Streetwise Professor

April 29, 2011

Oh They’re Reliable All Right

Filed under: Economics,Energy,Politics,Russia — The Professor @ 11:08 am

Russia has announced a sharp hike in export taxes on gasoline, and a complete ban of refined petroleum exports for May.  The reason: shortages of gasoline, leading to “panic buying” in numerous regions.

Now, shortages result from price controls–almost always.  But the Russian government has no authority to set prices--officially, anyways.   But unofficially–that’s a different story.  And that’s exactly what’s happening.  Bigfoot–Putin, that is–is interfering in the market:

Government officials, and in particular Prime Minister Vladimir Putin, have strongly warned gasoline producers and retailers to maintain cheap prices for gas. “I don’t want to think that the reason for the jump in prices is as trite as the wish to crudely extract an unreasonable, maximum gain,” said Putin in mid-February.

Such statements from government officials are often recognized as a kind of informal regulation by oil and gas companies, said Elena Anankina, a senior director at the Standard & Poor’s rating agency, and the companies may be willing to make some concessions on gasoline prices in order to maintain favorable terms for negotiation on crude oil and other products. Nonetheless, price caps will produce an expected, negative effect in any market.

“Officially, the government has no authority to regulate gas prices, but in a country like Russia where the government is an important factor in doing business, even if there is no legally binding power to that statement, oil companies need to listen to what the government is saying. At the same time, as anybody who lived in the Soviet Union will tell you, if prices are artificially low by government decree, it creates a shortage,” said Anankina.

I especially like that part about “the wish to crudely extract an unreasonable, maximum gain.”  Translated: That’s my (Putin’s) job; well, me and my judo buddies’.*

Or, as this AFP story put it:

“Putin ordered (oil companies) to control wholesale and retail prices and they complied,” the Vedomosti business daily remarked.

“But world oil prices continued to grow and the companies quietly stepped up their exports, leaving only enough for the domestic market to keep their own (gas station) chains going,” Vedomosti observed.

More evidence of state pressure:

Jonathan Muir, chief financial officer of Russia’s No.3 producer TNK-BP, said on Wednesday that “regulatory pressure” on domestic fuel prices prices had cost the company $54 million in the first quarter.

One of the knouts used to beat suppliers into submission is the antitrust authorities:

In February, Prime Minister Vladimir Putin issued a stern warning over fuel prices and vowed increased oversight of the fuel business.

“This may be one of the kinds of cartel agreement for which the antimonopoly legislation includes criminal responsibility as a measure of last resort,” Federal Antimonopoly Service head Igor Artemyev said in a statement after a Monday meeting with fuel unions.

. . . .

The Altai branch of the FAS launched a suit against Rosneft and Gazprom Neft on Tuesday on suspicion of price collusion.

Uhm, no, actually.  Cartel agreements that jack up prices do not cause shortages.  Shortages occur not because prices are too high, but because they are too low.

In sum, for populist political reasons Putin pressures companies to keep down prices in Russia despite rising prices for crude and refined products abroad.  So, not surprisingly–well, maybe to Putin, who’s no economic swiftie–Russian refiners sell less in Russia and more abroad.  Moreover, the inability to charge a market clearing price in Russia leads to shortages domestically and a shifting of supplies from Russia to other markets.  It’s not that complicated.

Russia–and Putin personally–like to preen about how reliable they are as energy suppliers.  Oh, they’re reliable, all right.  You can rely on them to cut off supplies in a trice for a political or geopolitical reason.  Someone at Gazprom Neft is quoted as saying “export contracts are holy.”  Thanks for that!  I needed a laugh.

More evidence of Russia’s obvious readiness for WTO membership.  As we’ve witnessed over and over again in recent months, on things from cars to grain to energy Putin uses tariffs, export taxes, and trade bans to achieve political objectives.  Not that he’s alone in this, mind you, but he is distinctively aggressive–and unrepentent–in his use of trade restrictions to shift around rents and put out political fires in the natural state.

There’s also a potentially bigger issue looming in the background.  Inflation is picking up in Russia, and to the surprise of some analysts, Russia’s central bank is taking aggressive action (unexpectedly raising interest rates) to combat it.  Putin has made fighting inflation his top priority.  His remarks on US monetary “hooliganism” must be read in that context.  This is a politically sensitive issue, and Putin is pulling out all the stops to deal with it.

The thing is, there are some stops that are good to pull, others not.  Attempting to control inflation through export bans and price controls–official or unofficial–leads to huge real distortions.  The grain export ban is evidently leading to sharp cut backs in planting, and imposing hardships on farmers.  The gas export ban and associated information price controls will also lead to distortions.

But politicians everywhere–especially those likely seeking reelection–have a tendency to overlook those distortions and seek short term palliatives.  But in the end the costs have to be paid.

Russia is just one country coping with inflationary pressures.  What hath Ben wrought?  More on that subject as time permits.

* For a great illustration of how judo makes you really, really smart–and hence rich–check out this story about the shenanigans involving the Novorossiysk port, in which Putin’s judo buddies raked off a cool billion, no risk, no work.

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  1. I guess Russians would say that if Putin calls every other candidate for president into his office, or every editor of a newspaper, and tell them they’ll be killed if they don’t do what Putin wants, and then they do exactly that, Russia still has a constitution. But any thinking non-Russian would say that Russia has abandoned the rule of law.

    Let’s see now. Russia is ruled by a proud KGB spy. It plays the anthem of the USSR at sports events. And it tells oil companies when and where they can sell their products. It’s a world-leading producer of oil, yet it is short of gasoline. No opposition parties in Duma. Sham presidential elections. Local leaders appointed rather than elected. Nearly 100% of draft-age men conscripted into the army by force.

    Somebody please tell us how Putin’s Russia differs from the Soviet Union? Other than in that the KGB never had so much formal power back then, of course.

    Comment by La Russophobe — April 30, 2011 @ 5:16 am

  2. The past week saw 11 central banks announce monetary policy decisions, with just 3 making adjustments to interest rates: Colombia + 25bps to 3.75%, Vietnam +100bps, and Russia +25bps to 8.25%.

    Yup, Columbia, Vietnam and, of course, their good pal Russia.

    High rates: Botswana, Namibia, Egypt and Russia.

    Low rates: Japan, US, HK.

    Whose club would you rather join? Russia’s? Maybe not.

    Comment by La Russophobe — April 30, 2011 @ 10:18 am

  3. I never thought I’d see Prokofy Nutcase defend helicopter Ben Bernanke on the basis of which central banks are raising interest rates this week. It’s kinda like saying Hitler built autobahns, therefore Ike was Hitler-like for pushing the Interstate highway system.

    But then again, Prokofy Nutcase is every bit as much on the hook of the Establishment, if not more so, than the Professor. After all, The Republic of Texas-stan (is Pirrong going to Panarin’s next speech in Houston urging Texans to separate, mirroring the American Council for Peace in Chechnya) should still be able to pay faculty from the natural gas revenues — maybe. But at least the host of this site has never been paid by that creeptastic, transnationalist Soros who dreams of looting America and acquiring its assets on the cheap just like he did as the kryshe for Khodorkovsky and some other oligarchs in the early Nineties. Not because he needs the money mind you, but because he can.

    So here’s looking at you Prokofy…

    Comment by pahoben lite — May 1, 2011 @ 7:33 pm

  4. Putin is directly responsible for Russia’s gas shortage.

    Only when Russians figure out how to hold their (unqualified) leaders accountable for their errors will Russia have a chance to be anything more than a basket case.

    Comment by La Russophobe — May 3, 2011 @ 2:06 am

  5. Phobie, do you want to talk about your [lack] any journalistic ethics or not?

    Comment by pahoben lite — May 4, 2011 @ 7:22 pm

  6. PAHOBAN: Why are you trying to change the subject of this post? Does it perhaps make Russia look a little too uncomfortably barbaric for you?

    Where did you get the idea that we are journalists? We are not. We are crusading advocates for freedom in Russia, struggling to warn the country back from an abyss.

    And why don’t you want to talk about the outrageous lie Kevin Rothrock attempted to tell on our blog, namely that U.S. presidents never make human rights in Russia a cornerstone of their administrations, as we urge Barack Obama to do? Or about his failure to apologize? Is it because you are a pathological supporter of Putin’s Russia and, like Rothrock, you use lies and deception to mislead Americans into attempting to trust the Putin regime rather than, as Ronald Reagan did, confronting it and seeing it into its grave?

    And why don’t you want to link to our published comments which clearly lay out our position?

    Why, in short, are you such a liar? And why are you so barbarically rude as to SPAM this fine blog with your offensive, dishonest nonsense?

    Comment by La Russophobe — May 5, 2011 @ 4:57 am

  7. “Why, in short, are you such a liar? And why don’t you want to talk about the outrageous lie Kevin Rothrock attempted to tell on our blog, namely that U.S. presidents never make human rights in Russia a cornerstone of their administrations, as we urge Barack Obama to do?”

    Here’s the quote from Rothrock:

    After the initial questions and my response, there was a single follow-up email asking some follow-up questions. As it turns out, Zigfeld’s “good faith” only applies to your answers, as she will tweak the wording of her questions, giving the appearance that you ignored some of her comments. For instance, she inserted a long aside about the gloriousness of Ronald Reagan into the final text of my interview, though it was never a part of her questions to me. I only saw it when she posted the interview publicly.

    So getting called on making stuff up is lying, apparently, and journalistic ethics are also for people not righteously crusading to free Russia, apparently from its own corrupt people, not merely its leadership. And you wonder why your favorites in Russia attract pathetic levels of support.

    Phobie, I’ve posted here for the simple reason that SWP is taken seriously at least in his chosen profession, which is academic (and paid consulting) analysis of commodities markets.

    Why he should be taken a bit less seriously on Russia is clear, because he attracts deranged fan ‘girls’ such as yourself and quasi-fascists like vorobey and adopted country ultra-nationalists like Andrew who insist on distorting history for their own ends (i.e. Stalin and Beria were proud Russians who had nothing to do with Georgia).

    You have never operated with the slightest bit of transparency (Jamestown Foundation? Soros? Who funds you?) or ethics but demand this from everyone else, even as you make up controversies from the word go.

    You also would probably annoy the hell out of SWP if he were being ‘Google-bombed’ all the time by a harassing, anonymous cyber-thug, as Guillory and other ‘scum-sucking Russophiles’ are.

    My question still stands: where is your cyber bullying directed against the heavy hitters who actually greased the skids for ‘Reset’, as opposed to ‘pathetic Russophiles’? Could it be that Gov-oogle would scrub your stuff so fast it wouldn’t even be detectable if it were directed against top executives at…BP, Boeing, NASA, you name em’? Why so easy to bash a bunch of guys in their twenties in thirties while hard to take on the real powers that be who seem bent on appeasing Putvedev, if only to keep someone buying 10-15% of U.S. Treasuries that get sold to some fool other than The Fed, U.S. shale gas plays, and U.S. steel mills?

    Comment by pahoben lite — May 5, 2011 @ 7:42 pm

  8. I should add, and the Professor is well aware of this being in Houston, that NASA now relies 100% on Russians to put Americans into orbit. And there are probably even deeper level stuff that he’s not even aware of, plus the deteriorating relationship between the U.S. and Pakistan which makes Uncle Sam even more reliant on Russia and more specifically Russian Railways to keep the troops supplied. But go ahead Phobie, tell us Russia shouldn’t tick off Uncle Sam because the U.S. is economy and military are so much bigger, and low interest rates are great and a sign of Japan’s glorious economic health rather than twenty years of stagnation.

    Comment by pahoben lite — May 5, 2011 @ 7:51 pm

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