Streetwise Professor

December 28, 2008

Random Russian Bits

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

A few items re Russia caught my eye over the holidays.  

David Kakabadze writes:

U.S. Ambassador to the Organization for Security and Cooperation in Europe (OSCE) Julie Finley recently told RFE/RL that Russia’s move to prevent the OSCE from extending the mandate of its mission in Georgia came as “a surprise” to her.

Similar sentiments were heard from many Western officials back in August, when Russia’s large-scale military intervention in Georgia seemed totally unexpected to them. A short time later, Moscow again took the West by surprise when — in violation of the UN Charter — it recognized the independence of the breakaway Georgian regions of South Ossetia and Abkhazia.

It seems that only Central and Eastern Europeans — as well as Georgia’s own leaders — have a good sense of what to expect from Vladimir Putin’s Russia. “Russia’s attack on Georgia was not unexpected,” Georgian President Mikheil Saakashvili told a conference in Riga in November at which international experts assessed how the international situation had been altered by the Russia-Georgia war.  

Saakashvili’s counterparts from Poland and the Baltic states — educated by bitter historical experience — have long tried to persuade their Western allies that the world must be prepared for “unexpected” moves from the Kremlin.  

But these warnings have largely fallen on deaf ears, and the West continues to be surprised.

Those in the West who are surprised must be grossly ignorant of history.  Soon after reading Kakabadze’s piece, I came across this in Adam Zamoysky’s Moscow 1812: Napoleon’s Fatal March:  

Many in Europe [in the early 1800s] were alarmed at this seemingly inexorable onward march of russian power.  There was talk of ravening Asiatic hordes and some fear, particularly after the first partition of Poland in 1772, that Russia might engulf the whole of europe as the barbarians had done with ancient Rome.  “Poland was but a breakfast. . . where will they dine?” Edmund Burke wondered, echoing the fears of many.  Diplomats were struck by the single-mindedness and ruthlessness of Russia’s foreign policy: she did not play by the same rules as others.   What few appreciated was the extent to which Russia saw herself as a special case.

The Asiatic hordes are a bogeyman of the past; Russia’s shrinking population, the aging of that which survives, and its economic weakness, mean that its ability to overwhelm any robust resistance is long gone.  But the messianic tendencies, the singlemindedness, the ruthlessness, and the belief that Russia is above the rules, are still manifest today.  There is a huge mismatch between capabilities and intentions, but western Europe’s pussillanimity and America’s distance and strategic distraction permit Russia to achieve results through aggression and bluster that its military and economic capacities should not be able to support.  

For now, anyways.  The tragedy is that if and when Russia’s policy of  derzhavnost  succeeds sufficiently to pose a more serious threat to Western Europe’s immediate interests, its military and economic potential, and that of the United States, will overwhelm Russia’s.  And then, it’s 1991 all over again.  

So, what we have here is a mutual acting out of Satayana’s injunction about forgetting the past, and repeating it.  Or of Talleyrand’s jibe of forgetting nothing and learning nothing.  Or of Marx’s aphorism about the past repeating itself as tragedy then farce.  Europe and the United States are apparently oblivious to Russia’s historical tendencies, and hence are surprised to see these tendencies re-assert themselves in the aftermath of the supposed end of history.  Russia fails to recognize that these historical tendencies have led to shattering defeat on multiple occasions, so plunges ahead on a quixotic quest to reclaim past glories (largely imaginary though they be).  This mutual ignorance will lead to a confrontation of some sort sooner or later.  But given Russia’s enervated economic, demographic, and military condition, this confrontation will be simultaneously farcical and tragic.  And the tragedy will, as it always has, fall most heavily on the Russian people.  

[Zamoyski’s book is quite excellent, by the way.  It provides a very graphic illustration of the old adage that amateurs talk tactics, professionals talk logistics; he shows that Napoleon’s shambolic logistical preparations doomed his campaign to failure, and his soldiers to misery and death.  It also has other interesting tidbits of history that foreshadow current phenomena, such as: “In peacetime [each Russian] platoon functioned as a trading corporation, an artel, leasing their labour to local civilians, with the profits theoretically being shared out between them, though more often going into the pockets of their officers.”  A historical continuity that makes me skeptical about the prospects for Medvedev’s military reforms.]  

In economic news, Finance Minister Alexi Kudrin has apparently dumped Rosie Scenario and started dating Debbie Downer, or else has taken sodium pentathol:  

Year 2009 will be the worst for the Russian economy since the World War-II, with the country’s national budget deficit touching the USD  
$70 billion mark, says the  Finance  Minister.  

“2009 will be the most difficult for the Russian and world economies. I cannot remember a worse year since the end of the Second World War. This will be the worst year for the economy in modern times,” Russian Finance Minister Alexei Kudrin said last night in a TV interview.  

Kudrin, who holds the rank of vice-premier in the cabinet of Prime Minister Vladimir Putin told state-run Vesti TV channel, “In 2009, the budget will have a deficit of 1.5 to two trillion rubles, which we will have to make up from the national Reserve Fund”.  

Kudrin’s statement virtually acknowledges the  bankruptcy  of Putin’s economic model based on high oil prices, with oil windfall fueling the rapid re-emergence of the former Communist country as a global power.  

Earlier, the Kremlin aide Arkady Dvorkovich said that the budget deficit could exceed five per cent of GDP in 2009 if the economy does not begin to recover by the middle of the year.  

“If the situation follows a negative scenario and the economic recession lasts throughout next year, the deficit could exceed five per cent,” he said.  

During eight years of Putin’s rule of consolidation of the state power, the Kremlin had been reluctant to introduce democratic reforms to give economic liberties to the common man, which in the situation of global  economic  crisis  could spark off massive protests and unrest in the country.

Considering that “modern times” “since WWII” includes 1998, that is a pretty sobering prognistication.  The reserve fund will be depleted substantially, by about one-third if Kudrin is correct, just to pay pensioners, bureaucrats, the military, and cover other current expenses.  (Methinks that paying the military will come close to the top of the priority pile.)  For a nation that desperately needs to invest in industry (including in the oil industry that generated the reserve funds in the first place), infrastructure, public health, and human capital, this is bitter medicine indeed.  (But the nation plans to plunge ahead in spending on military hardware, budgeting $140 billion over the next three years.  Not enough, in other words, to seriously improve its military position vis a vis the US, but more than it can afford to spend with dwindling oil revenues and pressing domestic needs.)  

This is a far cry from Medvedev’s or Putin’s standard lines, and is hard to square even with Kudrin’s recent statements that the Russian economy would grow 2.4 percent or so in 2009.  One wonders why, so soon after his more optimistic statements, and the government’s fervent denials that a recession was possible in 2009, that Kudrin would say such things on government television.

Kudrin’s pessimism could well reflect last Wednesday’s steep drop in oil prices (a 10 percent decline in Brent, pushing it well below $40/bbl for February delivery.  Oil regained about half of that on Friday, and in overnight trading on ICE is up about 4 percent today.)   It suggests that the Finance Ministry’s projects that oil prices will remain in the $40-$50 range at best, and perhaps in the $30s, for a good part of 2009.  

The declining oil price and the prospect for a yawning Russian budget gap is putting additional pressure on the ruble, and the Russian Central Bank is slowly turning up the heat on the frog pot:

The ruble fell to a record low against the euro as Russia’s central bank extended six weeks of devaluations to compensate for falling oil prices.

The ruble lost as much as 1.6 percent to 40.8931 per euro before trading at 40.8143 at 12:28 p.m. in New York, the weakest level since the European currency was introduced in 1999. It declined as much as 1.2 percent to 29.0577 against the dollar, a four-year low, capping a 19 percent drop since early August.

Russia’s foreign reserves, the world’s third largest, have fallen by a quarter since August to $451 billion as the central bank sought to prop up the currency and export revenue declined. Standard & Poor’s cut Russia’s credit rating this month for the first time in nine years to BBB on concern Russia is wasting reserves defending the ruble.

And speaking of oil, it takes all my will to fight schadenfreude when reading this:

With Prime Minister Vladimir Putin presiding, energy ministers from 12 gas exporting countries, many of them OPEC members, agreed to transform an existing gas forum that they said could benefit consumers and would not control output or prices.

The event, partly meant to increase Russia’s clout in global energy diplomacy, did not go smoothly for Moscow.

Concern about falling prices and flagging demand quickly surfaced as country representatives said Russia should have sacrificed some of its own output to back up President Dmitry Medvedev’s promise to support OPEC oil production cuts.

The Kremlin’s critics said an important way to help gas prices is to bolster the oil price, which they reflect.

“We needed to redress the situation to the market of oil so as to redress the situation in the gas market,” Libya’s top oil official, Shokri Ghanem, told the ministers.

“We are still waiting for a declaration from the Russian Federation that they are cutting their (oil) production not only to support the (oil) market, but also to support the gas market,” Ghanem said.

Russia, the world’s No.2 oil exporter, has said it is considering all options, including joining the Organization of the Petroleum Exporting Countries, to defend its national interests.

However it did not make any firm pledges when OPEC ministers, meeting at Oran in Algeria last week, agreed their deepest production cuts of 2.2 million barrels per day.

OPEC’s President Chekib Khelil told Reuters on the sidelines of the meeting that Russia had enjoyed the benefit of OPEC’s cuts without sharing the pain.

“If there was no OPEC reductions in September and October, I think we would have seen prices today at maybe $20 (per barrel). So it was because of OPEC that revenues for Russia were at $40 now, not at $20,” Khelil said.  

OPEC members were fools to believe that Russia would do anything more than pay lip service to the idea of sharing the pain of output cuts (beyond those dictated by the declining productivity of Russia’s fields).  Putin et al were perfectly content to play footsie with OPEC, then let the cartel bear virtually the entire burden of cutting output.  (Note that OPEC’s announced cut was larger than originally forecast by almost exactly the amount that Russia had suggested that it would cut–then didn’t.)  As I wrote before, there’s no honor among colluders, and Russia’s incentive (given that its exports make up only about 4 percent of non-Russian consumption) is to continue to export as much as possible while others (with a larger collective market share) cut output to prop up prices.  

Russia will gain little from this however, because (a) the global demand crunch is likely to be protracted, (b) burgeoning inventories will suppress prices for an extended period, and (c) it is highly doubtful that OPEC discipline will be robust enough to support prices at much above the competitive level.  

New Years is the biggest holiday in Russia.  It will not be a happy one, and the year that it ushers in is likely to be unhappier still.

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  1. How does demand forecasting of oil work? Is the signal sent by the futures market the main indicator to believe that the oil crunch will be protracted?

    Comment by Surya — December 28, 2008 @ 10:53 pm

  2. I’m cross posting a comment I made at LR because it fits with your thoughtful post:

    The party is over for Putin. But, I’m betting on the Russians missing another historic opportunity to emerge from this crisis with the vertical thuggery they’ve always lived under dismantled. They’d have to accept the premise that they would be irrelevant for a few decades which doesn’t fit with grandiose Russian myths about themselves. They’d have to confront their cruel and squalid Communist past which isn’t going to happen. They’d have to wake up some morning and refuse the state’s rations and put their kids future first which isn’t going to happen.

    The best the US and Europeans can do is to isolate Russia and let time and attrition takes its toll.


    I’ve got to assume that Finance Minister Kudrin’s statements were approved beforehand. I’m guessing it’s Putin’s pre-emptive ploy of throwing out the bad news to prepare the public. As the crisis deepens Putin can sit in the shadows watching his lackey Medvedev take the blame and position himself to return triumphantly as the guy that can fix things again.

    Comment by penny — December 29, 2008 @ 11:01 am

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