment by So? — February 16, 2011 @ 4:31 pm

  19. She even invented a new major WWII battle: “the battle of Ryazan”

    No, she merely confused Ryazan with Rzhev, funny you and So? still haven’t figured that out.

    Comment by peter — February 16, 2011 @ 5:29 pm

  20. LaR is the Russia expert around here.

    Comment by So? — February 16, 2011 @ 6:48 pm

  21. @ peter: “No, she merely confused Ryazan with Rzhev, funny you and So? still haven’t figured that out.”

    That’s a possible but unexpected explanation. Are you a professional specialist on mental disorders, or do you do this as a hobby?

    Why do you think she confused these places? Both start with “R”?

    Comment by Ostap Bender — February 20, 2011 @ 12:17 am

  22. That’s a possible but unexpected explanation.

    Numbers of losses and two letters (r and z) are quite enough to identify the battle in question.

    Comment by peter — February 20, 2011 @ 5:27 am

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