Streetwise Professor

March 24, 2009

Music to My Ears

Filed under: Commodities,Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 7:28 pm

Vlad is POd.  Seriously POd.  At the Ukrainians and the Euros, for having the audacity to modernize Ukraine’s shambolic gas pipelines without consulting HIM.  Can you imagine, the nerve.  Like Ukraine must think it is a sovereign country or something.

Here’s a glimpse at little Vlad’s foot stamping, hold-his-breath tantrum:

“It seems to me the document about which we are talking is, at a minimum, ill-considered and unprofessional because to discuss such issues without the basic supplier is simply not serious,” Putin said in the Black Sea resort of Sochi.

Just how the “basic supplier” would be harmed by measures that would improve the reliability and capacity of a major route linking its supplies to the ultimate consumer, Vlad didn’t say.

He’s so cute when he’s mad, dontcha think?  All I can say is, when he goes off like this, I know there is something right with the world.  For a change.

Loyal Putin creature Sergei Shmatko, the Energy Minister, chimed in:

Shmatko said the joint declaration touched on more sensitive issues than just gas and might damage EU energy security.

“It goes far beyond modernization of the Ukraine transit system and talks of the integration of Ukraine into the legal sphere of the European system as far as energy is concerned,” he told reporters.

Uhm, and what business is of yours, Sergei?  Ukraine and Europe have a perfect right to enter into such relations, even if it does involve some legal integration.  The concept is called “sovereignty.”  I’m sure you’ve heard about it.  After all, you and your cronies never tire of telling the rest of the world to f*ck off, and leave your “sovereign democracy” alone.  Goes both ways, dude.

Putin, gansta that he is and wants to be, sounds like one.  “Hey, Ukraine, you MY b*tch!  How dare you go out with somebody else.  Don’t make come over there and slap you around like I did that Georgia b*tch!”

This is all particularly rich in light of some of the things that Putin said during January’s gas war.  (Seems like years, not months, ago.)  At the time, Putin repeatedly denigrated the condition of Ukraine’s gas transport system, and called its reliability into question.  This was, in large part, an effort to pump up the prospects for Nordstream and South Stream, both of which would bypass Ukraine.

And that’s the real reason for Vlad’s pique.  He doesn’t want a reliable Ukrainian transportation network.  It undermines his goals, geopolitical and economic.

So, I say to Ukraine–You Go.  And to the EUnuchs–you surprise me, and in a good way.  (Though perhaps they didn’t foresee how Vlad would react.  It will be interesting to see whether they hang tough after Vlad’s outburst, and the inevitable follow on efforts to intimidate, and to play divide and conquer in an attempt to undermine this deal.  I’m sure that Schroeder will soon slouch to Moscow to get his orders to attempt to derail this deal.)

In other Russia news, Economy Minister Nabiullina has announced that the Russian economy contracted 8 percent year-on-year in February, and will likely contract 7 percent YOY for the first quarter. To put things in perspective, this collapse began in August, when GDP was probably on the order of 3-4 percent above its level as of February, 2008.  Thus, in 6 months, GDP has declined about 10-11 percent, a 20+ percent annual rate.

Economists often evaluate performance relative to growth potential.  Given a growth potential in Russia of 6-7 percent annualized, GDP should have been 7 percent higher, rather than 7 percent lower, than February 2008 as of the end of 2009.  This output gap of 14 percent compares with an approximate 8 percent gap in the US.

This is consistent with my view that the economic crisis has hit Russia harder than the US and Europe.  As is the fact that Russian economic indicators (e.g., the stock market, the ruble) have done better than their counterparts as of late.  The US market has turned around in recent weeks.  As I’ve noted, Russia is effectively a strongly procyclical economy (it’s “beta” to the world economy is greater than one) due to its dependence on highly procyclical energy and mineral industries.  With oil rallying 25 percent plus in recent weeks, in part due to the Fed’s apparent willingness to tolerate a lot of inflation to turn around the economy, and other commodity prices (e.g., copper) rallying too, Russia has benefited.

Though not so much as to justify this heady optimism by Deputy Prime Minister Igor Shuvalov (H/T R):

In comments to foreign media, First Deputy Prime Minister Igor Shuvalov said the government was increasingly upbeat about the Russian economy and hoped it would start growing again by the end of this year if the global economy doesn’t sharply deteriorate. As oil prices have risen above $50 a barrel, the ruble has steadied against the dollar and the Kremlin says there are tentative grounds for optimism, sounding an increasingly confident note about its handling of the financial downturn.

“The first phase is over,” said Mr. Shuvalov. “Most businesses have already adapted and the budget is not playing out according to the worse scenario.” Mr. Shuvalov confirmed that the Kremlin was no longer willing to offer large-scale bailouts to distressed corporations, something it did during the first stage of the crisis, but said that the government would help strategically important firms that had a genuine need. He stressed that commercial banks were now awash with cash, however, and could cover many of the lending requirements.

It is way too early to make such giddy pronouncements.  Russia is still highly dependent on the state of the world economy, which is anything but strong.  Kudrin is certainly not so ebullient.  He recently warned of a new wave of bad debts hitting Russian banks.

And Russia still faces its own home-grown curse: its legal nihilism, personified by Igor Sechin (will Marty Feldman play him in the movie?).  Sechin sent a letter to Norilsk Nickel, raising questions about some transactions, and in shades of the Mechel episode, Norilsk’s stock tanked immediately:

Norilsk slumped as much as 12 percent after the country’s biggest mining company said it received a letter from Deputy Prime Minister  Igor Sechin‘s office seeking information on transactions that were carried out last year.

. . . .

Norilsk sank 11 percent to 2,203.90 rubles on the Micex Stock Exchange, the biggest drop in a month. Sechin is seeking details on 86 billion rubles ($2.6 billion) of spending on share buybacks and asset purchases, and information on the sale of mining permits to a company owned by former Chief Executive Officer Mikhail Prokhorov, company spokeswoman  Erzhena Mintasova  said today.

Norilsk Nickel has complied with Russian law and the company’s own charter for all its transactions, Mintasova said.

Sechin, as chairman of  Rosneft, oversaw the state oil company’s acquisition of bigger rival  Yukos Oil Co.‘s largest assets at bankruptcy auctions after an investigation that led to the imprisonment of Yukos founder  Mikhail Khodorkovsky, once Russia’s richest man.

Meanwhile, the Telenor/Vimplecom farce continues:

Telenor said a Russian court rejected a motion to stay a ruling that found the Nordic region’s largest phone company liable for $1.7 billion in damages related to a dispute among OAO VimpelCom shareholders. VimpelCom sank as much as 11 percent in New York trading.

Wise words, these:

“The Norilsk and Telenor cases serve well to remind investors that Russia risk is a real phenomenon, which is the last thing Russia needs in this new, tighter-liquidity global market,” said  James Beadle, chief investment strategist at Moscow-based Pilgrim Asset Management.

The dispute is “an open demonstration of Russia’s aggressive business culture,” and is the same story as  OAO TNK- BP Holding, Beadle said.

So, in other words, la plus ca change.

The political uncertainty also continues.  A couple of interesting articles today, one by Pavel Baev in EDM, which noted:

Both Medvedev and Putin tried to perform as wise statesman meeting with Kissinger, but in reality for them global issues are just a public relations campaign of little importance compared with their real priorities of re-distributing money and property among servile but disloyal oligarchs (, March 20). This role of two-headed godfather is central for the regime’s survival in times of falling oil revenues when doubts in the irritated elites grow and spread under the surface of total obedience. Firing governors is apparently not enough to exterminate these mutinous doubts, so the second trial of Mikhail Khodorkovsky and Platon Lebedev is rolling towards the “guilty-as-charged” sentence (Novaya gazeta, March 18).

There is no way around the simple premise that in order to achieve a new positive start in U.S. relations, Russia has to begin a meaningful reformatting of its corrupt quasi-democratic regime. The Obama administration refrains from advocating any conditions of this sort, but Medvedev seems to be aware of the need to modernize the rigid system of “Putinism.” He remains reluctant, however, to deviate from the course set by his senior partner, who believes that the crisis hurts the U.S. more than Russia and will diminish its leadership, scorned as “uni-polarity.” Putin relies on the “fear factor” to keep the disgruntled elites under control and expects that demonstrative generosity towards pensioners and other “have-nots” would prevent an escalation of protest activity. His new anti-crisis plan unveiled last week does not envisage any new grants to struggling oligarchs, but gives first priority to social protection; it could, however, be overtaken by the unfolding disaster – as was the previous plan adopted last November (Kommersant, March 19). Such an emergency would require different kinds of measures, and forceful mobilization against an external threat is Putin’s fall-back option of choice; anti-Americanism, therefore, remains an important political resource – perhaps the very last refuge for a pair of scoundrels.

I particularly agree with Baev’s statement that the Khodorkovsky/Lebedev trial is intended to squelch “mutinous doubts.”

I found this paragraph entertaining:

Medvedev has personally explained to bankers that it would not be “fair” to demand money from the insolvent Rusal and its owner Oleg Deripaska; he also maintains that the International Monetary Fund should be governed by a board with a “fair” representation of contributors. Deputy Prime Minister Igor Sechin suggested at the recent OPEC meeting to establish a more “fair” system of regulating oil prices, which the gang of seasoned quota-fixers found only slightly amusing (Kommersant, March 16). This concern about “fairness” is not always driven by pragmatic calculations but betrays a grudge about the lost prosperity and stability that were perfectly on track until the U.S. made their economic problems everybody’s headache by provoking the global crisis.

The touching concern of Medvedev, Sechin et al for fairness brings to mind a spoiled child screaming “No FAIR!” when he doesn’t get what he wants.  Not that he earned it.

The other interesting article is from Goble’s WindowOnEurasia:

Even in other countries, he suggests, the notion that people are ready to sacrifice their rights to the state in exchange for economic well-being and will revolt if the government fails to provide it is overstated. Even in today’s severe economic crisis, the Moscow commentator says, “there are no signs in Europe of an 1848 or even of a 1968.”

In most cases, he argues, “the chief stabilizer is open political activity within a legal framework.” But in Russia, “our system is completely different, although it employs (for conspiracy!) the very same words,” an arrangement which includes the kaleidoscopic assertion that with Russians everything is exactly the same and at the same time entirely different.
This pattern has deep roots in Russian history and reflects a decision on the part of all those not intensely involved in political issues to focus on “their personal affairs and only on them” and to view politics as something alien to and apart from them and yet to see leaders as “symbiotically” involved in the survival of the state.

To this arrangement, Radzikhovsky says, a European would react with surprise: “They are DEPRIVING you (the people) of the rights to judge and decide and you (the people) nonetheless are still willing to support this arrangement!” But a Russian, he suggests, would understand the situation instantly, seeing it was being “a question of words.”

For the Russian it is not about deprivation, it is about “RELIEVING” the individual and society “of responsibility … and of the work involved in judging and deciding.” And as an example, to Radzikhovsky quotes Saltykov-Shchedrin’s observation that “the energy of the actions of fools opposes the energy of inaction.”

“The energy of societal inaction is the foundation of [the Russian] State,” he continues. “Therefore firmly or shakily, we stand by it.” Indeed, he says, “individualism (in individual affairs) plus humble fatalism (in common affairs) equals the ethnic Russian or better civic Russia (everyone in Russia, regardless of nationality acts that way) social-political SYSTEM.”
Given that set of attitudes – and Radzikhovsky insists that they can be called “sobornost,” “collectivism,” “apoliticalness,” or “alienation” – the relationship of those in power and everyone else is fundamentally different. Those in power have “a DIFFERENT function” and serve as “a shepherd” to the society.

Such a system, of course, has a dangerous tendency: the absolute power of the state in such circumstances tends to “corrupt absolutely, “both those who rule and those who are ruled.” But there is “a still more dangerous alternative: the absolute lack of rights on the part of the government and the absence of power [which can also] corrupt the people absolutely.”
The way out of this vicious circle would be a government with “LIMITED POWER,” but in Russia that has never been known and is not unknown now. “And with that is connected the completely SPECIAL role of the government in Russia,” one that is reflected in the very different attitude people have toward criticizing the government.

In most countries, Radzikhovsky continues, government is viewed as “only a superstructure’ over society” and thus as something from whose change the society does not think will change society. Consequently, any criticism of the powers that be for [such a] society is secure.”
But for Russians, “as is well known to all,” the picture is “different.” That is because criticism raises the question of leadership change, and “in the course of all Russian history up through today the main political question has not been resolved.” That is the question of the creation of mechanisms for a peaceful, regular and lawful change of the highest levels of power.”
Those in power, of course, “exploit this: destroy the powers that be and you will destroy Russia! This is a big EXAGGERATION. But it is only an EXAGGERATION” because the problematic situation it reflects is not invented but quite real. Russia has not succeeded in dividing “the powers that be” and “the country” just as it has not split power and property.

Consequently, the deference the population shows to the rulers is not so much “a slavish instinct” as an instinct for national SELF-PRESERVATION,” Radzikhovsky suggests, arguing that it rests on the notion that the powers and the population are linked together in “a biological symbiosis” whose violation by either side could lead to the death of the whole.
Thus “the real social compact [in Russia] is much more serious. It is not a trade off of independent sides,” and it is not about well-being “but about survival.” In this situation, the population will remain far more willing to defer to those in power because “the people DO NOT WANT” to do anything but “to AVOID being the opposite of humble.”

Understood in this way, Radzikhovsky concludes, the social compact in Russia has not yet been violated sufficiently to cause a revolt, especially given how great fears remain of “chaos.” And he reminds his readers that “one cannot free people externally more than they are ready for that internally.”

This is a very interesting commentary on the apathy of Russians.  It points out the fundamental lack of a civil society in Russia, the alienation between state and people (in spite of the allegedly organic relatonship between them) and reinforces a point that I made in my summer post On Russophobia, namely, that classical liberal limited government is an anathema in Russia.  (This, ironically, gave rise to charges that I was in fact a Russophobe projecting pejorative images of The Other.  But, as I noted at the time, this is considered a feature not a bug by many Russians, and many Russians like Radzikhovsky who think it is a bug acknowledge its existence nonetheless.  They have met The Other and it is Them.)

This is why, although I don’t discount the possibility of popular unrest, I believe that the main threat to the system comes from within, due to the “doubts in the irritated elites . . . spread under the surface of total obedience” (in Baev’s words).

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  1. […] Amsterdam's Blog and Streetwise Professor write about Russia's reaction to the deal signed between Ukraine and the EU to upgrade […]

    Pingback by Global Voices Online » Ukraine, EU, Russia: Gas Pipelines Deal — March 24, 2009 @ 8:44 pm

  2. Good turn for Ukraine! With the LNG market growing, Russia should be careful with its threats to cut off supplies, since it may end up selling natural gas for much less to China. I am super surprised that EU has finally grown a pair, something that is a welcome development in this formerly spineless dinosaur.

    Timoschenko is ultra-smart, and she has demonstrated that time and time again. On one hand, she talked about taking $5bil from Russia, but now, she turned on a dime, and got the best solution from EU.

    Comment by ukrainian — March 24, 2009 @ 11:31 pm

  3. Do I sense notes of fear here from the almighty, all-powerful oily orthodox mother roosha world empire?

    I think the EU may have hit upon something here. Pootler is crawling into his cave to ponder the situation, and to think up some kind of scheme for menace somewhere. But he had better think twice, and he had better think hard.

    And – another comment I saw elsewhere.

    Rasha is afraid that the pigeon (Ukraine) may have turned into a hawk.

    Comment by elmer — March 25, 2009 @ 10:40 am

  4. Actually, to refer to Vladimir Putin in the dimunitive of his first name, you should call him “Volodya” or “Vova”. Vlad is actually short for Vladislav, not Vladimir.

    Love your blog,

    Ray in Russia

    Comment by Ray — March 25, 2009 @ 4:12 pm

  5. Thanks, Ray. Yes, I should know that. I am trying to learn some Russian, and have read that diminutive for Vladimir in some of the textbooks I’m reading, and also have a friend, Vladimir Shlapentokh (a prof at Michigan State), who signs his emails Volodya.

    In the US, the most common mental association with “Vlad” is “Vlad the Impaler” A/K/A Dracula. That’s part of the reason I use it;-) But I will try to be more authentic next time.

    Very glad you like the blog. I’ll try to keep it that way.



    If I were on my Mac I’d use my cyrillic keyboard;-)

    The ProfessorComment by The Professor — March 25, 2009 @ 4:23 pm

  6. LPC = Loyal Putin Creature

    I like that! That’s a keeper! Must steal at first opportunity.

    Comment by La Russophobe — March 25, 2009 @ 9:16 pm

  7. I prefer to refer to Putin as “malignant little troll” but that’s just me

    Comment by La Russophobe — March 25, 2009 @ 9:17 pm

  8. I for one don’t see the benefit in the deal for Ukraine or Europe. It doesn’t matter whether Ukrainian pipeline capacity is 140bcf or 200bcf or 100,000bcf per year, what matters is the capacity of alternate routes around it. This looks like meaningless posturing by all sides, especially considering that European banks would be mad to lend money to a country that is already practically bankrupt.

    It also seems many of the people here are very disappointed that the economic decline in Russia abated in February, the manufacturing PMI is surging back up and that my prediction a few months ago that growth will resume in H2 is looking prescient. Sucks doesn’t it.

    Comment by Sublime Oblivion — March 26, 2009 @ 2:50 am

  9. Hey, DR, how about providing a link to your “surging” manufacturing PMI comment. It’s nice to see the source so one can determine the validity.

    Comment by penny — March 26, 2009 @ 10:01 am

  10. About the EU- Ukraine deal:

    simply put, as Tymoshenko said, it’s far less expensive to upgrade and improve Ukraine’s existing system, than to build new alternate pipelines.

    Comment by elmer — March 26, 2009 @ 1:55 pm

  11. “Hey, DR, how about providing a link to your “surging” manufacturing PMI comment. It’s nice to see the source so one can determine the validity.”

    “simply put, as Tymoshenko said, it’s far less expensive to upgrade and improve Ukraine’s existing system, than to build new alternate pipelines.”

    I’m not sure how that is relevant. The main issue isn’t really the decaying state of its gas pipelines, but the fact that it doesn’t want to pay Russian-set prices for its gas (and when that happens, Russia turns off gas to Ukraine, Ukraine in turn understandably continues heating its homes and the profitable supply to Europe drops which pisses off both Russia and Europe). It is thus in both Russia’s and to a lesser extent Europe’s interests (although not Ukraine’s) to skirt past Ukraine regardless of the condition of its pipelines.

    Comment by Sublime Oblivion — March 26, 2009 @ 3:38 pm

  12. Uhm, DR, re “surging PMI”, methinks that (a) you are misled by the rather clumsy colored graphics, and (b) you don’t really understand the interpretation of the PMI. The apparent upward spike at in the line is an illusion. The line actually ends before the spike, at the 40 level, and the PMI has not moved from 40 to 50. It was 40.6 in February, and 34.4 in January. Moreover, the appropriate benchmark is 50. Anything below 50 means contraction, above 50 means expansion. So, the 40.6 in Feb compared to the 34.4 in January means that Russian manufacturing continued to contract in February (since 40.6<50), but that it contracted less rapidly than it had in January. Sinking at a slower rate is better, I guess, but it is still sinking.

    The ProfessorComment by The Professor — March 26, 2009 @ 5:14 pm

  13. a) and b) not true.

    As you say, what it demonstrates is that the rate of decline, is declining. 6 points in a month is a pretty big shift. China is doing even better, in February its PMI was nearly back up to 50 / break even.

    The same cannot be said of much of the developed world (, which remains mired in the 30-37 range.

    Comment by Sublime Oblivion — March 26, 2009 @ 7:14 pm

  14. I really wonder what it was that Russia did to earn such pathological hatred from folks like “Sublime Oblivion.” To equate a decline in the rate of decline with a surge, and to cherrypick ridiculously insignificant isolated indicators, is exactly what the Russia haters who governed the USSR always did in order to deflect blame and avoid reform, thus bringing the USSR rapidly to its knees.

    Meanwhile, the real news is that Russia faces a horrifying rate of bank loan default which may soon reach 1/5 of all loans extant and rend asunder the very fabric of the Russian economy. Russia faces rising unemployment and inflation simultaneously, the ultimate perfect storm of economic catastrophe, and all maggots like this one can talk about is “PMI index” this and “PMI index” that.,Authorised=false.html?

    It’s truly revolting. But then, maybe Russia really has mishaved so badly that it deserves this type of contempt.

    Comment by La Russophobe — March 28, 2009 @ 9:22 am

  15. […] Don’t know why we are getting all wound up about Ivans rocket boats. If they want to screw up Europe it would be easy – just turn the gas off! The modern day equivalent of giving Berlin a squeeze Music to My Ears […]

    Pingback by New Russian Subs - PPRuNe Forums — March 28, 2009 @ 4:33 pm

  16. Excellent news, LR.

    Consolidation in the Russian banking sector is long overdue.

    Comment by Sublime Oblivion — March 28, 2009 @ 5:55 pm

  17. Dear Da Russophile, you last comment was good for a chuckle. You remind me of Saddam Hussein’s Information Minister Mohammed Saeed al-Sahhaf during the Iraq War: Both of you do not let reality get in the way of your unbridled optimism 😉

    Comment by Michel — March 29, 2009 @ 7:52 am

  18. Michel–

    LOL. Right on. The key issue is WHY these banks are in trouble. It is because there are huge quantities of bad loans on their books: “‘We can expect that the level of overdue loans for the whole system might reach 15-20 per cent’ by the end of the year, Mr Aven told the Financial Times. ‘Maybe the 20-30 biggest banks, including Alfa, will receive state support – we’re sure. But the future of hundreds of small banks is under big question . . . I believe that hundreds of banks will disappear by the end of the year.'” This reflects serious problems in the “real” sector of the Russian economy. Similarly, note that big banks will need state support, another indication of the problems in the real economy; the big banks are exposed to Russian manufacturing, servicing, and construction firms both directly, and indirectly through their relations with small banks. Thus, this is not driven by a rationalization of the banking system through consolidation, but by rampant insolvency, which is driven in turn by a very weak economy.

    DR’s comment is also of a piece with some of his previous comments, e.g., his satisfaction with, not to say glee over, the high death rates among middle aged Russian men.

    The ProfessorComment by The Professor — March 29, 2009 @ 8:45 am

  19. You turn around my observation (in previous posts) that high death rates amongst the middle aged will somewhat mitigate the fiscal effects of aging, to mean that I view it with satisfaction and glee. Which is in fact not the case, and which I believe I made quite clear in that post. I also question your motives for comparing bank insolvency to people’s premature deaths. Low and quite despicable, IMO.

    PS. If you haven’t noticed banks are popping and needing bailouts throughout the Western world because of bad loans. I am pointing out that in Russia this process will help resolve its particular problem that too many of its small banks should not have existed in the first place. I hope you lot will refrain from moving on to my “whataboutism”, though knowing you it would not be surprising.

    Comment by Sublime Oblivion — March 29, 2009 @ 1:56 pm

  20. As I noted in another thread, Canadian banks are doing fine and they are not being asked to be bailed out. But, if you want to take some consolation that the bankruptcy of banks and businesses in general in Russia will lead to consolidation, feel free. I presume this is all part of your green Communism fantasy to drive all Russians back to the collective farms where they will grow potatoes and keep goats to survive LOL!

    Comment by Michel — March 29, 2009 @ 3:57 pm

  21. Who cares about Canada? *yawn*

    Comment by Sublime Oblivion — March 29, 2009 @ 6:45 pm

  22. Well, the Soviet Union cared, as Canada exported a fair share of wheat there 😉 But, I see that you have nothing to add to the conversation.

    Comment by Michel — March 29, 2009 @ 8:35 pm

  23. With all due respect (read: none), neither do you.

    Citing Canada is skirting the issue. Banks in the US, the UK and (it looks increasingly likely with the East-Central European debacle) the Eurozone do have to be bailed out and those regions far exceed Canada in economic weight and importance.

    Comment by Sublime Oblivion — March 29, 2009 @ 10:19 pm

  24. LOL! Dear Russophile, might I remind you that Canada is part of the G7 (still ahead of Russia by the way). I am not saying that Canada will bail out the United States, but we might be a model for some countries as to how to regulate banks. I will give credit, where credit is due however. If one needs a model as to how to be an efficient kleptocracy, then I will bow to Russia’s and Putin’s expertise 😉

    Comment by Michel — March 29, 2009 @ 10:34 pm

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