Streetwise Professor

Bloomberg Business Week has a long profile of Igor Sechin that illustrates perfectly why Putinism is an economic dead end.  Huge, inefficient state companies run by Putin cronies who have no clue about economics or how to create value.  But you’ll say: “Sechin has a PhD in economics!”  Well, a PhD in economics from a Soviet university is best described as an advanced degree in idiocy.

The piece describes Sechin as having an encyclopedic knowledge of Communist Party congresses dating from before the Revolution. So yeah, that definitely comes in handy in maximizing the value of the largest oil reserves of any publicly traded oil company.

Sechin refused to be interviewed for the article (probably a wise idea), but Putin’s Carney, Dmitri Peskov shared this description of Sechin’s penetrating economic philosophy:

“Sechin is a believer in the role of the state in his economic philosophy while at the same time not excluding a free-market approach. And he is firm in pursuing his viewpoint.”

Clear as mud. Problem is, I am sure that  it is an accurate characterization of Sechin’s muddled thinking.

Peskov is actually quite revealing, though almost certainly unintentionally so, in revealing the “thinking” that is propelling Russia into an economic cul de sac:

“For example, in shipbuilding it’s absolutely pointless to carry out privatization,” he says. “You can privatize enterprises, but they won’t be competitive; they will be doomed to failure. So consolidating the assets under the state’s wing is the only way to preserve key sectors of the economy.”

The reason for relying on markets, and privatization, is to determine the industries and firms that are economically viable.  The ones that generate more value than it costs to produce it.  Propping up those that would otherwise fail using state resources-which, never forget, are extracted by force from the citizenry-destroys wealth.   If Russian shipbuilding can’t compete against the Chinese or Koreans, it’s because Russian costs are higher.  Since costs are driven by the value of resources in alternative uses, the losses suffered by Russian shipbuilders in open competition means that the resources the Russian companies use would generate more value if deployed elsewhere.

That is, the success or failure of firms in the market is the mechanism that communicates where resources should be deployed, and where they shouldn’t be.  But that’s not the way statists-and Putinists-think.   Rather than having the market reveal which firms and industries should survive, the Putinists stand things on their head: they decide what industries they think are important, and provide the state resources necessary to ensure their survival. Their determination of the importance of industries is driven largely by history and political economy: the managers (and some workers) of legacy industries importune the state for support, and through personal and political connections largely succeed.  Thus the dead hand of the past rules the present and the future.  Rather than embracing the creative destruction of unviable firms and sectors, Putin embraces the destructive maintenance of legacy companies and industries.

It is a fundamentally uncreative system, because it is bounded by the cramped imaginations and interests of those who benefit from the status quo.  The interests of those who run the state are inherently biased to the status quo.  The more dominant the state becomes, the greater the tendency to stasis, and the greater the resistance to dynamism and change.

This affects even industries that are viable: the Russian oil and gas industries are clearly viable, due to the the capriciousness of nature which has endowed the country with bounteous reserves.  But the statist, Putinist system squanders that bounty.  The statistics don’t lie:

Compared with non-state-owned energy giants such as Exxon, Rosneft is inefficient. Even though Rosneft’s lifting costs — the cost of getting oil out of the ground — are less than a third of Exxon’s, the Russian company’s workforce is less productive.

Net profit per employee at Rosneft was $70,815 in 2012, versus $620,026 for Exxon. Rosneft’s price earnings ratio was 5.4, compared with Exxon’s 13.2 as of Jan. 13. Rosneft shares fell 6.87 percent in 2013, while Exxon shares rose 16.93 percent during the year.

But many find the company’s reserves to be an irresistible allure:

“The main reason to hold Rosneft is the reserves,” Greenwich Capital’s Snykov says.

But the point is that the value of these reserves is radically diminished by putting them under the control of a mullet-headed ex-KGB mouth breather.

The mental world of Sechin and Putin and the like was shaped in the USSR.  They don’t want to recreate it down to every last detail, but they do want to restore its broad outlines.  This is a recipe for stagnation.

And it will only get worse.  There is no mechanism for changing the leadership: indeed, Putin’s priority project in the past several years has been to neuter-or worse-any possible challenge to the incumbents.  So the current gang-and it is a gang, in all essential features-will remain in control for the foreseeable future.  And as they age, they will become even more resistant to change, and more sentimental about the world of their youth.

I still shake my head at those who understood the problems with the existing system, and assumed that Putin would too, and would be forced to institute changes and reforms to prevent the system from lapsing into senescence. How can one be so oblivious to the implications of the interests of the rulers of a system combined with the conservative impulses of aging men? Together, these forces work relentlessly to resist change and reform, and to attempt to maintain the status quo–or even roll back the clock.

Indeed, just this week, one of the few tepid reforms instituted by Medvedev has been rolled back.  The eunuch prime minister announced that state officials will be allowed to serve on the boards of state corporations, reversing a policy instituted a few years ago.  Remember when Medvedev’s original announcement was viewed as a dire defeat for Sechin, in particular?  Hardly.  Medvedev is being kept around to serve as the sacrificial lamb to pay for Putin’s mistakes, and Sechin is the second most powerful man in Russia.

So read the BW profile to understand Russia’s past, present, and future in a single story.  For Igor Sechin is the poster boy for Sovokistan, and Sovokistan is what Putin has created.