Streetwise Professor

October 12, 2009

He’s Doing it Again

Filed under: Economics,Energy,Politics,Russia — The Professor @ 3:11 pm

Dmitri Medvedev stepped up what can only be considered his campaign against Putin and Putinism by emphasizing Russia’s dismal economic performance in 2009, and placing blame for the country’s economic malaise on its energy export dependence:

Russia’s economy may contract by a “very serious” 7.5 percent this year as dependence on energy exports left the country more vulnerable to the global financial crisis than expected, President  Dmitry Medvedev said.

“I must admit that we sunk below our lowest expectations,” Medvedev said in an interview to be broadcast today at 9 p.m. Moscow time on state television. “The real damage to our economy was far greater than anything predicted by ourselves, the World Bank, and other expert organizations.”

Initial forecasts indicated the economy may drop between 3 percent and 3.5 percent this year, Medvedev told Channel One. The government predicted last month that the economy will shrink 8.5 percent this year, the most in a decade. Russia will return to growth in 2010, the government forecast in a report published on its Web site.

. . . .

Russia needs to modernize the economy and reduce reliance on oil and gas exports, to protect it against financial crises, Medvedev said. This may take as long as 15 years, he said.

“That is a perfectly plausible time frame in which to create a new economy, an economy that will be competitive with other major world economies,” Medvedev said.

“Once a significant portion of our revenue is generated by something other than energy exports, let’s say at least 30 or 40 percent of it, then we would already be living in a different economy and in a different country.”

Russia should pursue energy efficiency, including creation of new fuels and energy saving, develop nuclear power, information infrastructure, and produce its own medicines, the president said.

“Everything was okay as long as prices for energy and raw materials were high,” Medvedev said. “Then those prices fell. Our economy was hit hard. Our citizens were hit hard.”

Several comments.

First, the tone and tenor of Medvedev’s remarks contrasts starkly with the happy talk that has been Putin’s staple for over a year.

Second, the repetition of the theme that it is imperative to wean Russia from its dependence on raw material exports is by now so frequent, and so contrasting to Putin’s position as the de facto Prime Minister of Gazprom (“Gazputin,” remember?–he’s now off to China to do more gas deals), that these statements must be considered as Medvedev’s framing of his challenge to Putin.  Blood brothers?  Really?  So were Cain and Abel, if memory serves.  It still remains to be seen, however, whether Medvedev has the personal steel and the political support to challenge Putin successfully.

Third, with respect to the economics, even if Medvedev did not face a political battle over the future of the country, comparative advantage is what it is, and will inevitably affect the structure of the Russian economy.  That said, the wealth consequences of Russia’s natural resource factor intensity, and the susceptibility of the country to terms of trade shocks could be mitigated to the extent that these risks could be shared through the financial markets, e.g., by exchanging claims on Russian natural resource endowments for claims on capital assets in other countries.  The inability of Russia to precommit credibly not to expropriate foreign natural resource investments limits, however, the potential for this potentially beneficial exchange.  This will continue to shackle Russia to the vicissitudes of commodity prices, and perpetuate its status as a very high beta (that is, high risk) economy.

Fourth, and relatedly, this inability to precommit in large part reflects the political obstacle that Medvedev is unlikely to overcome.  Skimming resource rents is very lucrative to the siloviki elements, and they are almost certainly unwilling to constrain themselves institutionally and legally even though such constraints would increase Russian wealth–because it would reduce the siloviki wealth.  They are perfectly happy to have a big piece of a smaller pie than a small (or non-existent) piece of a bigger one.

There’s one last thing in the article that deserves comment:

The jobless rate fell to 7.8 percent in August, lower than previously estimated, from 8.3 percent in July on rising seasonal demand for agriculture and construction. The number of unemployed was 6 million, the Federal Statistics Service said.

It is very hard to square the relatively low (compared to the US, for instance) and falling unemployment rate with an economy that sank “below [the] lowest expectations.”  This translates into plunging productivity, and means that true unemployment is almost certainly masked, probably by companies under state pressure and receiving state support continuing to pay unutilized or heavily underutilized workers.  Big Russian companies are almost certainly serving as de facto providers of a social safety net, which does not speak well for Russian state capacity.  Moreover, it means that either (a) these companies will be badly positioned financially to recover, or to exploit a world rebound, or (b) the government will likely provide additional support to these companies going forward, thereby impairing the state’s fiscal condition. Either alternative, or a combination of both, will serve as a drag on Russian economic performance in 2010 and beyond.

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17 Comments »

  1. Wow – as difficult messed up as the US economy has been, it’s stunning to think of a 7.5% contraction in a year. And under official numbers no less.

    Two side questions:
    1) could more of the economy be moving underground, given the regime’s very “aggressive” intrusions
    2) given Russia’s horrible demographics, absent a short-term spike in oil prices, will they ever see economic growth again?

    Comment by Hal — October 12, 2009 @ 4:10 pm

  2. I think this is part of the strategy to try and “convince” the international community that Russia is realizing the key issues. I don’t think it is Med’s challenge to Putin. Just these guys playing the good cop – bad cop game.

    Comment by Surya — October 12, 2009 @ 5:28 pm

  3. The Tandem is transient.

    Comment by So? — October 12, 2009 @ 8:46 pm

  4. “It is very hard to square”

    SWP, the Moscow Times has explained it!

    http://www.themoscowtimes.com/news/article/387305.html

    It’s just this simple: The Kremlin is lying.

    Comment by La Russophobe — October 13, 2009 @ 2:47 am

  5. “First, the tone and tenor of Medvedev’s remarks contrasts starkly with the happy talk that has been Putin’s staple for over a year.”

    Contrast the performance of the Baltic States, so often praised in the West as an instructive example for Russia to follow. Until 2008 that is.

    “Second, the repetition of the theme that it is imperative to wean Russia from its dependence on raw material exports is by now so frequent, and so contrasting to Putin’s position as the de facto Prime Minister of Gazprom (”Gazputin,” remember?–he’s now off to China to do more gas deals), that these statements must be considered as Medvedev’s framing of his challenge to Putin.

    Please identify a strategy which, starting from where Russia was when Putin found it in 1999, which would have provided Russia a diversified economy able to withstand a global financial collapse in 2008.

    “Blood brothers? Really? So were Cain and Abel, if memory serves.”

    Is it anything like Kissenger/Rogers? or Brzezinsky/Vance? No.

    “It still remains to be seen, however, whether Medvedev has the personal steel and the political support to challenge Putin successfully.”

    Pathetic. You do know that Medvedev has the power to fire Putin at any time, don’t you?

    “Third, with respect to the economics, even if Medvedev did not face a political battle over the future of the country, comparative advantage is what it is, and will inevitably affect the structure of the Russian economy. That said, the wealth consequences of Russia’s natural resource factor intensity, and the susceptibility of the country to terms of trade shocks could be mitigated to the extent that these risks could be shared through the financial markets, e.g., by exchanging claims on Russian natural resource endowments for claims on capital assets in other countries. The inability of Russia to precommit credibly not to expropriate foreign natural resource investments limits, however, the potential for this potentially beneficial exchange. This will continue to shackle Russia to the vicissitudes of commodity prices, and perpetuate its status as a very high beta (that is, high risk) economy.”

    Yeah, we saw how well this worked to shelter the Russian economy from global financial shocks back when USAID and USAID contractor personnel were writing Russian economic policy.

    “It is very hard to square the relatively low (compared to the US, for instance) and falling unemployment rate with an economy that sank “below [the] lowest expectations.” This translates into plunging productivity, and means that true unemployment is almost certainly masked, probably by companies under state pressure and receiving state support continuing to pay unutilized or heavily underutilized workers. Big Russian companies are almost certainly serving as de facto providers of a social safety net, which does not speak well for Russian state capacity.”

    Please identify a strategy which, starting from where Russia was when Putin found it in 1999, which would have provided Russia a Russian state capacity able to withstand a global financial collapse in 2008, better than the one they have now.

    “Moreover, it means that either (a) these companies will be badly positioned financially to recover, or to exploit a world rebound, or (b) the government will likely provide additional support to these companies going forward, thereby impairing the state’s fiscal condition. Either alternative, or a combination of both, will serve as a drag on Russian economic performance in 2010 and beyond.”

    This is what happens when you focus your bailout efforts on people, rather than merely pushing terabucks worth of bailouts and guarantees to Government Sachs et. al., like Paulson did. We shall see which strategy proves to be a greater drag going forward.

    Comment by rkka — October 13, 2009 @ 3:40 am

  6. “Contrast the performance of the Baltic States, so often praised in the West as an instructive example for Russia to follow.”

    What a totally idiotic, shameless liar. The only thing anybody ever said about the Balitcs was that they were able to generate huge economic growth WITHOUT OIL such as Russia is blessed with AND DESPITE A LEGACY OF RUSSIAN EXPLOTATION that Russia is not burdened with.

    But you have to feel for these pathetic Russophile creeps. Here they have THEIR OWN LEADER trashing the Russian economcy AND THEIR OWN STATISTICS MAVEN saying the Putin regime IS LYING about basic economic facts. Where are they to turn? What are they to do?

    Only pathetic, neo-Soviet lies. It’s really pathetic.

    Comment by La Russophobe — October 13, 2009 @ 7:32 am

  7. LR / Moscow Times propaganda piece title: Statistics Chief Claims Number Shenanigans

    What he actually said: “Now the ministry starts to give orders: We should monitor this and that,” Sokolin said in the interview. “At least they don’t tell us how to monitor. They don’t try to manipulate figures. If they start giving such guidelines, this will mean real trouble.”

    More mendacious lies from the Russophobe cockroaches. Only pathetic, neo-Soviet lies. It’s really pathetic.

    Comment by poluchi fashist granatu — October 13, 2009 @ 11:56 am

  8. Gregor – poluchi fashist granatu

    The creepy neo-stalinist poluchi fashist granatu do not hide his ideologi and strongly held belief

    In Franz Kafka’s The Metamorphosis, a man, Gregor, is transformed overnight into a dung beetle or cockroach (translation not specific, hinted at with description of beetle-or-cockroach-like features) . He views himself as repulsive in his new identity.

    Comment by Oleg — October 13, 2009 @ 12:35 pm

  9. Phoby’s so cute. She’s trying to think, but nothing happens.
    “Prosperity” generated by the Baltic model of accepting vast, unrepayable loans isn’t prosperity, as they are now discovering.

    What has become clear is that the Baltics, and Ukraine for that matter, are not independent States. They are dependencies, with no prospect of ever being able to pay their bills.

    Comment by rkka — October 13, 2009 @ 4:44 pm

  10. Stalin was a great leader.

    Comment by So? — October 13, 2009 @ 9:03 pm

  11. poluchi fashist granatu aka Sublime Oblivion has done more metamorphosizes than Imelda Marcos has changed shoes.

    And, rkka, please freshen up your pro-Pootie stats and central memes. You need to ask the boss for better material.

    Comment by penny — October 13, 2009 @ 11:29 pm

  12. There you go again, penny.

    Comment by So? — October 14, 2009 @ 12:10 am

  13. “And, rkka, please freshen up your pro-Pootie stats and central memes. You need to ask the boss for better material.”

    In other words, you have no effective factual response. But we knew that already.

    Comment by rkka — October 14, 2009 @ 4:51 am

  14. poluchi fashist granatu:

    You are a true P-S-Y-C-H-O-P-A-T-H.

    How can it be a propaganda piece IF YOU YOURSELF ADMIT that it contains accurate information, and quote it? Did you think AT ALL before you vomited on this blog?

    YOU are the one guilty of mendacious propaganda. Did you read the article? It states: “If we look at the Rosstat model, it does not confirm the Economic Development Ministry’s information that we have already started to move upward.”

    IT SAYS ROSSTAT IS LYING, YOU MENDACIOUS BABOOON!!

    It also stays the Kremlin tells the statistics agencies what information they can and can’t collect.

    Before you write something, dear, it’s necessary to read both the material you comment on and your own words. If you don’t, you just end up looking like a monkey. Also, probably best not to drink quite so much in the process, we already know you are Russian.

    Comment by La Russophobe — October 14, 2009 @ 6:44 am

  15. Correction: The Economics Development Ministry, I meant of course, not ROSSTAT, is lying.

    Comment by La Russophobe — October 14, 2009 @ 6:52 am

  16. Hey SWP, check it out, even more stunning evidence of impending economic collapse for Russia from the World Gas Conference:

    “If the new forecasts are accurate, Gazprom is not going to be the perennial cash cow funding Russia’s great power resurgence. Russia’s budget may be in structural deficit.”

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6299291/Energy-crisis-is-postponed-as-new-gas-rescues-the-world.html

    I propose a two-step plan for Dima Medvedev to respond to this crisis:

    (1) Fire Vlad Putin
    (2) Resign

    Comment by La Russophobe — October 14, 2009 @ 7:18 am

  17. LR–

    Yes, related to shale gas, which I suggested some weeks back should be the focus of a major European push. Was thinking of composing a blog piece on this (saved the AEP article and another from the NYT) but haven’t had time.

    You’re right, though–it is a gun pointed at Putin’s head. His best hope is that Euro dithering and nimby-ism will preclude them from exploiting fully the potential for domestic shale gas production.

    Thanks for the link/heads up.

    The ProfessorComment by The Professor — October 14, 2009 @ 1:02 pm

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