Streetwise Professor

May 27, 2013

Oh, the Irony: Putin Reaps What He Sows

Filed under: Military,Politics,Russia — The Professor @ 2:32 pm

Not much about Russia late, because not much is new.  Putin is increasing his python-like stranglehold on civil society.  The economy is sputtering.  Both foreshadow a period of social and economic stagnation.  This stagnation, in turn, will put pressure on Putin and Putinism.  Putin has always been the equilibrator of the elite, and his ability to do so has depended on the perception that he is popular, and his access to a stream of rents that he can dole out to buy support, and withhold to punish those who cross him.  His crackdown indicates that he realizes that he is no longer broadly popular, and is dependent on the support of the most reactionary elements of Russian society: the elites can see that too, and calculate accordingly.  Further, economic stagnation constrains the ability to use rents to buy support.  Both of these developments can be expected to lead to intensifying conflicts among the elite as Putin’s grip slips, and there is evidence of this: they mysterious departure of Surkov, and the attack on anyone attached to Skolkovo (Medvedev’s pet project) being the most prominent examples.

In other words, the stagnation dynamic is progressing inexorably, and there is little in prospect that will change that.

But Putin will hang on.  What choice does he have?  He is like Midas.  He has, according to credible reports, and in accordance with basic logic, accumulated huge sums of wealth.  Sums that he cannot enjoy fully while President, but which he would lose in a trice if he were to leave power.

There is one story that did catch my eye.  Echoing Putin (more on that below), Rogozin the Ridiculous is sounding the alarm about the parlous state of the Russian naval building program.  The naval rebuilding is the centerpiece of Russia’s exhorbitant rearmament program (accounting for a full 25 percent of expenditures on new equipment), but it is in the hands of state-owned behemoth Russian Shipbuilding Corporation, which mashed together virtually all of the multiple shipyards and design bureaus inherited from the USSR.  The company has proved utterly corrupt and incompetent, and cannot deliver the ambitious shipbuilding program:

The Russian government is ready to step in to sort out the crisis in Russian naval shipbuilding which is threatening to derail the defense procurement program, Deputy Prime Minister Dmitry Rogozin said on Friday.

The government’s direct intervention in the situation is the only way of averting further problems, he said at a meeting with shipbuilding company heads.

“I can see only one option: Direct dialog between the government, the United Shipbuilding Corporation, and private companies working in this field to ensure that all plans are implemented and all problems that have emerged recently are rectified,” said Rogozin, who oversees the defense industry.

“We are planning to sink, and have already sunk big money into shipbuilding but I can’t see any payoff yet,” he said.

Rogozin made his comments the day it was revealed the United Shipbuilding Corporation (USC) is looking for money that was allocated to complete the Nerpa nuclear submarine for India’s Navy. A total of 500 million rubles ($15.9 million) has been lost.

He urged shipbuilders to employ specialists from abroad if they cannot find enough at home and promised to facilitate the granting of Russian citizenship to experts from other countries.

The fact that Rogozin-a pugnacious nationalist-is urging the employment of foreigners tells you everything you need to know about how desperate the situation must be.

There are other signals.  Medvedev just announced that USC would receive state guarantees amounting to billions of dollars to permit it to secure credit for working capital needed to deliver on contracts:

The Russian government will provide 265 billion rubles ($8.5 billion) in state guarantees to defense industry enterprises this year, to ensure weapons are delivered on time in accordance with the national procurement program, Prime Minister Dmitry Medvedev said on Monday.

“The resolution [signed by Medvedev] provides for the allocation of 40 state guarantees worth 265 billion rubles for loans which will be granted to 26 companies from the defense and industrial complex,” Medvedev said.

The provision of state guarantees is the first this year, Medvedev said, and stressed the beneficial effects it would have on the economy as a whole.

“Everything invested in the defense industry has an influence on industry. Actually, the defense sector helps boost adjacent industries,” he said.

State guarantees allow defense enterprises to obtain loans at a time when they face a shortage of working capital and have no other sources of financing, Medvedev said.

Over a half of the state loan guarantees for defense producers this year will go to shipbuilders and developers of intercontinental ballistic missiles, according to the government resolution.

Working capital, folks.  Meaning that the firms don’t have sufficient cash flow and short term financing to deliver on contracts.  That is a sure sign of sick companies.  No other source of financing.  Need I say anything else?

Last Tuesday, Putin delivered one of his hissy fits, this one directed at United Shipbuilding:

Russian President Vladimir Putin criticized the United Shipbuilding Corporation (USC) on Tuesday for delays in delivery of warships to the Russian Navy and demanded the shipbuilders improve efficiency.

“Problems still remain with deadlines and the quality of implementation of orders, including defense projects. In particular, the construction of a number of nuclear submarines and surface ships and their delivery to the navy has been unjustifiably delayed,” Putin said at a meeting with USC officials.

Putin also encouraged the hiring of foreign experts.

This is a pattern for Putin.  He issues ukasi. They are ignored.  So he calls the delinquents together, gives a stern lecture that they must get their act together . . . and nothing changes.

Here’s the irony, which none of the reporting on the subject points out (imagine that): USC is a Putin creation.  It is one of the state owned behemoths that Putin created during the mid-2000s: others include United Aircraft and Oboronoprom.  In his construction of the vertical, Putin created several state-owned monopolies that were intended to be national champions, and achieve efficiency by exploiting economies of scale.  Instead, they have proven to be efficient only at their parasitical ability to extract resources from the state.  They have become black holes, sucking in money, spitting out very little in the way of ships or planes.  Putin’s creations are obstacles in the way of achieving Putin’ ambitions.

The irony is too rich.  Putin is reaping precisely what he sowed.  Couldn’t happen to a nicer guy.

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  1. Hello Professor,

    Let me ask your opinion- do you worry about US bank deposits being snatched by the Feds?

    Comment by Tom Henderson — May 27, 2013 @ 2:37 pm

  2. @Tom. That’s not a first order concern, though I don’t rule it out altogether. It is currently a much bigger risk in the Eurozone, because (a) their banks are in a more parlous state than US banks, and (b) they’ve already crossed that Rubicon (in Cyprus).

    Deposits-especially insured deposits-should be the most senior component of capital structure. Equity, subordinated, and unsubordinated debt should be exhausted before deposits are touched. The situation in Cyprus was exceptional, perhaps, in that the banks had very little sub debt and unsub debt to participate in the losses.

    Someone has to eat losses if assets are less than liabilities. Not to say that depositors in the US will never be in that position, but politically and economically, I can only see that happening in extreme/dire circumstances.

    The ProfessorComment by The Professor — May 27, 2013 @ 4:04 pm

  3. “The fact that Rogozin-a pugnacious nationalist-is urging the employment of foreigners tells you everything you need to know about how desperate the situation must be.”

    Ah. So finally the Russians have realised that attempting to execute large, complicated, technical projects cannot be done by using Russians alone. When are they going to relieve the foreign oil companies of their stringent national content obligations in light of this new-found wisdom?

    Also. It might not be expertise that Russia is looking to import, it might well be fairly ordinary tradesmen they are struggling with. It wouldn’t surprise me at all if they found themselves importing Polish welders as much as European nuclear experts.

    Comment by Tim Newman — May 27, 2013 @ 6:35 pm

  4. In other words, they now have to import foreigners to create Potemkin villages to impress foreigners. Interesting.

    Comment by Sotos — May 28, 2013 @ 8:51 am

  5. @sotos-it’s a throwback. Peter I brought in European (mainly Dutch) designers and craftsmen to build ships for his navy.

    The ProfessorComment by The Professor — May 28, 2013 @ 9:49 am

  6. I always wonder how Putin can act so arrogantly about the greatness of Russia, yet sees the underbelly of incompetence more than anyone. Perhaps that’s the only way to handle it psychologically.

    And such a bummer. I have no shipbuilding expertise. There goes my shot at Russian citizenship.

    Comment by Howard Roark — May 28, 2013 @ 12:40 pm

  7. @Howard. Yes, Putin must have enormous capacity to endure cognitive dissonance.

    The ProfessorComment by The Professor — May 28, 2013 @ 4:19 pm

  8. The real tragedy is that Russia has plenty of skilled tradesmen…Russia doesn’t lack for technical expertise, it really isn’t difficult to find a decent Russian welder. What is impossible is for a Russian company to hire and retain a decent tradesman without resorting to arsehole behaviour like not paying him, making him work unpaid overtime, fucking him over on his holiday and other entitlements, and any number of actions which Russian managers think is all just fine because they are in charge. The Russians in Sakhalin by far preferred working for foreign companies than Russian companies, and within the companies much preferred foreign managers to Russian managers, for precisely these reasons. So most tradesmen are completely unutilised and instead go off to do something else where they are less exposed to Russian management practices. I’m willing to bet that most of the shortage at USC comes from their unwillingness to pay decent money and a reputation for fucking over employees, and has little to do with Russians being technically hopeless.

    Comment by Tim Newman — May 28, 2013 @ 6:22 pm

  9. @Tim. I agree wholeheartedly that it is almost certainly a management issue. Or, more accurately, a mismangement issue. The old serf driving mentality never went away.

    The ProfessorComment by The Professor — May 28, 2013 @ 7:04 pm

  10. Isn’t it going to be a small problem for Mr. Rogozin and his country that he and they have spent years railing against foreigners, ignoring their murders on the subway and cheering their murders by Hezbollah and al Qaeda? Didn’t they notice when not a single major nation supported their land grab in Georgia? Do they really think we don’t see the nasty little proud KGB spy behind he curtain?

    Comment by La Russophobe — May 28, 2013 @ 11:51 pm

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