Streetwise Professor

January 1, 2009


Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 8:54 am

The island of stability theme is now longer operative.   According to Interfax,

Russia more vulnerable to world crisis because of integration – Putin

MOSCOW. Dec 29 (Interfax) – The global financial crisis’ effect on the Russian economy is rather substantial because Russia has become an integral part of the world economy, Prime Minister Vladimir Putin said at the Monday meeting of the federal government.

“Since the late 1990s we had been seeking integration with the world economy. Our integration wish came true. As people say, we slit our own throat,” he said.

Is this a self-reproach?   Hard to tell.   But since (a) Putin has been in charge of the integration policy since its initiation in the late-1990s, and (b) he blames integration for his country’s current difficulties, that seems a reasonable conclusion.

I must say, however, that his diagnosis is largely misguided.   Even in the days of its alleged autarky, the USSR was integrated with the world economy–through the commodity markets, most notably the oil market (as a seller) and the grain market (as a buyer).   In its later days, the USSR also borrowed extensively on the international credit markets.   Indeed, the collapse of the USSR was hastened–and arguably caused–by a collapse in the price of oil that deprived it of the export revenues necessary service its debts and to buy grain to feed the populace.

Current events are not all that different.   A collapse in raw material prices (led by oil) knocked the props from under the Russian economy.   Government debt is not large, but private debt is, and the decline in resource export values is making it very difficult for the borrowers to service that debt.   Moreover, the line between public and private debt in Russia is somewhat blurred, given the Russian government’s adamant refusal to let control of “strategic” firms fall from Russian hands.

Some things are somewhat changed.   Today, international investors and currency traders make very public evaluations of Russian economic conditions, as revealed in stock prices and the exchange rate.   These signs of economic distress were lacking in the 1980s.   These public expressions of gloom no doubt infuriate Putin, who desires total control over information and publicity.   But, in my view, these markets are of secondary importance compared to commodities and debt.   In these areas, Russia’s integration with the world economy is nothing new.

I will say, however, that Putin is right about “slit[ting] our own throat.”   He’s just right in the wrong way.   Yukos; backsliding on various economic reforms; Sakhalin II, etc., Mechel, BP-TNK, the Russo-Georgian War, continuing legal nihilism and hostility to property rights, a misguided ruble policy and other ham-handed economic policies in the midst of crisis, and a revanchist foreign policy have all conspired to dramatically increase the difficulties that Russia will face in recovering from its current difficulties.   And all–all–of these elements are Made in Moscow, and Produced by Putin.

In brief, Vlad’s laments, and dreams of some imaginary autarkic paradise, reflect a sadly distorted view of history, and the way the world works.   Russia (and its Soviet predecessor) have long been integrated in the world economy.   It has been connected through the commodity/oil price channel, and its booms and busts have followed closely the waves of world commodity booms and busts.

Ironically, Russian policy under Putin has not ameliorated, and arguably has aggravated, this integration.   The focus on energy-led development, the disregard of the development of other sectors (silly things like the creation of state nanotechnology corporations don’t count), and the erosion of property rights have increased Russia’s reliance on industries that are highly sensitive to world economic conditions.   So, again, he is in a way correct about slitting his own throat–just not in the way he thinks.

Putin’s remarks suggest a desire to turn inwards, to cut Russia off from the broader world economy, probably through protectionist measures (already seen in automobiles and timber).   That would be just another self-inflicted wound.   Protectionism would only exacerbate the economic malaise (cf., Smoot-Hawley), cement the retrograde practices so common in the Russian economy, and delay its economic evolution.   It’s a really dumb idea, but given Putin’s economic illiteracy, I fully expect it to be implemented.

* The Deguello was a tune dating from the wars of the Reconquista in Spain.   Literally, it means “The Throat Slitting,” and was played before battle to signal “no quarter.”   Santa Anna’s army played it before storming the Alamo.

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  1. One thing that may not have changed much when comparing the Soviet Union and contemporary Russia is transparency. According to some, Russia’s “official” data can’t be trusted. This is what Anders Aslund had to say in the Moscow Times:

    “Under Putin, transparency has systematically been reduced, and we no longer dare to trust the government’s public statements on its currency reserves. Officially, they have declined by $163 billion, or 28 percent, from $598 billion in early August to $435 billion in early December. But when Vneshekonombank was given $50 billion of state reserves to help Russian oligarchs with refinancing, nothing was deducted from the official reserves as it should have been. In an article on on Oct. 24, Alexei Mikhailov plausibly claimed that another $100 billion or $110 billion of “other reserves” had been transferred to the banking system and were nothing but rubles. To my knowledge, no official denial has been issued. If that were correct, the reserves have fallen by more than half to less than $300 billion, but the government sheds no light on this.”

    In the same way that the Soviet Union did it best to cover up the Chernobyl disaster as long as they could in Soviet times, Russia my be doing its best to conceal negative data as long as it can now.


    Comment by Michel — January 1, 2009 @ 5:16 pm

  2. 1. “Ironically, Russian policy under Putin has not ameliorated, and arguably has aggravated, this integration. The focus on energy-led development, the disregard of the development of other sectors (silly things like the creation of state nanotechnology corporations don’t count), and the erosion of property rights have increased Russia’s reliance on industries that are highly sensitive to world economic conditions. ” – SWP

    I interpret it differently. The main reason development was “energy led” was because global prices for commodities became very favorable and as such skewed the statistics. When in reality the government pursued policies aimed at industrial growth (preventing a too rapid ruble appreciation, creating special economic zones, requiring foreign auto companies to source from local suppliers after a certain period after opening their factories, etc). Talking of the automobile sector, annual automobile production rose from 1.0mn in the early 2000’s, to 1.7mn in 2007 with a huge amount of extra capacity projected to come on-stream in the next few years.

    To make a very crude illustration: assuming Russia produces 6 units of oil at 10$ and 1 unit of cars at 40$ in 2000 for a GDP of 100$, and 9 units of oil at 100$ and 2 units of cars at 50$ in 2007 for a GDP of 1000$. It would appear that its economy’s “reliance” on energy has increased from 60% to 90$, and is true in the sense of nominal GDP (and the energy dominated stockmarket), whereas in a real sense the importance of energy declined. And of course most of the economic things for which Putin is critiqued for have affected precisely the energy industry, e.g. high taxes on oil exports slowed the industry’s growth, but ironically actually lessened Russia’s energy dependence from what it otherwise would have been! (As well as leaving more oil in the ground for future extraction, which is also a form of saving).

    The vast majority of the world’s successfully developed nations developed behind (selective) protectionist walls with strong government co-ordination and incubation of higher-value industries, that might reduce consumer surplus today but increase long-term wealth. Branding this as ‘economic illiteracy’ is a reflection of your ideological slant, not an objective statement.

    2. Thanks for the happy New Year Michel, you too (and SWP and other readers). I’ll have to disagree again though. 🙂

    Firstly, the 50bn $ need not have been transferred at once to the VEB. It is also a possibility that these transfers accounted for the bulk of the loss in official reserves. Without having access to the accounts, this speculation is as authoritative as Aslund’s. The second claim about the 100-110bn displays what appears to be a certain confusion – if they were in RUBLES and is “plausible”, then they;d have NO effect on the FOREIGN currency reserves at all. And if Russia is so fond of opacity, why reveal its reserves weekly, while the vast majority of countries release their figures quarterly?

    Comment by Da Russophile — January 2, 2009 @ 12:03 am

  3. Craig, I have one question for you. How do you interpret GAZPROM’s tiff with Ukraine? This is what I am thinking: they are bullying Ukraine to sign a contract because they know that the price of natural gas will soon be coming down. What is your analysis? Will natural prices go down significantly and how quickly will this happen?

    Comment by Michel — January 4, 2009 @ 11:04 am

  4. Michel–

    Great minds;-) That’s what I was going to post on tonite. The pricing issue you mention is a big part of it. Stay tuned!

    The ProfessorComment by The Professor — January 5, 2009 @ 7:11 pm

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    Pingback by Russland skrur igjen gasskrana — January 6, 2009 @ 8:02 am

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