Streetwise Professor

March 2, 2009

Kudrin Channels SWP

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:28 pm

And admits mistakes were made:

The Russian government overspent its vast oil revenues in recent years, fueling inflation, and did not do enough to reduce the economy’s reliance on oil, Finance Minister Alexei Kudrin said in an exclusive CNN interview.

“Of course, I too bear the responsibility for not managing to diversify the economy as much as we wanted,” Kudrin said. “We were spending more money than we could afford, which is why we had a rapid strengthening of the national currency [and] a high inflation rate.

“I think the government should have been more conservative in its financial policy and save more money that it received from the high global oil prices,” he said.

It is interesting, though, to look carefully at what mistakes Kudrin identifies.  This interview is really a shot at  Vladimir Yakunin and Yuri Luzhkov.  Those fierce Kudrin critics have argued that the Finance Minister was too stingy, and that rather than banking oil revenues, the government should have spent more on infrastructure, construction, etc.  Kudrin in effect responds that his only mistake was that he spent too much.  

An interesting glimpse at the infighting and recriminations currently going on between various factions in Putin’s Russia.

Speaking of Yakunin, and infighting, his Russian Railways is cutting back on infrastructure spending:

Plans to develop Russia’s railway system have been put into question as the government focuses on measures to combat the economic crisis, the head of the rail monopoly said on Monday, Interfax reported.

‘We are talking about the 100 billion roubles ($2.80 billion) meant for the development of infrastructure. This sum is now in question,’ the head of state-owned Russian Railways, Vladimir Yakunin, was quoted as sayingLast year, at the cusp of almost a decade of growth and high global oil prices, Russia laid out ambitious plans to overhaul its Soviet-era infrastructure over the coming decade.

The global financial crisis, however, is forcing the government to shelve many of these projects and spend its cash pile to prop up banks, support the value of the rouble and finance the social sphere.

And Yakunin is not happy about it.  And who does he blame?  That’s an easy one:

In the United States and parts of Europe, governments have taken a different approach, boosting infrastructure spending in an effort to create jobs and kick start the stalling economies. [In other words, the US is spending money it doesn’t have to build a lot of infrastructure it doesn’t need, and Russia doesn’t have the money to build the infrastructure it needs.  There are many ways to be screwed.]

Yakunin indicated that he would support this approach, but that bankers and financial experts are advising against it.

‘The approach of these financial experts is puzzling to us. Investment in infrastructure cannot cause inflation. It should be viewed as an instrument to avert the crisis, as a way of creating GDP growth, new jobs and a basis for future growth,’ he said, the news agency reported.

For “financial experts” insert “Kudrin.”  Note that Kudrin is supporting a more conservative government spending program that limits the deficit to 8 percent of GDP in order to prevent greater inflation.  Yakunin’s specific mention of inflation is clearly a direct response to, and attack on, Kudrin.  

Putin has come down on Kudrin’s side and against Yakunin’s in one area, at least for now: exchange controls.  Putin has come out publicly opposing them, and praised Kudrin’s exchange rate policy.  This is a slap at Yakunin, who openly advocated these controls.

But what’s interesting about this is that the disputes are becoming increasingly public.  The strains on the power vertical are showing.  And that bodes ill for Russia’s stability.  Along these lines, a Russian commentor, Dmitry Oreshkin, channels SWP too:

or most countries of the world, the global crisis is strictly economic. But Russia is experiencing two crises simultaneously — economic and political.  

Economic downturns, including the current one, come and go, but Russia’s political crisis will never go away. This is because Russia’s political model has always been deeply grounded in the myth of monism: one monolithic state, one party, one ideology, one national leader and one people. Those who lived during the Soviet period remember the ubiquitous overblown slogans of “the unity of all Soviet nationalities” or “the unified Soviet nation.”

Russia under Vladimir Putin’s leadership is doomed by historical inertia and tradition to continue the Soviet monistic model. United Russia is Putin’s modern version of the Soviet Union’s “United U.S.S.R.” — that is, the Communist Party. Nonetheless, United Russia is not as unified as Putin would like. There is the United Russia faction loyal to State Duma Speaker Boris Gryzlov, and there is the one loyal to Mayor Yury Luzhkov. Luzhkov rigidly controls the party’s membership in Moscow and won’t let any federal functionaries get within a mile of holding power.  

. . . .  

Putin could have continued propping up his Potemkin power vertical and his Potemkin democracy for many more years if the petrodollars kept pouring in. That money was crucial to keep Putin’s “circus lions” — that is, the various elite surrounding him — well-fed and docile. But now the money is running out, and it is frightening to consider the consequences. It is well-known that even the best-trained circus lions have been known to turn on their trainers unexpectedly, even when they are well-fed. Just think of what could happen if those lions are hungry — and angry. We have already heard the first menacing roars from Putin’s lions. They are gritting their teeth and salivating at the mouth. I am sure that Putin sees and hears all of this.  

Putin’s Potemkin village is about to fall apart at the seams, but this is nothing to rejoice over. The only pluralism we will see as the result of this collapse will be “armed pluralism” — that is, widespread protests and violence on the streets. The government will respond by further strengthening its autocratic rule.  

There is an outside chance that the collapse of Putin’s model might end with a whimper, but it all likelihood it will end with a huge explosion — like the lid blowing off an overheated pressure cooker.  

That’s what I’ve meant by brittleness; the system appears strong, but is subject to complete collapse if the necessary condition for its continuance–copious quantities of red meat for the lions–disappears.   The Kudrin vs. Yakunin spat in the press is probably a tame and censored version of what is going on out of the public eye, but could be a harbinger of turmoil and conflict to come.

Print Friendly, PDF & Email

29 Comments »

  1. This journalist seem to have all the wrong facts. He cites that the currency dropped by 30% when in reality it has dropped more than 50%.

    Also, in watching the full interview, Kudrin follows the standard Kremlin line that even though things are bad in Russia, they are worse in the United States. He says, for example, that the Russian stock market has lost 5 years of value, while the American stock market has lost 10 years of value, i.e. implying that the American economy is doing twice as badly as the Russian economy 😉

    As for the journalists contention that it was an admission that “mistakes had been made” I don’t see it. He asked a very leading question, and Kudrin was very reserved in his answer. Kudrin’s statement does not quite match the conclusion that the journalist drew at the end. It is just too bad that I was not able to hear the original Russian of what Kudrin had said.

    Comment by Michel — March 3, 2009 @ 9:45 am

  2. He cites that the currency dropped by 30% when in reality it has dropped more than 50%.
    You must be from a different reality than the rest of us, because the ruble has gone from its August low of 29.3 to today’s value of 40.3 vs the basket. That’s 27%. It’s not much different against the dollar.

    All this nonsense about infighting is mostly fabrication of the media, and anyone rational enough to look beyond their own political wetdreams would be able to see that. It’s an interesting story, but it’s sensationalist and geared towards people who don’t actually know anything about Russian politics. I’ll be back in a few months to a year, when Russia hasn’t collapsed politically or economically, and remind you about all this.

    Comment by Bob from Canada — March 3, 2009 @ 5:06 pm

  3. Bob, the ruble peaked at roughly 23 rubles to the dollar (+/- 50 kopecks). It is now trading at roughly 36 rubles to the dollar. 36 – 23 = 13. 13/23 * 100 = 56.5%. I may be off by a couple of percent, but it my number is a lot more accurate than yours. Yes, let’s compare our predictions in a year from now.

    Comment by Michel — March 3, 2009 @ 5:42 pm

  4. Infighting=wet dreams. Yeah. Right. They’re all just sitting around the campfire, singing Kumbaya. Look, the Kudrin/Yakunin/Luzhkov conflict is clearly out in the open. Each is calling the other an idiot in public.

    And the whole Storchak thing, and Investigative Service head Bastrykin’s other attacks on Kudrin allies. Nothing to see here. Just move on.

    Re the decline in the ruble–of course it depends on the currency against which you compare it. The ruble has gone up against the Zimbabwean dollar, for instance. The fact is, that (a) the ruble has gone down a lot, and (b) it should have gone down a lot more. The cratering of the Russian manufacturing sector was greatly exacerbated by wasting $200+ billion propping up the ruble.

    Michel–you are right re the full interview, and the attempts to suggest that it’s not so bad by comparison to the US. To me the main revelation of the interview is the kind of mistake Kudrin is willing to acknowledge–being TOO conservative with oil money, not being excessively conservative. Apropos the beginning of my comment, this is a direct response to Yakunin’s/Luzhkov’s criticism. We can also throw Sechin’s name in there too, because he has been pressing for more liberal use of various state funds to prop up Russian businesses. In the past I’ve compared Kudrin to Horatius at the Gate defending the various state monies against the attempts of various interests to grab it. This is taking the battle public.

    The ProfessorComment by The Professor — March 3, 2009 @ 6:05 pm

  5. Does Kudrin have a choice? My guess is that he is being set up to take the fall for the present economic crisis. I agree with you that it will be interesting to see if (or perhaps more a question of when) the fighting will spill out into the open.

    Michel

    Comment by Michel — March 3, 2009 @ 6:14 pm

  6. Michel, all you need to do is search google. According to bloomberg, as of March 3 the ruble has dropped 35% against the dollar since August. And the dollar has been appreciating at the same time, so the ruble’s drop against the basket is less than that.

    Comment by Bob from Canada — March 3, 2009 @ 6:20 pm

  7. The professor, I’m not suggesting that there’s no infighting going on at all. Only that it’s being greatly exaggerated by the media, and by you. There’s a hell of a lot of infighting going on in Canadian politics right now, even more than usual. Yet I don’t see anyone predicting our collapse.

    Comment by Bob from Canada — March 3, 2009 @ 6:26 pm

  8. Bob, why would I Google when I can find tools such as oanda.com which will give me the historical currency exchange rates (the official interbank rates). Today, the ruble closed at 36.3200 rubles to the dollar. On August 8, 2008 (the day the war broke out with Georgia), the ruble was trading at 23.6266. Unlike some, I don’t need Google or Bloomberg to do some simple math. Let’s do it once more: 36.3200 – 23.6266 = 12.6934. So whereas 1USD bought 23.6266 rubles on August 8, 2008, it now buys 53.7% more rubles as of March 3, 2009 or to put another way, the ruble has lost 53.7% of its value. Do you not agree with the math involved?

    Comment by Michel — March 3, 2009 @ 7:19 pm

  9. I’m not sure of why the emphasis is on the ruble-dollar rate, when a) 45% of Russia’s foreign currency reserves are in rubles, b) something like 75% of trade is with Europe and c) every other major currency has fallen substantially relative to the dollar too.

    Comment by Da Russophile — March 3, 2009 @ 7:25 pm

  10. Da Russophile,

    a) You write: “45% of Russia’s foreign currency reserves are in rubles.” How can you have foreign currency reserves in your own currency? This is nonsensical.

    b) The question is what currency is specified in the contracts. They might be using Euros, they may be using USD, they may be using Zambian kwachas for all we know 😉 Nonetheless, the ruble has lost value compared to the Euro as well (see c)

    c) Fine, using OANDA.COM I can specify that 1 Euro will buy you 25.7% more rubles today than on August 8, 2008 and even 1 Canadian dollar, will buy you 25% more rubles today than on August 8, 2008.

    Michel

    Comment by Michel — March 3, 2009 @ 7:38 pm

  11. a) I meant 45% in euros.

    Comment by Da Russophile — March 3, 2009 @ 8:27 pm

  12. This is like watching tennis!

    Re the currency issue, it partly depends on what you put in the numerator, and what in the denominator. Pct Change in RUB/USD=36/23-1=.565, which can be interpreted as a 56 pct decline in the value of the Russian currency. Change in USD/RUB=(1/36)/(1/23)-1=.64-1=-.36, or a 36 pct decline .

    The key thing to me, though, is that however you measure the decline, it should have declined further. Russia blew reserves, and helped blow up its manufacturing economy, by propping up the currency.

    The ProfessorComment by The Professor — March 3, 2009 @ 10:32 pm

  13. “Unlike some, I don’t need Google or Bloomberg to do some simple math. Let’s do it once more: 36.3200 – 23.6266 = 12.6934. So whereas 1USD bought 23.6266 rubles on August 8, 2008, it now buys 53.7% more rubles as of March 3, 2009 or to put another way, the ruble has lost 53.7% of its value. Do you not agree with the math involved?”

    Your math is wrong. Your calculation is based on as if the ruble were 23 right now and had devalued from 10. The ruble didn’t go from 10 to 23, it went from 23 to 36. 13 is 36% of the ruble’s current value of 36. Therefore it has lost 36% of its value. Try using this calculator.

    When you come up with different numbers than what everyone else is reporting, it’s usually you who’s messing something up, not everyone else. Bloomberg doesn’t botch its math 😉

    Comment by Bob from Canada — March 3, 2009 @ 10:51 pm

  14. Okay, fine, I will accept your calculation: the ruble only fell 36%. I am sure Russians will be dancing in the streets as their imports will be 36% more expensive 😉 I concede your point, but that hardly makes Russia a healthy economy, and I expect the ruble to fall lower in the coming months.

    Comment by Michel — March 4, 2009 @ 1:30 am

  15. For the record, I am not the only one who calculates a roughly 50% drop in the ruble. This from one of Russia’s best (IMHO) analysts, Yulia Latynina:

    The authorities are unable to grapple with the crisis because it was precisely their actions that caused the crisis in the first place. When a drunk driver slams into a tree, the tree is not the cause of the accident. Russia’s leaders are like a drunk driver. Intoxicated by petrodollars and racing along the highway at 200 kilometers per hour in his armor-plated Mercedes, the driver slammed into a huge tree called the global financial crisis. The driver is still alive thanks to the automobile’s fat air bag — the country’s stabilization fund. Although heavily bruised and injured, the driver is able to get out of the smashed car, look at the tree and scream, “It was you, America, that caused this whole mess!”

    Russia’s economy is falling at a record rate, comparable only to its rapid decline in fall 1941. The country spent a whopping $200 billion on “supporting” the ruble. In the end, the only support to speak of is that the ruble has lost about 50 percent of its value since last summer, while the $200 billion spent on this accomplishment is gone forever.

    Few know for sure how much money is really left in the Reserve Fund. Meanwhile, the market value of Russian companies has decreased by roughly 75 percent on average since their peaks last year, while their huge debts have not gone away. This imbalance could easily result in mass defaults or bankruptcies.

    Source: http://www.moscowtimes.ru/article/1016/42/375024.htm

    Comment by Michel — March 4, 2009 @ 10:00 am

  16. http://en.wikipedia.org/wiki/Yulia_Latynina

    If you think Yulia Latynina is one of Russia’s “best” analysis, then I really don’t know what to say other than I’m not surprised. She’s a nutty conspiracy theorist and notoriously anti-Putin (hence why I’m not surprised she’s being quoted on this blog). Her own track record on predictions and outlandish claims is enough to discredit her.

    That’s like saying Alex Jones is one of America’s best analysts.

    Comment by Bob from Canada — March 4, 2009 @ 2:09 pm

  17. This from one of Russia’s best (IMHO) analysts, Yulia Latynina

    Thanks for the laugh, Michel. The fact that you actually mean it makes it especially funny.

    Comment by Da Russophile — March 4, 2009 @ 2:20 pm

  18. Seems that the fair Yulia is a Rorscach test.

    The ProfessorComment by The Professor — March 4, 2009 @ 2:26 pm

  19. Bob, please feel free to list her “outlandish” claims.

    As for you dear Da Russophile, I am not surprised 😉

    Comment by Michel — March 4, 2009 @ 3:15 pm

  20. I don’t actually read her tripe (life is only so long), but I think quoting the Wiki page on her suffices:

    “Yulia Latynina is known for her sharp and polemic statements. She claimed that Italian Prime Minister Silvio Berlusconi, French President Jacques Chirac, Chancellor of Germany Gerhard Schröder, and U.S. President George W. Bush have all been successfully “recruited” by Vladimir Putin to serve his political objectives.[2] She also alleged that “President Putin will secure a third term simply because this is the authorities’ logic. Power in Russia is in essence authoritarian, and there are no other ways to hand over power: control must be maintained over it.”[3]”

    Comment by Da Russophile — March 4, 2009 @ 11:42 pm

  21. And, where exactly is she incorrect?

    Comment by Michel — March 5, 2009 @ 12:46 am

  22. Bob & DR,

    Ever heard of Ad Hominem attack?

    Comment by Dixi — March 5, 2009 @ 3:08 am

  23. “And, where exactly is she incorrect?”

    “Yulia Latynina is known for her sharp and polemic statements. She claimed that Italian Prime Minister Silvio Berlusconi, French President Jacques Chirac, Chancellor of Germany Gerhard Schröder, and U.S. President George W. Bush have all been successfully “recruited” by Vladimir Putin to serve his political objectives.[2] She also alleged that “President Putin will secure a third term simply because this is the authorities’ logic. Power in Russia is in essence authoritarian, and there are no other ways to hand over power: control must be maintained over it.”[3]“

    She also alleged that “President Putin will secure a third term simply because this is the authorities’ logic. Power in Russia is in essence authoritarian, and there are no other ways to hand over power: control must be maintained over it.”[3]“

    She also alleged that “President Putin will secure a third term simply because this is the authorities’ logic.

    alleged that “President Putin will secure a third term simply

    “President Putin will secure a third term

    “President Putin third term

    third term

    third

    Comment by Da Russophile — March 5, 2009 @ 3:42 am

  24. Well, she was right. President Putin did effectively secure a third term, however, he did it in a way that I did not expect: he effectively maintained the power of the presidency in the office of the prime minister by having a president that he controls.

    Comment by Michel — March 5, 2009 @ 8:22 am

  25. I simply do not know how to reply to that.

    Comment by Da Russophile — March 5, 2009 @ 4:24 pm

  26. I know, it is hard for you to debate when faced with reason and logic 😉 This, just for you Da Russophile: a hilarious German video on Putin’s puppet Medvedev 🙂

    Comment by Michel — March 5, 2009 @ 5:09 pm

  27. http://www.youtube.com/watch?v=P3xsdR_m5sA

    Comment by Michel — March 5, 2009 @ 5:09 pm

  28. It is ironic in the extreme for a person who makes such bizarre and circular arguments, which can be used to “prove” anything, to claim “reason and logic” are on his side. As SWP would say, it is Swiftian, nay, Orwellian. Same goes for the Germans who write roSSiey.

    Comment by Da Russophile — March 5, 2009 @ 7:05 pm

  29. Well, Putin clearly did not leave the presidency to go grow flowers at the dacha. He did not abandon power, just exercises power in a different form. Everything indicates that he is wielding as much power and influence as he did as President. As the French expression adopted into English goes, “Plus ça change, plus c’est la même chose.”

    Comment by Michel — March 5, 2009 @ 7:23 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress