Streetwise Professor

October 9, 2008

Check Out Michel’s Comments

Filed under: Uncategorized — The Professor @ 8:56 pm

MIchel has some excellent comments to Under Pressure. His remark about the higher expectations of the Russian people (as compared to 1998) is very well taken. This is another factor contributing to Russian brittleness. A genuine improvement in living standards, the “splendid little war” in Georgia, American stumbles, European cravenness, and the steady diet of propaganda from the state controlled media have obscured Russia’s fundamental structural weaknesses, and fostered unrealistically high expectations about what the future holds for Russia. The country teeters on the economic brink–the world does, but Russia is arguably closer to the brink than just about anybody else–and if the deluge comes, a disappointed people that had put its faith in Putin and Putinism will turn on him (and it) in a fury.

Michel’s statement about the disconnect between the plans for an aggressive military buildup costing billions at the same time the country’s fiscal cushion is “melting before [their] eyes” is also right on the money. The $5 billion loan to Iceland, another extravagance apparently driven by geopolitical calculation, is another bizarre choice under the circumstances. Ditto the Venezuelan adventure. There is an air of unreality about all of this. The only thing that makes sense to me is that Putin, Medvedev, Sechin, et al, feel powerless to address the economic problems, so they are flogging the “Russia is Back”-military might-patriotism-derzhavnost line for all it is worth. They blame the US for all of the economic problems (and to be sure, the US has a lot to account for, but not all of Russia’s travails can be laid at the American doorstep), which feeds the hostility to the US, and exploit this with grandiose plans to rearm–by spending the money set aside for a rainy day. Memo to Vlad: It’s raining, dude. Like, really hard.

In the Under Pressure post I suggested that too many people viewed the reserve fund as a talisman. Evidently, nobody more than Putin and the siloviki. It gave them a sense of omnipotence that fueled their bumptiousness at home and abroad, near and far. This sense of omnipotence will melt along with the fund. And if and when that happens–and is seen to happen–Putin’s and Medvedev’s political support will erode, and their position will become precarious. How will they react? Most likely, with a combination of foreign adventurism and an intensification of political repression at home. Not a pretty picture.

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24 Comments »

  1. 1. Oil prices can and almost certainly will be stabilized at above 70$ / barrel. OPEC is going to co-ordinate with Russia to keep them around 100$ for the near-term future (http://209.85.173.104/search?q=cache:U0c0mJG5gDgJ:news.yahoo.com/s/nm/20080910/ts_nm/opec_dc_3+opec+russia+news+90&hl=en&ct=clnk&cd=1&gl=us).

    2. “The 200 billion or so in new spending will have to come out of the budget, which will push it deeper into the red.” – Michel

    This is wrong on two counts. Firstly, the budget is placed firmly in the black (+4.5% of GDP according to the Economist). Secondly, and more importantly, the money for propping up the domestic financial sector is NOT coming from the budget. It comes from bringing back Russian reserves parked abroad in G7 sovereign debt securities. (Goldman Sachs has a paper on this). Since the problem with the credit market in Russia is overwhelmingly one of liquidity (rather than insolvency, as in the Anglo-Saxon economies) it’s unlikely that a large portion of these reserves will actually be lost.

    3. Can I also point out that noting that foreign currency reserves have lessened by 16bn$ in a week and thus arriving at the idea that they will diminish to nothing within a few months is just an example of the meaningless linear extrapolation that Russophobes seem quite prone to when it suits their purposes. It is interesting but not surprising that Michel didn’t bother pointing out that of that week’s 16bn $ fall, some 10bn $ of that was directly linked to the strengthening dollar – and this comes from the same article he linked to. Finally, the entire point of having foreign reserves is to use them to avoid crashes in times of international financial crisis – a continuation of smooth growth in a period of severe Western recession would be well worth the entire 500bn $ reserves.

    4. “The country teeters on the economic brink–the world does, but Russia is arguably closer to the brink than just about anybody else” – SP.

    This statement is beyond my powers to comprehend. Iceland is worse off. So are many over-leveraged (mostly central-east European) states with huge current account deficits – Latvia, Estonia, Ukraine, Turkey, Argentina, Bulgaria, Hungary, etc. So is, in all likelihood, the US and Britain who’s financial systems increasingly appear to be systematically insolvent. Do you still live on Earth Professor?

    5. “The $5 billion loan to Iceland, another extravagance apparently driven by geopolitical calculation, is another bizarre choice under the circumstances.” – SP

    5bn $ in relation to 500bn $ is nothing. And it’s still far from decided. Although, I think paying 5bn $ for getting Keflavik with an Operation Red Storm Rising and neutralizing the SOSUS line is far more cost-effective than spending 700bn $ on, erm – how exactly did the US benefit from Iraq??

    I agree with you that it’s raining. It’s raining with the tremors of the approaching collapse of the unipolar world and the spectre of it lashing out blindly as it loses primacy. As such ensuring the most modern and effective national defense is something that Russia should regard, rightly, as one of its priorities.

    Comment by Da Russophile — October 11, 2008 @ 7:41 pm

  2. http://darussophile.blogspot.com/2008/10/editorial-some-thoughts-on-financial.html

    Comment by Da Russophile — October 12, 2008 @ 4:09 am

  3. You write: “This is wrong on two counts. Firstly, the budget is placed firmly in the black (+4.5% of GDP according to the Economist). Secondly, and more importantly, the money for propping up the domestic financial sector is NOT coming from the budget. It comes from bringing back Russian reserves parked abroad in G7 sovereign debt securities.”

    Why is the Russian deficit “firmly” in the black? Two thirds or so of the Russian budget revenue comes from oil, gas and other raw materials. Have you looked at the price of oil lately? It is tanking. Have you read on the numbers on oil production? They are stagnating. Unless you increase production to compensate for lower prices, this will leave you with less money. With fewer petrodollars and production in other sectors stagnating or falling, this leaves the Russian government with two options: running deficits or massive cuts in government expenses.

    As for the money parked outside of Russia, it still comes down to the same thing. Russia has to spend money either by tapping into its savings (the fabled reserves) or taking it out of its budget. At the end of the day, the reserves will be quickly spent at this rate (barring some form of global financial miracle) and the Russian budget will fall into deficits if oil prices fall too low for too long. Where the money was spent and where it came from is meaningless if the end result is a Russian state with no reserves, a devalued ruble and budget deficits limiting what the Russian state can do.

    Comment by Michel — October 12, 2008 @ 9:48 am

  4. @Michel,

    1. The oil price fluctuates a lot. That it’s tanking today does not mean it will not rise sharply in the future, e.g. if OPEC and Russia agree on collusion (which seems quite likely).

    Also, what matters for the budget and whether it’s balanced or not, is not the fact that it has fallen to around 80$ recently but it’s average for the year. And I assure you, that figure is well above 70$.

    As for falling production, you should keep in mind that the magnitude of that (something like -1% this year in total volume extracted) is completely dwarfed by swings in global prices. For the record I think giving tax breaks to oil companies (which Kudrin wants) is a stupid idea, since it would leave fewer resources in the ground for the future AND depress the current oil price even further. So on this particular issue I hope the siloviki (who want co-operation with OPEC) win.

    2. “With fewer petrodollars and production in other sectors stagnating or falling, this leaves the Russian government with two options: running deficits or massive cuts in government expenses.”

    A casual skim through Rosstat statistics will disprove this myth, which I’ve exposed for what it is (a myth) numerous times on my blog. Actually, it is hydrocarbons production that is the only “stagnating” sector in Russia. I suppose construction will join it, but general consumption and investment should continue growing since Russia relied much less upon credit than the Anglo-Saxon and many East-Central Europe economies.

    3. That reserves will diminish depends on the assumption that Russia’s financial system continues falling apart, whereas I think it is totally out of sync with its fundamentals and that a rally is coming soon. If I’m right, then there’s no reason they won’t even manage to make a profit. The chances of that happening, I’d imagine, are rather more than with Paulson’s plan to buy up toxic assets (on the topic of which, how’s that for systematized corruption?).

    Oil prices, I can assure you, won’t fall below 70$ for long because that is today the marginal cost of producing another barrel of oil, or thereabouts. Industrializing China is unlikely to go down and the Western economies will eventually recover. In the end the realities of peak oil make the fulfillment of your wishes of oil prices falling “too low for too long” quite unlikely.

    Comment by Da Russophile — October 12, 2008 @ 2:45 pm

  5. I looked at your blog. You write: “Russia is a normal country with a booming non-hydrocarbons economy underpinned by a well-educated and secular workforce. The Putin administration has affirmed democratic values, worked to improve human rights and pursued Russia’s national interests abroad.”

    Have you ever been to Russia? And, by Russia I don’t mean as a tourist visiting Red Square and the Hermitage. If you believe that Russia is a “normal” country witha booming non-hydrocarbons economy, you clearly have not seem much of Russia. If you are Russian, then you must not have traveled far from whatever bubble you live in.

    Will oil prices recover? Short term versus long term?

    Oil prices are shaped by supply and demand. Demand will continue to stagnate pushing down prices. A recession will lead to less oil and gas being consumed that will push down prices. OPEC will try to cut down production, but their economics are comparable to Russia’s in that they are also dependent on oil revenues. Lower prices and decreased production will undermine the stability of a number of oil producing nations in the Middle East.

    Long term demand my mitigated by new technologies. New innovations in solar technology (see http://www.economist.com/science/displaystory.cfm?story_id=12376666&CFID=25852466&CFTOKEN=57599474) will provide alternative forms of energy and progress is being made in biofuels, notably algal oil. These likely won’t replace oil and gas any time soon, but they may cut down on demand, thus keeping prices down.

    Also, feel free to explain what it is about the Russian “fundamentals” that leave you so optimistic? I don’t see the source of your optimism.

    Comment by Michel — October 13, 2008 @ 2:30 pm

  6. I have spent years in Russia and have traveled widely there. While I don’t currently live there I go back most summers to visit acquaintances. I have observed broad-based growth in the economy, including in the regions. I have been a massive expansion in retail and hotels/catering, and from around 2005 the boom has extended to domestic manufacturing. These observations are confirmed by things like Rosstat stats, World Bank Russia reports, … meh I’m not going to repeat myself, I already explained my views on it here (http://darussophile.blogspot.com/2008/03/editorial-fighting-russophobes.html), as well as Western expats in Russia like Timothy Post (http://www.timothypost.com/) – who is incidentally a regular commentator to this blog, and Eric Kraus (http://nikitskyfund.com/content/blogsection/4/37/), who publishes the excellent “Truth and Beauty (and Russian Finance)” newsletter.

    Actually, the fact that YOU seem to be blind to broad-based economic growth in Russia makes me suspect that it is YOU who lives in a bubble of some sort (though I was polite enough to refrain from saying out loud until you switched to ad hominems).

    What you write about oil prices is obvious, (patronizing) and doesn’t contribute to the discussion. The point I made in BOTH my last posts is that falling demand is likely to be matched by co-ordinated falls in supply on the part of OPEC and Russia, which will keep prices STABLE. Also, even for demand to fall substantially there must also be a near cessation of growth in China, which has accounted for most new world oil demand in the last few years. The IMF thinks that that is unlikely (http://www.economist.com/markets/indicators/displaystory.cfm?story_id=12381421). Unless there is a truly global DEPRESSION, oil prices short-term will almost certainly remain high.

    “Lower prices and decreased production will undermine the stability of a number of oil producing nations in the Middle East. ”

    What?? Decreased production will increase prices and increased production will lower them. You can’t have it both ways. And since oil demand is inelastic, decreasing production IS the way towards revenue maximization, if the big producers manage to collude – which is why it is a good idea for OPEC and Russia to do so.

    About long-term, I am well aware of the exponential trends in growth of solar (and wind) power and believe they are the only realistic path to sustainable development. However, exponents have very little visible effects when absolute magnitudes are small (as is the case today – solar photovoltaic made up a grand total of 0.04% of world energy consumption in 2005) and are realizable only within decades-long timetables according to most serious projections. Considering that oil extraction is peaking NOW and that there has been only negligible prior mitigation, the next few decades are going to be tough for oil-importers. Meanwhile, oil exporters will have the breathing room to channel their resources into building up their manufacturing bases and a sustainable energy infrastructure.

    “Also, feel free to explain what it is about the Russian “fundamentals” that leave you so optimistic? I don’t see the source of your optimism.”

    High human capital (http://darussophile.blogspot.com/2008/03/core-article-education-as-elixir-of.html) which pushes it to rapid economic convergence to developed country status, many natural resources at a time when many of them are beginning to become scarce, a visionary industrial policy and favorable geo-climatic trends (global warming, which will open up vast new areas and resources and make Russia into a global transportation hub thanks to an ice-free North-East Passage).

    You might want to read Myth No.4 and its justification here (http://darussophile.blogspot.com/2008/03/core-article-top-10-russophobe-myths.html) and Reading Russia Right (http://darussophile.blogspot.com/2008/01/editorial-reading-russia-right.html).

    Comment by Da Russophile — October 13, 2008 @ 10:18 pm

  7. Dear Russophile,

    I am happy to see that you have spent some time in Russia. My experience is a bit different. Yes, some people have benefited from the last 8 years, invariably those who are close to the state and those in power. Employees in the Russian Federal tax service, for example, have been given generous bonuses. This accounts for most of the rise in Russia’s middle class: the stats I have read indicate that at least half of Russia’s middle class (last year defined roughly as anybody earning more than 10,500-or-so rubles per year) are state employees. Not only was the Russian middle class dependent on the state, this fabled middle class was also largely concentrated in Moscow and to a lesser degree in the larger regional capitals. The farther away one travels, the greater the economic hardships one invariably encounters in Russia.

    How are the others faring, the 70 to 80% of the population that is not part of the Russian middle class? Well, if I base my experience on friends and acquaintances, there is a stagnation in incomes outside of Moscow. People are earning pretty much the same thing they were earning a few years ago. Inflation, however, is eating into the gains that had been achieved before then. An article published last week in gazeta.ru highlighted that this summer inflation was overtaking salary increases and for the first time the average income increases were not keeping up with inflation. In other words, on average the money people had this summer could buy less than it could a year or two earlier, and as a consequence most Russians have no choice to cut back. The question is what will they buy less of in the coming months?

    In today’s newspaper, there is a headline that sadly summarizes much about contemporary Russia. In gazeta.ru one can read: “Россияне экономят на молоке, но не на алкоголе и животных.” Russians economizing on milk, but not on alcohol and pets. Based on interviews with 10,000 Russians, the survey concluded that Russians are cutting back on some food purchases, notably milk products.

    Why are Russian consumers cutting back on food? The answer is quite simple: for most Russians, food represents their largest expense, and where inflation has been the highest overall has been on basic food products. Inflation therefore has been hurting those Russians who can least afford it.

    Will Russia and OPEC collude? Well, Russia may “collude” because it does not have a choice: not having invested enough in production will produce less. Hardly collusion, rather than a “choice” it has made. Will the other OPEC countries cut production? The problem is that they need the oil money, and they certainly want the other countries to cut production, but will they be willing to cut their own production? Past history has shown that OPEC is not always good at acting together in a coordinated manner. It is one thing to cut production when oil prices will increase dramatically as revenues will rise compensating lost production. However, if you cut production and prices lag, then you have to live with less income while you wait for prices to recover. Not an easy task when oil revenues are the main source of income for your state. Under those conditions, if a state can slyly increase production, while convincing other states to cut production, it can benefit. However, all states are likely to try to do the same thing, undermining the ability for states to collude.

    Like it or not, we are going to go through a recession and this will have an impact on demand for oil. Even if China’s economy is not hit hard, a slowdown in the American economy will mean fewer exports for China and less oil being consumed. This will stifle demand and will keep oil prices down. OPEC will do its best to counter this by talking about cutting production, but as I noted the competition between member states works against OPEC being able to effectively impose production cuts.

    However, the problem with Russia is that it does not have enough oil to ensure everybody’s prosperity, but it has enough to create a few speculative bubble in its economy when prices are high. Even if oil prices were to go back up to $147 a barrel (not likely), then you risk having a continuation of the same problems that existed in Russia prior to the fall in oil prices: high oil and commodity prices, pushing prices up for everybody and undermining all the other sectors of the Russian economy.

    Konstantin Sonin has a good piece in today’s Moscow Times. He writes: “Nonetheless, it appears that the healthy economic growth that Russia has enjoyed for the past seven years will soon come to an end. The Kremlin’s efforts to stimulate the economy by increasing government spending will only create an illusion of growth, which means that when this temporary windfall wears off, there will be a sharp economic decline.”

    Economies go up and they go down. This is pretty standard for all countries. However, the question remains as to what will be the political consequences for Russia if its economy does go through a recession in the near term. Putin was able to get away with much as the economy was seemingly getting better and many felt more prosperous (or hoped that prosperity would eventually reach them). What happens if this is no longer the case, if only for a couple of years?

    Michel

    Comment by Michel — October 14, 2008 @ 11:42 am

  8. […] and Da Russophile are engaged in an interesting debate on Russia in the comments to Check Out Michel’s Comments. I’ll add my two cents (or should it be kopecs?) […]

    Pingback by Streetwise Professor » The Debate — October 14, 2008 @ 8:36 pm

  9. Michel, I’ve read your comment above. While my experience in Krasnodar may not be representative of all of Russia, I can tell you that Krasnodar is booming. There is a very very vibrant middle class. Just go to the shopping mall or super markets and you’ll see them buying consumer goods, eating in cafes, playing games, going to the movies, etc.

    This middle class is neither imaginary nor small. It is also quite important to distinguish those who live in cities with more than a million people (about a dozen cities), those who live in 3rd tier cities (500K to 1 million), 4th tier cities (50K to 500K), 5th tier towns (10K to 50K). While my population break-down might be down differently, my point is still valid. Namely, the quality of life for those in the top two tier cities is so much better than it was 10 years ago as to almost be beyond disagreement. For 75% of the folks in the 1st tier cities, life is very quickly approaching Western Europe.

    However, for many folks in the lower tiers life remains quite simply and without a hell of a lot of hope. Food comes from garden plots and jobs aren’t great.

    One last point which shows how statistics need context. The point was made above that food represents the single largest item on Russian household budgets. True enough but why? Is it because food prices in Russia are going through the roof? Nope. Food is the largest expense because less than 5% of Russians have mortgages and the vast majority of Russians own their homes/apartments outright. Therefore, the item which in most Western countries represents the largest expense (rent/mortgage payments) can be crossed-out in Russia.

    This fact is a significant clue on why Russians, who are seemingly not making large gross incomes, can afford to buy cars, consumer goods, and take vacations. The percentage of disposable income for Russians is a much higher percentage of gross income than in the West.

    One more final point. Incomes in Russia continue to rise year to year. Hope about the future is strong for all Russians. Russia is moving in the right direction without doubt. What we are really debating is whether there are ways to speed-up the rate of progress not whether progress, itself, is being made. keep that in mind.

    PS: I welcome any of you who want to see the “real” Russia to come visit Krasnodar Krai. Either come in the Summer to enjoy the Black Sea resorts or come in the Winter to enjoy some of the best powder skiing east of Utah.

    Comment by Timothy Post — October 14, 2008 @ 11:36 pm

  10. My observations differ substantially from yours, Michel. While I agree with the Professor that “anecdotal evidence is seldom conclusive”, I’m of a different mind when it comes to “official statistics are not that illuminating” – because they are backed up by solid evidence from the media. Rosstat indications of a BROAD-based consumption boom can be validated by looking at things such as cell phone penetration rates where Russia is well over 100% (https://www.cia.gov/library/publications/the-world-factbook/rankorder/2151rank.html), the fact that Russia has become Europe’s largest auto market (http://www.businessweek.com/globalbiz/content/jul2008/gb20080711_765850.htm) and mass consumerism spreading out into the big provincial cities (http://www.nytimes.com/2008/05/17/business/worldbusiness/17mall.html?_r=1&ref=world&oref=slogin). Considering credit is still poorly developed in Russia and household debt is negligible as % of GDP, this evidence of a broad-based consumption boom implies that real incomes have also risen substantially.

    Frankly there aren’t enough bureaucrats to account for all the new spending, and that’s even assuming they’re all “middle class” – which assuredly not all are (I know one tax collector who leads a modest existence and mostly lives off renting out his Moscow apartment (while living on his dacha) rather than the job). Incidentally, stats about incomes are the ones I’d actually trust least from Russia. While official state salaries tend to be reported accurately, lowering reported income levels on the part of small businesses or individuals is prevalent (to avoid taxes). I suspect this is an important reason why it ostensibly appears (according to your sources) that wealth has increased for gov’t workers.

    Unlike you practically everyone I talk to objectively has a materially better standard of living today than several years ago, even though a significant percentage insist things are getting worse by the year even as they use the car or notebook or recount the foreign holiday that they didn’t have and couldn’t have afforded several years ago. It’s called “creeping normalcy” (http://en.wikipedia.org/wiki/Creeping_normalcy), although in this particular case with positive connotations. On which note I can’t resist one more piece of anecdotal evidence, from my blog:

    “(To be honest, though, I can see how the myth of apocalyptic Russian inequality developed. Novye Russkie businesspeople are brash and ostentatious in showing off their wealth, as if to make up for seventy years in which private wealth was repressed. Ordinary people complain a lot about their poverty, and Moscow has its fair share of unfortunates who have fallen through the torn post-Soviet social net and succumbed to drug addiction, alcoholism, etc (like with any American city, although that is not to excuse the fact). Nonetheless, many of these bigwigs spend themselves to bankruptcy, while the hoi polloi get access to utilities that are still heavily subsidized and live in a country where essential commodities are twice cheaper than in the US. Appearances can be deceptive.)”

    Finally I should also point out that development is a gradual process and wealth typically trickles down, not showers down. I am not disputing that a large portion of the population remains consumer poor and that’s not surprising considering Russia’s GDP per capita is only around a third of America’s and half the EU’s. Rather like Ireland as late as the 1980’s and Korea as late as the 1990’s. It’s the long-term trends that matter, and I’m very bullish on them.

    About OPEC and oil prices,
    Well, let’s move this discussion to SWP’s latest post.

    Comment by Da Russophile — October 14, 2008 @ 11:55 pm

  11. Well, I agree that there is a lot of consumption in Russia. However, this is not necessarily a sign of a strong middle class: you have a very rich layer in Russia that spends a lot.

    Let us look at the statistics. According to Russian State Insurance Company statistics(http://www.rgs.ru/media/3B08E019-4D85-45E6-A170-3A84D910EF51/Middleclass_2008_2.pdf), you now have 17.3 million families that earn more than $20,000 per year. True, this number has grown from 11.9 million families in 2007. According to Kommersant, the average family has 2.7 people (see http://www.kommersant.com/p-11352/income_family/). So, this means that roughly 46.7 million people live in families earning more than $20,000 per year. However, this would mean that over 90 million people would live in families earning less than $20,000 per year. Progress, yes, but the Russian state had better hope that the economic crisis won’t last very long and that there won’t be too many businesses going bankrupt as this will certainly push many families back into the less than $20,000 range.

    Gazeta.ru has an interesting spin on these statistics. They write: “К 2020 году задача, поставленная Владимиром Путиным может быть выполнена – доля среднего класса в населении страны может достигнуть 60%. Но для этого нужно будет считать средним классом семью с доходом в $500 в месяц на человека, что не соответствует мировым стандартам.”

    In other words, even if Putin and co. achieve their ideal of having 60 percent of families being classified as “middle class” by 20202 it will still be a relatively poor middle class by international standards as they define the middle class as a family where both family members earn on average $500 per person (i.e. both parents). Simply put, Russia defines the “middle class” at a level that Canada, for example, would define as poor. Yes, I am sure that Da Russophile will say that it is cheaper living in Russia, but this would be counter to the facts on the ground. Try renting an apartment anywhere in Moscow for less than $800 per month. The only way you can make ends meet if you at the bottom end of the middle class in Moscow and have not inherited an apartment from babushka is to live way out in the Moscow oblast and spend hours each day commuting. Hence, the title of the Gazeta article: “Самый бедный средний класс” (The Poorest Middle Class. Source: http://www.gazeta.ru/financial/2008/02/26/2649832.shtml).

    Comment by Michel — October 15, 2008 @ 10:28 am

  12. 1. Yes, economic crises do tend to reduce the size of the middle class.

    2. “In other words, even if Putin and co. achieve their ideal of having 60 percent of families being classified as “middle class” by 20202 it will still be a relatively poor middle class by international standards as they define the middle class as a family where both family members earn on average $500 per person (i.e. both parents).”

    “Но для этого нужно будет считать средним классом семью с доходом в $500 в месяц на человека, что не соответствует мировым стандартам.””

    Erm, the translation is “For this you’d have to count a family with income of 500$ per month PER CAPITA as part of the middle class, which doesn’t correlate with world standards”. Assuming an average family size of 2.7 people per family in 2020, that implies an income of 1350$ OR MORE per household. This is limited information, I don’t know their assumptions about things like the GDP deflator in 2020, etc, which would be vital for gauging real material wealth in that year.

    3. That ignores the fact that around 90% of Russians own their own apartment and that commuting isn’t that bad since mass transit around Moscow is relatively quick and efficient (as much as is possible for a large metropolis, anyway). Approaching costs in Russia from the perspective of a rich pampered Westerner isn’t a good guide to gauging living conditions of the poor.

    Comment by Da Russophile — October 15, 2008 @ 7:49 pm

  13. Well, Da Russophile, let’s keep in mind that children in households don’t work (they go to school, etc….). So, even if both parents work, that leaves the lower end of the “middle class” with $1,000 per month. Or perhaps you are suggesting that children should be sent to work for the sake of statistics?

    As for 90% of Russians owning apartments, that may be true, but quite often the jobs are not where the apartments are located. You may own apartment in a village in the Russian Far East, but what do you do if your son and daughter has to go to Moscow for a job? Or what happens if you want to move so you can earn more money? Kommersant reports that people living in the richest region of Russia (Moscow) earn on average 10 times more than the average in the poorest region of Russia (Ingushetia). What do you do then?

    Comment by Michel — October 15, 2008 @ 8:33 pm

  14. Michel, let’s keep in mind what the article says. It says quite clearly that it’s 500$ per member of a family. Children are members of a family. Hence, since the average size of a family/household is 2.7, it means the gross income for an average Russian family right on the borderline between middle class and poor is 1350$. This has nothing to do with whether children work or not.

    Poor labor mobility is a weakness of the Russian economy and exacts a small productivity penalty. If a son or daughter has to go for a job in Moscow, as you yourself pointed out salaries are relatively high there and they can rent out a small room in one of the peripheral suburbs around Moscow and commute to the city. Many people do that. It is actually quite typical of Western metropolises. Exactly how many cleaners or waiters or maintenance workers of New York own housing in Manhattan?

    Comment by Da Russophile — October 16, 2008 @ 12:54 am

  15. Fine, for the sake of argument, we will consider middle class as a family earning $1350 per month or $16,200 per year. It is still a very poor middle class by international standards, and the majority of Russians can’t even reach this low standard. If we look at the reality, close to half of all Russians replied to a survey conducted by the Levada Center last year that they don’t earn enough money to feed their families and only 40% of Russians say their families don’t have to worry about feeding their families. Nonetheless, even last year, 76% of families were spending half or more of their income on food. We can say, therefore, that the Russian middle class would be that 24% of the population that doesn’t spend more than half of their income on food. (Source: Ð’ ходе опроса “Левада-центра” 48% россиян признались, что их доходов не хватает, чтобы прокормить семью. Половина и более семейного бюджета уходит на питание в 76% семьях. http://www.start.bishelp.ru/rich/anatomia/1905eda.php). And this was before inflation really took off in Russia. I would expect that this 24% has actually shrunk this past year.

    As for commuting being typical of Western metropolises, you seem to not understand the challenge faced by most ordinary Russians. True, most working class families could not afford to buy a house in Manhattan, but they could afford a house elsewhere in New York. Also, housing is no longer affordable even in the suburbs of Moscow. Housing is not affordable in most of the cities big and small in Russia. This is particularly difficult for young families. Quite often, if a son and daughter gets married, they have no choice but to go live with one of their parents. They will live in a cramped apartment with the parents in one room and the married couple (and their children) in another room. Is this what you consider typical of Western metropolises? Is this what you consider normal for most countries of Europe and North America?

    Comment by Michel — October 16, 2008 @ 8:02 am

  16. Odd, my last post did not go through. To recap, it seems that you know little about the plight of most Russians. According to a survey conducted by the Levada Center, more than three-fourths of Russian families spend half or more of their income on food and close to half of Russian households say they do not have enough to feed their families. (Source: Ð’ ходе опроса “Левада-центра” 48% россиян признались, что их доходов не хватает, чтобы прокормить семью. Половина и более семейного бюджета уходит на питание в 76% семьях. http://www.start.bishelp.ru/rich/anatomia/1905eda.php). Yes, Russia did make some progress thanks to high oil prices. It went from a very poor country to a somewhat poor country. Nonetheless, it is hardly the utopia you describe. In reading your posts and your blog, I conclude that you are largely indifferent to the challenges faced by most ordinary Russians.

    Comment by Michel — October 16, 2008 @ 8:28 am

  17. I posted a reply, two actually, and they did not get through. I will try again.

    Da Russophobe, it seems to me that you are completely out of touch with the challenges facing most Russians.

    The Levada Center did a survey of Russians last year (2007) asking them how much they spend on food. Close to half of all who responded (48%) said what they earned was not enough to feed their families. Over three-quarters (76%) noted that that they spent 50% or more of their salary on food. This left the 24% of Russians (i.e. the “middle class” who actually had disposable income to spend on something other than food). These numbers demonstrate that in spite of the economic achievements, most Russians are still struggling just to buy enough food to feed themselves.

    As for your comment on cleaners and waiters owning housing in Manhattan, you once again minimize the problems faced by most Russians. I can’t speak of the United States, but in Canada most cleaners and maintenance workers could afford to buy housing in the cities in which they lived. Until a decade or so ago, housing prices were within a reasonable range: average house price being 3-5 times average household salary. Prices in some large cities were pushed out of that range, but I expect a correction in the coming year or two. In Russia, even in small cities, housing prices were 10 times or greater the average household salaries. The disparity would be even greater in Moscow. This is in large part due to a number of factors: corruption skewing building and housing markets and unequal development with the center grabbing most resources.

    You are valiantly trying to prove that Russia is a state comparable to the United States and others, but I beg to disagree. The facts on the ground do not support your hypothesis.

    Comment by Michel — October 16, 2008 @ 2:48 pm

  18. Michel,

    I have never claimed that Russia is comparable to the United States in all respects. It is obvious that with a GDP per capita that is nearly three times lower, it will also have a higher incidence of extreme poverty, higher wealth/development disparities between regions, lower labor mobility, and a whole host of other undesirable things which are closely correlated to it. On the other hand it is not a very poor or even “somewhat poor” country by international standards. It is high-middle income. By most measures of development it is well ahead of all of Africa, Latin America, the CIS countries and with the exception of Japan and Korea, Asia.

    The original reason I started up my blog was that I believed and still do that there is a big disconnect between apocalyptic Russian reality as constructed in the Western MSM and the mixed Russian reality that I observed and read about in more professional analyzes. Hence I typically highlight positive achievements, because the market for negatives is utterly saturated, and no small thanks to intentional dumping on the part of Russophobic forces in the West (although I am open to debate with people who disagree with me, including on my blog – something that can’t be said for La Russophobe, another site you frequent and which censors anything I have to say). Doing this does not make me indifferent or ignorant to the supposed “plight of most Russians”. In fact one might make the argument that by helping clear up misconceptions about Russia, I am doing a small bit for attracting the foreign investment that contributes to economic modernization.

    One more thing. Polls are extremely ambiguous things. According to your poll, 48% of Russians can’t feed their families. But according to some time series polls I’ve looked at (http://darussophile.blogspot.com/2008/04/editorial-lovely-levada.html), in 2005, only 35% identified themselves as poor (and only 8% as very poor).

    Finally, I am not sure of the value of continuing this discussion, since I don’t think any of us has anything new to add and there’s only so much time available in a day. I think Timothy summarized it well back in Post 8:

    “One more final point. Incomes in Russia continue to rise year to year. Hope about the future is strong for all Russians. Russia is moving in the right direction without doubt. What we are really debating is whether there are ways to speed-up the rate of progress not whether progress, itself, is being made. keep that in mind.”

    Comment by Da Russophile — October 16, 2008 @ 7:15 pm

  19. Yes, incomes are rising, however, the question is whether they would have risen faster were it not for Russian corruption and the increasingly vertical power structure. The other question is whether they will continue to rise. I, for one, would argue that democracies are better at dealing with crises and that over the long run democracies (real democracies, not “managed democracies”) also ensure greater prosperity. Putin was lucky: global prices for oil, natural gas and other resources rose to record prices filling the coffers of the Russian state. However, this easy wealth allowed Putin to shelve necessary economic reforms that would, in my opinion, have resulted in greater prosperity and higher incomes.

    Comment by Michel — October 16, 2008 @ 10:24 pm

  20. I just got back home to Krasnodar after driving 12 hours from Zaparozhiye, Ukraine.

    What a huge difference just a couple hundred kilometers makes. I could hardly believe the poor shape of eastern Ukraine. The roads were beyond bad. I had to drive 40 kilometers per hour at times on the major “highway” between Mariupol and Zaporozhiye because the road was worse than a diret road in places. The garbage collectors in Zaphorozgiye have gone on strike and the place looked filthy. There were so many homeless drunk men in a corner store that I literally feared for my safety and left the sodas on the counter. There was no traffic at all. None. Very few foreign cars. Most buildings were in very bad shape. ….and the roads!!!!! In general, the city felt like Russia did 10 to 12 years ago.

    Don’t get me wrong, there were some bright spots. The city of Zaporozhiye is architecturally stunning. The main boulevard Prospect Lenina is beautiful and there were a bunch of nice modern shops and some cafes. but, in general, the city felt like Pittsburgh in the 1970’s. Sad, poor, and bored.

    However, when we crossed the border near Rostov we were immediately greeted by a beautifully new paved road and two Lukoil stations, one on each side of the road. Driving through Rostov I was amazed at the sheer number of foreign cars, traffic, signs for businesses aeverywhere. The roads were a delight. Well paved, well lit, and well marked.

    The highway between Rostov and Krasnodar is still a work in progress. But I should mention that that progress is now taking place 24 hours a day and there are dozens and dozens (50+) pavers, trucks, and other machinery involved. The parts of the highway that have been finished feel like you’re driving down the Mass Pike after they’ve just repaved it.

    Russia is now rich, or at least the part of Russia where I live and my experience of the past weekend makes me look at Michel’s comments above and think that he probably hasn’t been to Rostov or Krasnodar recently. If he had he’s know that Russia is doing very well.

    Comment by Timothy Post — October 21, 2008 @ 3:24 pm

  21. Well, I took the highway in northern Russia. We were crawling along avoiding all the potholes in the highway. We were averaging at best 50km/hour. Russia is now rich? Timothy, I am sorry, your Russia must exist in an alternate universe as it is certainly not the Russia that I have witnessed. Yes, there are pockets of prosperity in Russia, but most of Russia is still poor.

    Comment by Michel — October 22, 2008 @ 12:43 am

  22. Michel:

    Come to Krasnodar and then make a statement like “….your Russia must exist in an alternative universe…”

    My Russia is Krasnodar. I don’t claim to know much about other regions. Krasnodar is, in fact, rich. Agriculture, trade, and tourism have made it that way. Life here is good, the climate is warm, and the people are happy.

    Comment by Timothy Post — October 24, 2008 @ 11:55 am

  23. […] Now I have only a layman’s knowledge of finance, so one would expect Craig Pirrong, a “Streetwise” Professor of Finance at the University of Houston (a respectable institution, AFAIK) with a special interest in Russia, to knock me down hard with amazing arguments and financial gobledegook well in advance of any objection I could muster. Alas and alack, I suspect his populist Russophobia got the better of him, based on his articles Under Pressure and Check Out Michel’s Comments. […]

    Pingback by Editorial: Some Thoughts on the Financial Crisis | Sublime Oblivion — November 24, 2008 @ 2:49 am

  24. […] and our ideological differences, it has been generally civil and very interesting.The Great DebateCheck out Michel’s Comments (and Russian Poverty, later offshoot) – not […]

    Pingback by Editorial: The Great Debate | Sublime Oblivion — November 24, 2008 @ 2:52 am

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