Streetwise Professor

April 14, 2009

Kudrin Channels SWP, Part II

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:01 pm

Today’s WSJ reports that Russian Finance Minister Alexei Kudrin is publicly acknowledging that Russia’s economic straits are far more dire than the government has been willing to admit heretofore:

Russia’s rapid economic decline may force the country to return to international debt markets next year to fund its budget deficit and pave the way for corporate borrowing, Finance Minister Alexei Kudrin said Tuesday.

Such a move would be Russia’s first foreign borrowing after a decade marked by buoyant growth. But a recent, rapid reversal into recession — which was fueled by a plunge in oil prices — and the deterioration of the global economy is putting pressure on the state coffers and leaving companies struggling to refinance foreign debts.

“It will take us several years to get out of this crisis,” Mr. Kudrin said during a finance ministry board meeting.

“We need to look at the possibility of entering the external market already in 2010, and this year to hold a roadshow…which will allow international investors to get better acquainted with our aims and plans,” Mr. Kudrin told the meeting, according to Reuters.

He added that the government’s forecast for a 2.2% contraction in gross domestic product this year already seems “optimistic.”

I agree that the 2.2 percent contraction forecast is indeed optimistic, and have been expressing that opinion for several months now, thereby eliciting the scorn of some commentors (the scorniest of whom has apparently vamoosed.  I wonder why?)  

Kudrin does not say so specifically, at least he is not reported to have said so by the WSJ, but the oft-revised government budget is predicated on that 2.2 percent decline in GDP.  Moreover, if that forecast is no longer operative, neither is the 7.5 percent-8 percent of GDP deficit number; a figure that Kudrin has said was a red line.  This puts further stress on Russian policymakers, who have fewer tools at their disposal than their counterparts in the US or Japan or the EU.  

Given these circumstances, Kudrin’s position is not an enviable one.  The administration is apparently concerned about the deficit:

The issue of public debt remains sensitive for the Kremlin.

On Tuesday, President Dmitry Medvedev’s top economic adviser, Arkady Dvorkovich, started a debate over the 2010 budget by saying the forecast of a 5% deficit is dangerous for macroeconomic stability.

“It [the deficit] should be lower,” Mr. Dvorkovich said, urging the Finance Ministry to work on cutting it.

An 8 percent of GDP deficit (predicated on the current forecast) seems unachievable if the economy indeed contracts by more than 2.2 percent as Kudrin deems likely, so a 5 percent deficit would require deep spending cuts–cuts that would conflict with Putin’s plan for a fiscal stimulus totaling $90 billion (3 trillion rubles.)  How Kudrin can square that circle is beyond me.  (This also suggests the potential for a very testy interaction between Medvedev and Putin.  If his chief economic advisor is calling for a 5 percent deficit, and that means that Medvedev is of the same mind, there would be a clear potential for conflict between Putin and Medvedev.)  

The WSJ article contains one odd statement about the purpose of Russian government borrowing:

Russia might tap the markets next year, issuing as much as $5 billion in Eurobonds, with maturities of three to five years, Konstantin Vyshkovsky, the head of the finance ministry’s debt department, told reporters.

“What is important is not so much the ability to receive funds to cover the budget deficit as it is to pave the road for corporate borrowers,” Mr. Vyshkovsky said.

What “pav[ing] the road for corporate borrowers” means, I have no idea.  If anything, increased government foreign borrowing would tend to crowd out private  foreign  borrowing.  Foreign lenders take some comfort in the fact that Russian reserves are sufficient–barely, for now–to cover private foreign borrowing. Government borrowing will represent a priority claim on those reserves, making foreign lenders less confident in the ability of Russian corporations to service foreign currency borrowing.  Perhaps Vyshkovsky is intimating that some of the government borrowing will be used to pay down private corporate debt, but this would contradict other recent policy pronouncements.

I cannot leave this subject without quoting Putin’s latest rant on the subject (from the Bloomberg article linked above):

“We managed to avoid the worst scenario,” Putin said. “At the same time, 2009 will be very hard for us.”

The government abandoned the three-year budget it approved last year and has delayed passing the 2009 spending bill as it debates ways to minimize the first economic contraction in a decade. The government and central bank have already spent or pledged more than $150 billion in emergency funding since September to cope with the country’s worst financial crisis since the debt default and ruble devaluation of 1998.

“Could Russia have avoided the crisis or completely escaped its negative effects?” Putin said in the State Duma. “Of course not, it’s impossible, an illusion. The problems didn’t arise here and they weren’t our fault.”

That’s funny.  Putin now asserts that escaping the negative effects of a world crisis was “impossible, an illusion.”  Of course, some people (ahem) were saying that in September, and October, and November, when Putin was actively promoting an illusion–the illusion of Russia as an island of stability in stormy world economic seas.  

Even more funny, in a sick sort of way, is the continued whinging about “problems didn’t arise here and they weren’t our fault.”  To some extent that’s true, but it’s not completely true.  The policy choices made–or not made–when Russia was “on top of the world, Ma” and oil prices were climbing steadily made Russia acutely vulnerable to a world contraction.  That is, by its fundamental nature Russia is a high beta country due to its resource dependence, but  Putin fostered policies that reinforced that feature.  Moreover, his undermining of property rights and the rule of law made the financial system in particular more brittle, and encouraged capital flight when things turned bad.  

So, Putin misdiagnosed Russia’s vulnerability to “things arising” outside of Russia, and implemented policies that increased that vulnerability.  Moreover, his apparently genuine belief in things that he now acknowledges to be “illusions” interfered with the creation of a more constructive policy when the collapse came.    

Just why, objectively, should he continue to be so popular in Russia?

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  1. “the scorniest of whom has apparently vamoosed”

    What? Say what you will about me, but I have not “vamoosed”.

    Comment by Sublime Oblivion — April 14, 2009 @ 9:12 pm

  2. Hey, DR–get over yourself! I wasn’t talking about you. 😉 I was referring to Bob From Canada, who believe it or not, scorned me and my gloomy forecasts more than you did, or at least expressed his scorn more vociferously. Don’t be disappointed. You put in a good effort, but it just wasn’t quite in Bob’s league. And lately, I dunno . . . a relative civility seems to reign o’er SWP.

    And remember, you did threaten to vamoose. Several times. (What’s that song I’m hearing in my head? You know the one I’m talking about.)

    The ProfessorComment by The Professor — April 14, 2009 @ 9:59 pm

  3. Kudrin also said Russia will be forced to cut SIXTY BILLION in federal spending next year. That’s TWO TRILLION rubles. Wow.

    This is because of budget revenues this year falling ONE THIRD below projections for this year. Kudrin said Russia will be in a “much tougher position” this year than last.

    Spin that one, aptly named Mr. “Obvlious.”

    Comment by La Russophobe — April 15, 2009 @ 7:33 am

  4. Oops: That is, tougher NEXT year than last.

    Comment by La Russophobe — April 15, 2009 @ 7:34 am

  5. Yulia Latynina has a piece in the Moscow Times worth posting:

    Why are the assets of Russian companies so cheap and their debts so expensive? The high debt prices reflect the companies’ desire to reach an agreement with the banks, and the low asset prices demonstrate that private property in Russia is practically worthless.

    Why did Russian companies run up such high debts? One goal: They wanted to take out cheap Western loans to pay their Russian taxes. Did they use the loans to develop Russia’s own manufacturing base? No. A significant portion of this debt was used to buy assets in the West for the simple reason that they knew that Russian-based assets are always at risk of becoming the subject of one of Sechin’s arbitrary government inspections, whereas the Western assets are well beyond Sechin’s reach.

    The Russian economy survived the 1998 default in large part because Russia’s oligarchs made a fundamental change in their strategy: They stopped acting as bankers and became industrialists.

    Now, not a single industrial group in Russia is changing its tactics. Oleg Deripaska is a perfect example. He has about $30 billion in debts, but he is not about to part willingly with a single asset. His whole strategy consists of dragging out negotiations in the hope that the dollar drops in value, making his dollar-dominated debts more affordable.

    The overall volume of Russia’s assets has shrunk, even while its debt obligations remain unchanged. The only way of “solving” the disproportion of debts to assets is barter, and this means that even well-managed companies won’t be able to operate normally.

    And, an an amusing observation on Ivan Sixpack’s likely response to the crisis:

    What does that mean in terms of social unrest? It won’t be anything like the mass protests that our leaders fear so much. In Russia, the main form of social protest in response to worsening conditions is more often than not self-degradation. The average unemployed factory worker will not start up his own business or take to the streets. He will most likely grab a bottle of vodka and quietly drink himself into oblivion for the next couple of years. This is his best anti-crisis program.

    Comment by penny — April 15, 2009 @ 10:58 am

  6. “Hey, DR–get over yourself! I wasn’t talking about you.”

    Oh, right. Forgot about that. Yes, Bob was a great comrade in the struggle against Russophobic bourgeois reaction.

    “And remember, you did threaten to vamoose. Several times.”


    “Spin that one, aptly named Mr. “Obvlious.””

    There’s really nothing to add, Loserdope – I’ve said pretty much all there is to say.

    Now we play the waiting game.

    Comment by Sublime Oblivion — April 15, 2009 @ 9:51 pm

  7. You mean waiting for Russia to collapse just like the USSR?

    The fact that you would decorate a message making such a suggestion with a childish smiley
    face shows who the realy hater of Russia on this thread is.

    You don’t even try to spin it because you can’t. The facts have finally buried you, just
    as they buried Lenin and Stalin. Two TRILLION rubles in spending cuts JUST FOR STARTERS.
    But that’s GOOD for the people of Russia, right, just like wiping out dozens of banks from
    billions in bad debts is good?

    Idiot. With “friends” like you Russia needs no enemies.

    Comment by La Russophobe — April 16, 2009 @ 12:23 pm

  8. OK, OK, I’ll spin for you. 😉

    Where does it say there will be any spending cuts? As I recall the 2009 budget will be 0.5tn rubles bigger than in 2008.

    Of course there will be a huge deficit, but I don’t really see it exceeding the level of the US at 13% of GDP. The difference being that Russia still has negligible foreign debt and 385bn $ in reserves (funny how you all stopped talking about them once they stabilized), while US debt is projected to shoot past 100% of GDP in the next few years.

    🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂 😉 🙂

    Comment by Sublime Oblivion — April 16, 2009 @ 3:06 pm

  9. Uh, it says so IN THE LINK I POSTED you mindless gorilla. That’s not spinning, that’s simply lying. Spinning means you accept the fact that’s been documented and then explain why it doesn’t matter, not that you deny it. Crawl back into your vodka bottle in your dark little hole under that rock with the other skeevy worms.

    Russia is now going begging for foreign loans for the first time in ten years. But that’s a GOOD thing too, right?Suppose we in the West decide not to MAKE any loans? Or suppose Russia’s fortunes continue to slide and it can’t pay them back? It NEEDS these loans, or else it will have to CUT SPENDING EVEN MORE.

    Meanwhile, maybe you will read a book sometime and find out about the perils of deficit spending for an economy as fragile and one-dimensional and lonely as Russia’s.

    If the reserves went to zero they’d be stable. Would that “prove” Russia was doing well too? The only reason the reserves are stable is BECAUSE THE VALUE OF THE CURRENCY WAS ALLOWED TO FALL BY ONE THIRD, applying MASSIVE heartbreaking inflation on foreign goods. That’s also “good” in your view too, right. Because just as in Soviet times, Russians don’t want or need foreign goods!

    Thanks for proving with your smiley faces how seriously you can be taken. Whenever anybody asks (not that they ever will) I’ll be able to conveniently direct them to this page.

    You lose really ungracefully. It’s quite pitiful. But nothing short of exactly what you deserve.

    Comment by La Russophobe — April 16, 2009 @ 6:24 pm

  10. @Loserdope,

    1. You article talks about 2010, it’s doesn’t mention the base from which it is being cut (relative to 2008? to 2009? to previously planned expenditures for 2010?). Perhaps the article clarifies this issue but since it is behind a subscription firewall I can’t check.

    2. That was Kudrin, who although may have some influence does not set gov’t policy. According to official plans:

    Under the proposed 2009 budget, the government will boost spending to 9.7 trillion rubles ($282 billion), an increase of 667 billion rubles from the earlier approved budget, the Finance Ministry said earlier in a statement. Roughly 1.6 trillion rubles ($47 billion), or 16.5 percent of overall budgetary spending, will go toward anti-crisis measures, including support to the banking sector and social assistance.

    3. “Suppose we in the West decide not to MAKE any loans?”

    Too bad (well, actually, good) that YOU in particular will play no part in making those decisions.

    4. “The only reason the reserves are stable is BECAUSE THE VALUE OF THE CURRENCY WAS ALLOWED TO FALL BY ONE THIRD, applying MASSIVE heartbreaking inflation on foreign goods.”

    Heartbreaking? :-\ Methinks you need to get a book on English idiomatic usage.

    5. “That’s also “good” in your view too, right.”

    Of course. I’m a proponent of East Asian-style industrial policies.

    6. “Whenever anybody asks (not that they ever will) I’ll be able to conveniently direct them to this page.”

    Anyways, when are you planning to run an “Editorial” “exposing” me as a “neo-Soviet reptile”?

    Comment by Sublime Oblivion — April 16, 2009 @ 8:39 pm

  11. Mindless ape:

    (1) The base is irrelevant because I’m discussing absolute dollars, not percentages. You know that, it’s why you tried to change the subject to discuss reserves. Your first thought, that this horror could not be spun, was perfectly correct. Now you’ve just made a fool of yourself against your own better judgment. Typical Russian foolishness.

    (2) “Official plans” said GDP would shrink 2%. They say LOTS of things that are TOTALLY WRONG. Except to a mindless propandizing ape like you, who could care less about facts. The fact that you would so cavalierly dismiss Alexei Kudrin as some kind of bit player proves conclusively how far out of touch with reality you are. You also ignore his comment that spending cuts may need to be far more draconian once more economic data comes in.

    (3) Again, you’re afraid to respond so you try to change the subject in an utterly childish manner. Lame. And so very Russian.

    (4) More subject changing to avoid the horror of the facts. Pathetic. No wonder Russia is such a mess, with the likes of you as its defenders.

    (5) Don’t flatter yourself, imbecile.

    Comment by La Russophobe — April 17, 2009 @ 11:35 am

  12. The most immportant fact about the massive budget cuts is that, just as in Soviet times, the military budget not only won’t be affected but will actually be increased:,9171,1891681,00.html

    In other words, the Kremlin will deny basic social services to the starving population in order to propagate its crazed cold-war policies.

    And so, Russia shall go the way of the USSR.

    Comment by La Russophobe — April 17, 2009 @ 12:29 pm

  13. What should I do to get into a LR “Editorial”? How many Google hits? How many unique visitors? How many publications in the Moscow Times? etc. I want to know what to aim for.

    Comment by Sublime Oblivion — April 17, 2009 @ 2:34 pm

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