Streetwise Professor

March 11, 2010

How Do You Define “Blatant”?

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 9:58 pm

Igor Sechin says that any decision to take TNK-BP’s license for Kovytka would be “fair.” “‘There’s no talk of any blatant expropriation. I think we will find a solution to this issue,'” Deputy Prime Minister Igor Sechin told reporters.”

Yes, I am sure there will be a fig leaf.  I am sure that TNK-BP will be browbeaten behind the scenes to convince them to smile and play nice and do a deal and say “thank you sir may I have another?” in public.  But at the end of the day, any deal will take place under the threat of expropriation, and will not be a truly voluntary transaction.  Just another day in the life of the natural state.

Meanwhile, Sechin and Kudrin are taking it to the mattresses over the issue of tax breaks for Siberian oil:

A feud between Russian Prime Minister Vladimir Putin’s deputies over how to plug the budget gap may end up curbing growth in oil output, the biggest source of state revenue, and limiting flows to Asia, analysts said.

Finance Minister Alexei Kudrin wants to claw back some of the Siberian tax breaks granted to oil companies led by OAO Rosneft and increase taxes on gas producers such as OAO Gazprom. Rosneft Chairman Igor Sechin, Kudrin’s fellow deputy prime minister, wants to prolong oil export tax exemptions to fund output increases. Gazprom and Rosneft are both state-run.

“The Pandora’s box has been reopened,” Yaroslav Lissovolik, chief strategist of Deutsche Bank AG in Moscow, said in an interview. “The tug of war between the ministries is starting.”

. . . .

Kudrin wants to boost gas taxes either at the extraction or export stage, a government official said last week. Gazprom, the world’s largest gas producer, defeated a similar proposal last year. Russia hasn’t increased extraction taxes for gas suppliers since 2006.

Kudrin is under pressure.  Sechin/Rosneft and Gazprom want to keep the rents flowing.  To add to his travails, Putin is trying his old gambit of pacifying discontent at the first signs of its appearance by playing Santa Claus.  Most recently, he ordered a 6.3 percent increase in pensions against Kudrin’s protest:

The government will increase pensions by 6.3 percent next month despite warnings from Finance MinisterAlexei Kudrin on Thursday that the budget cannot afford it.

“We have the means, and I think the decision to increase pensions will not affect the macroeconomic conditions,” Prime Minister Vladimir Putin said at a Cabinet meeting. The increase signifies “carrying out our responsibilities before our citizens,” Putin added.

The pension fund may see a deficit of up to 170 billion rubles ($5.71 billion) if any increases not indicated in the legislation are made, Kudrin said. By law, pensions can be increased if the Pension Fund makes a profit or if inflation is especially high. The fund’s profits did not increase, nor will they increase in the current year, and inflation is expected at clock in at 5.6 percent to 7.5 percent in 2010. Therefore, the law does not allow for a pension increase, Kudrin said, RIA-Novosti reported.

“We have the money,” Putin replied. “Our ability to lower inflation last year … indicates that we can maintain macroeconomic conditions as planned,” he said.

Putin says it, so it must be true!

Russia’s economy has bottomed out, but its rebound has been less robust than elsewhere in the world.  The service sector is barely growing.  Foreign direct investment is still in the dumper. Manufacturing eked out a extremely small gain: the most recent PMI came in at 50.2, with anything above 50 indicating growth.  In contrast, the Eurozone PMI was 54.2 and the US  was 56.5.  So Russia is a definite laggard.

The recent rise in oil prices to over $80/bbl is a mixed blessing.  It bolsters Russia’s budget, but also causes the ruble to strengthen, which hurts manufacturing in particular.  So while the rest of the world is recovering with some vigor, Russia is languishing.

So Kudrin is caught between the rent seekers and Putin doing his populist turn.  (What about Medvedev you ask?  Don’t make me laugh.)  He has done a remarkable job over the years at steering a very respectable macroeconomic course for Russia: the country’s problems lie with its institutions and microfoundations.  But it is a thankless job, and there is no guarantee that he will be able to hold off indefinitely those baying after state funds.

Which makes me think: maybe we should offer Kudrin a job over here, as, say, Treasury secretary.  He has just the skills we need.  The ability to craft and implement sensible macro and budget policies in the face of intense political pressure.

So how’s this for reset: we trade Timmy! for Kudrin, straight up.  Now that would be the steal of the century, sort of like Brock for Broglio.

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  1. Sounds like a plan to me!

    Comment by NinaIvanovna — March 12, 2010 @ 1:18 pm

  2. Kudrin always fascinates me. I can rarely draw any sinister conclusions about his motives like I often can with other leaders in Russia’s government. It actually just seems like he’s trying to make sensible, prudent economic decisions. Imagine that! Frankly, I’m amazed that he’s still around. The guy’s got 9 lives and he always seems like he’s too good to be involved with all these other characters. Trading Geithner for Kudrin could very well be a good option. That really says something when I’d consider hiring a Russian bureaucrat over an American one. SO and rkka can have a field day on that conclusion, I guess. Just as a reminder, though, when it comes to national financial issues, I don’t care where the person is from. I just want good, old-fashioned horse sense… “don’t spend what you ain’t got.”

    Comment by Howard Roark — March 13, 2010 @ 4:31 am

  3. Why would I have a field day on that conclusion? At the higher levels, I see the American government as being substantially more incompetent than the Russian one.

    I’m not actually against Kudrin and I support his running of Russian finances. The current arrangement is optimal. A fiscal hawk at the helm of finances, but one who could be overridden if there are political and social exigencies.

    And another thing… Putin has been crucial to covering Kudrin’s ass from the silovik clan. Why don’t you care to mention that?

    Comment by Sublime Oblivion — March 13, 2010 @ 2:48 pm

  4. Who says Putinomics is a fraud? SBERBANK, that’s who:

    Russia, despite “all its imperial ambitions and pretensions,” is no longer “the locomotive” for the economies of the Commonwealth of Independent States but instead, as the current economic crisis has shown, is now “the caboose,” according to a study prepared by Moscow’s Sberbank.

    In a report released this week, that bank’s Center for Macro-Economic Research compares the vectors of economic growth in the former Soviet republics and draws from that two conclusions, neither of which will be welcome to the powers that be in the Russian Federation (
    On the one hand, the bank’s experts found, the other petroleum-exporting countries have performed far better than Russia, thus showing the regular claims by the powers that be in the Russian capital that the situation in the Russian economy now is largely the result of falling energy prices on the world market.

    Such claims, the report shows, in the words of commentator Maksim Blant, thus are shown to be “a lie and an attempt to escape responsibility for [their] failed economic policies.” Indeed, he says, the report’s greatest contribution would be realized if it led the government and analytic community to stop invoking “raw material dependence” as an explanation.

    But the Russian powers that be have pushed that line so hard and so long and even “independent experts” have made it part of the “mainstream” that any move away from it seems unlikely anytime soon, even with all the evidence that the Sberbank report provides, Blant suggests.
    And on the other – and this conclusion too calls into question many of the pronouncements of Russian leaders– the Sberbank experts concluded that while a decade ago, the countries in the CIS were “strongly dependent” on Russia economically, “the crisis has shown that such a situation is receding into the past.”

    In dramatic language, the bank’s analysts suggest that Russia is no longer “the locomotive” but rather “the caboose” in this regard, although they acknowledge the importance Russia serves as an employer for migrant workers from many CIS states and as a source of financial assistance to their governments, two key forms of influence.
    Up to 60 percent of migrants from Belarus, Armenia and Ukraine are going to Russia, the bank reports, while 85 percent of those leaving Kyrgyzstan and 40 percent of those in Moldova seeking work abroad do so. And with regard to assistance, Russia has provided more to its CIS partners “than the IMF, the EBRD and the World Bank taken together.”
    That may have slowed but it has not stopped the reorientation of the economies of the CIS countries away from Russia, the Sberbank analysts said, with “the role of Russia falling as it were because earlier it dominated without any alternative” while now these countries have choices (,
    Russia was the basic and unchallenged trading partner of all these countries ten years ago, but “now this situation has changed significantly. The countries located to the east of the Urals [, for example,] even before the crisis were ever more focused on the rapidly developing markets in Asia, and in the last year finally reoriented themselves toward China.”

    The Sberbank report, according to Blant, thus highlights the unfortunate reality that “as long as the Russian powers that be and expert community start from false premises, the situation [that Russia and the other CIS countries have experienced in recent years and especially during the crisis] will repeat itself.”

    “The present crisis,” he writes, is not the first in the world economy and won’t be the last.” And if Moscow fails to draw the lessons offered by the Sberbank report and thus does not correct its mistakes and shortcomings, he concludes, then it will make its own situation even worse. But “unfortunately,” he says, “the Russian powers that be are not capable of doing so.”

    Comment by La Russophobe — March 13, 2010 @ 7:23 pm

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