Streetwise Professor

November 13, 2008

Life on a Volcano

Filed under: Economics,Politics,Russia — The Professor @ 9:23 pm

From Vedomosti (via JRL):

Federal TV networks, the prime media agency in Russia, make a point to ignore the crisis. There is no saying how advantageous this policy will turn out to be. Only one thing is clear. Should discrepancies between what the people see outdoors and what TV networks tell them become profound and impossible to ignore, the population will stop trusting TV networks and start regarding the current exchange course as the only trustworthy source of information.

This mum’s-the-word policy will become pointless then because trust in the source of information will be lost.

. . . .

Unfortunately, there are essentially no institutions in the country the population trusts enough to let them discuss the problem and suggest a solution to it. With the kind of Duma we have in Russia, expecting it to come up with anything worthwhile is pointless. As matters stand, anti-crisis measures are mostly decided on within small groups of decision-makers. Their traditional disinclination to discuss it with anyone else ups the risk of mistakes.

It is necessary to remedy this situation and therefore to alter information policy.

Continuation of TV networks’ current policy may eventually undermine trust in the principal line of communications between society and the powers-that-be. The latter will then have to pretend that the crisis has taken them by surprise. Also importantly, this whole situation serves as a reminder to all of us that it is wrong to have TV as the only channel connecting the population and the authorities.

There must be other channels as well – independent parliament where all civil forces and represented, non-governmental organizations with experts of their own, independent media… No better cure for distrust and panic has ever been invented.

Russians are living on a volcano. All may have looked placid mere months ago, but there were tremendous forces hidden from sight capable of exploding at a moment’s notice. The risk of an explosion is increasing dramatically , but as the Vedomosti article notes, and as I have argued on SWP, the government’s attempt to control the information flow is an extremely dangerous policy that could make the effects of the explosion far worse.

Failure to deal with the situation in a forthright way dramatically heightens the risk of massive disenchantment and a fatal loss of trust if–as is highly likely–the evidence at the exchange kiosk or the workplace or the bank gives the lie to the official line that all is well. Unrest of some sort–say, coal strikes or other industrial actions, as occurred in 1998–may well result. What then? The government will be forced to choose between capitulation and crackdown. If it chooses the latter, things will spiral further downward economically–but I have little doubt that is the choice that the Putin government would choose.

The exchange rate is doubtless a more reliable source of news than the TV news. Prices aggregate vast amounts of information . The problem is that getting information from a market price runs the risk of creating information cascades. A group of people panic and frantically sell rubles. This drives down the ruble, instilling fear in those who use the exchange rate as their gauge of the health of the economy. They sell rubles . . . and on and on.

This can happen even in circumstances when people have access to other sources of information, but it is most likely to occur when most everybody is using the same single source of information, and that source of information responds to the behavior of the people watching it. Then self-fulfilling, positive feedback, information cascades are relatively easy to start and very hard to stop. This is a danger of depriving people of multiple sources of information and news.

So, the government’s “information” strategy is extremely dangerous on at least two grounds: (a) it threatens to undermine the trust in the government, thereby increasing the risk of widespread civil unrest, and (b) it raises the likelihood of an information cascade that could precipitate a 1998-style ruble collapse. (This last is also another reason why trying to manage a “soft landing” of the ruble is probably a bad idea. People will be on the lookout for a faster than anticipated decline, and if they see it, will try to get ahead of the run on the currency–creating a self-fulfilling prophecy. If it is going to fall, it is better to let it fall quickly and decisively.)

There is a difference between Russia and a volcano. Volcano eruptions are exogenous–people can’t do anything to affect their likelihood or their severity. Economic collapses can be endogenous, or made more severe by the endogenous responses to exogenous shocks. Virtually the entire Russian policy response to the crisis seems designed to make the explosion catastrophic if it in fact comes.

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  1. Professor:

    In all honesty, you may be paying more attention to the “crisis’ in Russia than 90 percent of the people in Russia itself. Things may get worse, they may not but compared to many other countries throughout the world Russia’s in pretty decent shape. Perhaps it’s even in better shape than the US.

    As for civil unrest….. dream on. This scenario of economic turmoil creating mass unrest and therefore, making it difficult for the Russian government to govern is a pipe dream of the so-called opposition parties.

    I don’t mean to poo poo the possibility of economic dislocation here in Russia but the supposition that such dislocation will translate into political changes is nonsense.

    I actually think that the current group in Moscow has been quite measured and thoughtful in their actions thus far. Not perfect, of course, but I would suggest that the current leaders understand the root causes of the current global financial crisis more thoroughly than many in our government in Washington.

    I’m betting that the endogenous responses to the exogenous shocks (i.e. a huge increase in the dollar supply worldwide over the past 10 years) will be good enough to ensure that in 3 to 5 years Russia will be better positioned to move forward into a post-Anglo-Dutch monetary model.

    By the way, there is NOT a lack of information concerning the crisis. Come on over and spend 3 days with me and your jaw will drop by the level of awareness of the situation by average business folks and the volume of information available to everyone here. I know you probably won’t believe me but there is as much information available here as in the US. Think about all the criticism of Russia media “freedoms” and remember that they focus on the couple major TV channels not the magazines (hundreds) or internet websites (thousands). Think about America for a second and think about how much information is available on the 3 major networks each day concerning the crisis. Not much. 30 minutes each evening. Maybe. You don’t get your information from 30 minutes of CBS each evening. You read dozens and dozens of websites and blogs. So do the Russians.

    Comment by Timothy Post — November 14, 2008 @ 9:50 am

  2. Timothy, only 25% of Russians have access to the internet. The state owns ALL of the tv stations which is the largest source of news in Russia. That’s a huge information deficit by western standards. If 90& of Russians aren’t paying attention to this crisis it’s because the information isn’t there for them.

    Oh, and, as at least 20 journaliats have been murdered, whatever independent press is functioning is very cautious and self-censoring.

    You perpetually serve up cheery anecdotal postcards as if you are a hired PR employee of Kremlin Inc. I’m not suggesting that you are, but, the pure thuggery of Putin, his Salinesque antics, the toll it is taking on Russian society doesn’t seem to make a dent in the content of your don’t-be-so-hard-on-Russia blather.

    Comment by penny — November 14, 2008 @ 2:50 pm

  3. “Timothy, only 25% of Russians have access to the internet” – penny

    100% have access to print media, which has a wide variety of viewpoints. And those 25% are the people with the most money and as such the more dangerous element in a financial panic – plus people do talk to each other.

    It should also be pointed out that a typical TV package includes Euronews and sometimes CNN and BBC. Here’s a typical survey of channels available in a random region (Kursk oblast) –

    “You perpetually serve up cheery anecdotal postcards as if you are a hired PR employee of Kremlin Inc. I’m not suggesting that you are, but, the pure thuggery of Putin, his Salinesque antics, the toll it is taking on Russian society doesn’t seem to make a dent in the content of your don’t-be-so-hard-on-Russia blather.” – penny

    For the record, I have the exact same (inverted) impression of you and your La Russophobic associates.

    Comment by Da Russophile — November 14, 2008 @ 3:57 pm

  4. “And those 25% are the people with the most money and as such the more dangerous element in a financial panic”…

    Whatever. That has got to be the stupidest thing I’ve ever seen written. As you have access to the internet by your own definition that puts you with the “dangerous” category. Substitute “society” for “financial panic” and I think we’ve spotted a fascist. So, stupidity is a virtue? Is that your point?

    ….”plus people talk to each other”? So do dolphins with totally blank brains and no information on what is going on in the world? Again, your point?

    Sure, I’m on the CIA payroll just like any American that disses Russia. I’m sure there must be something that you are trying to defend here, what is it exactly? You and Timothy are the Useful Idiot tag team that never fail to bring laughs from your defense of Kremlin Inc.

    Comment by penny — November 14, 2008 @ 7:09 pm

  5. That is not my point at all, as anyone with a drop of reading comprehension skills and logic would realize, but I have gotten the drift of yours – putting words into the mouths of those you disagree with, in such a way as to invoke Godwin’s Law.

    Neither do I don’t think you’re on the CIA’s payroll (I doubt they have much use for such a logically challenged person, however heroically Russophobic) – sorry for deflating your ego if you thought otherwise.

    Comment by Da Russophile — November 14, 2008 @ 8:38 pm

  6. Penny:

    I think we might want to stay away from ad hominem attacks on one another.

    I have seen the figures that put the percent of Russians who use the internet at 25%. Let’s assume that this is in fact true.

    What would be interesting to know is what percent of young (under 50 years old) and urban Russians use the internet. Older folks, in any country, are not big internet users. Rural folks may want to use the internet but don’t have access to it.

    I would guess that internet usage rates amongst the young and urban would be comparable to many Western countries. I should also point-out that the internet in Russia is completely open. There are no domains that are black listed. This is not the case everywhere. When I was in Dubai this past Summer was black listed.

    Sorry for another anecdotal observation but among my friends and acquaintances here in Krasnodar almost everyone uses the internet at least a couple times per week. In fact, so many employees in Russia are checking their and (the equivalent of MySpace and Facebook respectively) accounts that many system administrators are blocking access on work computers.

    Also, if you go to the newspaper stands (Tobacco Gifts for example) or Auchon supermarkets and check-out the magazine section you will find literally hundreds of Russian language magazines. If you read Russian you would within 10 minutes of looking through the magazines discard your notion that media in Russia is limited. In fact, if you were to ask any Russian if they think there is a lack of information in Russia they’d give you the same “huh?” look as you would get from an American who was asked the same question about America.

    Many Russians in towns and cities have satellite TV or cable TV. We have both in our condo. The cable line-up has Euronews channel in Russian. It’s the same exact Euronews that folks in Brussels or Milan watch. Nothing is censored out. Our satellite TV has BBC, CNN, and Bloomberg; not to mention the Extreme Sports channel and the NBA channel.

    The point is that while there are probably many Russians (older or rural) who don’t have a huge variety of information sources, the vast majority of urban Russians are very, very well informed and opinionated.

    Finally, I think it should be pointed-out that in almost all countries there is only a minority (33%) of the population who really care about these topics the Professor is raising. This is neither good nor bad but natural. This 33% of the population are the people who actually “run” countries (entrepreneurs, managers, professors, doctors, politicians, etc.) Russia is no different. Therefore, the issue of media access and variety should be qualified to determine whether that 33% is well informed. I can say unequivocally that in Russia these folks are very well informed.

    Comment by Timothy Post — November 15, 2008 @ 5:04 am

  7. Penny:

    Let’s try to stay away from ad hominem attacks and personal insults. We’re just having a friendly discussion here.

    Comment by Timothy Post — November 16, 2008 @ 7:13 am

  8. The extent to which the Kremlin’s malignant little trolls like Timothy Post are willing to lie in order to deflect blame from the Kremlin is truly neo-Soviet in character. Mr. Post claims that Russians don’t pay attention to the financial crisis, and forgets to mention that they CAN’T pay attention to it because all state-sponsored media are CENSORING basic information about it, and relentlessly attempting to blame America the rest of the time. Even if it were true that America caused Russia’s crisis, that would make the Kremlin’s policy of attacking and antagonizing the U.S., even in the wake of regime change, totally insane.

    My blog has documented Putin’s catastrophic failures in Monday’s issue, chapter and verse:

    Those who seek to rationalize Putin’s failure, rather than to reform it, are Russia’s true enemies — just as was the case in Soviet times. Those who, like Mr. Post, undertake this vile activity for personal pecunariy gain are the most sordid and repugnant in the lot.

    Comment by La Russophobe — November 16, 2008 @ 12:28 pm

  9. Timothy, let’s not act like we own this blog when we don’t. Your delusions of grandeur personify a level of neo-Soviet arrogance and insularity that is truly loathsome and fully deserving of the strongest rhetoric Penny can come up with. Frankly, I think she’s being far too mild.

    Comment by La Russophobe — November 16, 2008 @ 12:29 pm

  10. LR, Glad to see that you haven’t mellowed with age. How dull would the Russia Watcher community be without you?

    Comment by Timothy Post — November 16, 2008 @ 1:22 pm

  11. so yea, lets say an average yank just watches the network news—
    you’re right—not much there, but at least within this little 22 minutes of actual news the
    viewer will hear very harsh criticism of the ruling party and gvt—bush gets blamed,
    bush is called an idiot, the gvt is NOT given a free pass.
    but that NEVER happens on russian tv news—-putin is always wise, always right, never makes a mistake.
    you get it the diff????—-

    Comment by John — November 18, 2008 @ 11:22 am

  12. […] Market Price of Risk, More Generally,Roger That,Worser and Worser,If you believe that . . .,Life on a Volcano,That Was Fast,Like Minds,Hostages,The Financial Crisis in Russia Begins to Bite. « […]

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