Streetwise Professor

February 13, 2009

Random Russian Stuff

Filed under: Economics,Energy,Politics,Russia — The Professor @ 4:56 pm

The ruble has rebounded strongly in the last week, despite no great strengthening in fundamentals.  Oil has been down/sideways during the period of the ruble rally.  News about the budget has been grim.  So what’s going on?  For one thing, the central bank is defending the band much more aggressively.  It’s reserves declined some last week (about $3 billion), but more importantly it cut the amount of liquidity it is supplying to the banks, jacking up interest rates, and the government is applying extraordinary (read–Chekist, the “All-Russian Extraordinary Commission etc.”) means to put pressure on banks not to sell rubles for dollars.  

The reduction in loans and the rise in interest rates have supported the ruble but has bad implications for the banks, and for borrowers.  Just an illustration of the Hobson’s choice the central bank/government face.  

Another factor in the rally is perverse, in a way, and actually reflects the bearish Russian outlook.  The odd announcement from the Russian Association of Regional Banks (subsequently sort of denied) that European banks were interested in restructuring their Russian loans due to their precarious condition spurred fears about the possibility that the banks had suffered severe losses on these loans (and others to emerging markets.) This contributed to a sharp drop in the Euro:

Speculation of European bank losses on Russian loans drove declines in the euro against the dollar and yen today. Russian President Dmitry Medvedev has pledged more than $200 billion in emergency funding to support banks and companies as the 62 percent decline in oil prices since August and the ruble’s 34 percent tumble against the dollar push the world’s biggest energy supplier into its worst economic crisis since the government defaulted on $40 billion of domestic debt in 1998.

. . . .

“People expect that part of these debts were from the European banking system,” said  Sebastien Barbe, a strategist at Calyon in Hong Kong, the investment banking unit of France’s Credit Agricole SA. “You already have a very weak banking system in Europe. If you have these Russian issues, the next step would be questions about whether similar problems will come out of other eastern European countries.”

Whereas subprime mortgage debt proved the Achilles heel of the US banking system, Europe binged on emerging market debt–including a lot to Russia.  That’s a major source of concern.  And given the interconnectedness of the European and North American banks, bad news for Eurobanks isn’t good news for American ones.

Another very peculiar story that may be freighted with serious implications–or not, as it’s always hard to tell in Russia–is the news that a Russian prosecutor accused current and past deputy finance ministers of fraud and corruption:

A senior Russian prosecutor accused past and present deputy finance ministers on Thursday of large-scale theft of state funds in signs of renewed pressure by hardliners on liberal Finance Minister Alexei Kudrin. The allegations coincide with a sharp economic downturn that has revived a long-running turf war between rival groups in the government over how Russia’s diminishing cash reserves should be spent.

“It would not be an exaggeration to say that some of the best specialists in finance and economics, including a former and a current deputy finance minister, have been involved in organising large-scale theft of state funds in recent years,” Alexander Bastrykin, the head of the investigative committee of the Prosecutor-General’s office, was quoted as saying.

Later the prosecutor narrowed his accusations to  Deputy Finance Minister Sergei Storchak and ex-Deputy Finance Minister Vadim Volkov, implicating no other officials.

Still, this is widely interpreted as an attack on Kudrin, most likely on Sechin’s behalf.  In the context of the immense challenges Kudrin faces in dealing with the financial crisis such a war would be extremely damaging to Russia.  Moreover, if Sechin gains the upper hand, it is likely that resources will be transferred to support state companies, or to facilitate increasing state control over other companies.  Given that these state companies–most notably Sechin’s own Rosneft–are notoriously inefficient, and likely serve as tunnels for smuggling wealth into the pockets of the connected, such a transfer would contribute to even more drag on the Russian economy.

The last item I have time for relates to something I blogged on a couple of days ago, namely the frantic Russian efforts to buy friends at a time when its financial resources are incredibly stressed.   Eurasia Daily Monitor Reports that Russia is planning to spend $7.5 billion to “bail out” former Soviet republics.  Belarus’s Lukashenko is asking for more and more money.  Russia just ladled out $2 billion to Kyrgyzstan.  

This is another example of the back-to-the-future nature of Russian policy.  As the Soviet economy imploded in the mid-to-late-1980s, the Soviet government felt compelled to support financially its similarly troubled Warsaw Pact allies in its bid to maintain its superpower status.  

The Soviet aid of decades ago, and the current Russian aid, is intended solely to buy geopolitical relevance.  In times of existential economic crisis, this is an expenditure that the USSR could not afford, and Russia cannot afford either.  But away they go.  

This is another illustration of the futile, learned nothing-forgotten nothing compulsion driving Russian policy.

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  1. For some reason, with respect to “Russian economists,” I am reminded of the old joke about the economists who predicted 9 or the last 5 recessions.

    Or Yoram Bauman’s joke:

    – macroeconomists are wrong about things in general

    – microenomists are wrong about specific things

    Comment by elmer — February 13, 2009 @ 10:59 pm

  2. I think your comparison of the USSR in the late 80s to current day Russia is flawed. You’re comparing an all-out collapse of a planned economy that had been rotting for years, to a recession in an otherwise fundamentally strong, capitalist economy. This current crisis, sparked by outside conditions (though certainly not helped by internal mistakes and neglect in years prior), is no where even close to the situation that the USSR was in where it was a lingering issue with wholly internal origins. You may be right that their aid to other countries is a reflection of their geopolitical ambitions, as is often the case with foreign aid, but that’s the only part of the comparison that holds some weight. They do still have the means to strive for their geopolitical ambitions right now, and they’re using the crisis to their advantage.

    Today there is still a substantial amount of reserves left, so assuming the recovery starts some time around Q4 2009/Q1 2010, future prospects are gloomy but not doomy. There’s no planned economy of an empire to prop up this time around, their economy was in an infinitely stronger position when this crisis hit, and I’d assume winning over influence of countries like Kyrgyzstan and Armenia is a bit cheaper than countries like Poland and East-Germany.

    Regarding that loan to Kyrgyzstan, they will be making some or all of that money back with America turning to them as a new transport route. It’s a win-win situation for them – A geopolitical gain, and another route for cash inflow to the state, which could last for who knows how many years.

    Comment by Bob from Canada — February 13, 2009 @ 11:01 pm

  3. Bob from Canada, have you actually ever been to Russia? You say that it is a “fundamentally strong, capitalist economy.” What exactly are you basing this on exactly? Capitalism? There is no rule of law, no true competition, rampant corruption, monopolies…. Paul Goble has a good analysis as to why the Russian “fundamentally strong, capitalist economy” can’t even build decent roads: What he describes can be pretty much applied to all spheres of economic activity in Russia.

    Comment by Michel — February 14, 2009 @ 1:41 am

  4. Michel, I’m basing my opinion on everything I’ve read regarding Russia’s economy over the past years from organizations such as the World Bank and the IMF (and when I say fundamentally strong, I’m comparing it to the USSR and countries like current day Ukraine or Latvia, not fully developed countries like Switzerland or Germany). I’m not sure how visiting a country could give one a better understanding of its economy, all the economic information one could want is available on the internet. And yes I’m well aware of the corruption and infrastructure problems, I was referring to the financial and macroeconomic situation. The condition of roads has nothing to do with how banks hold up, nor did they have anything to do with the Soviet Union collapsing.

    “Russia’s strong macroeconomic fundamentals, prudent fiscal policy, and lack of exposure to the US sub-prime crisis have partially protected its economy and helped limit the impact of the global financial crisis”

    Comment by Bob from Canada — February 14, 2009 @ 3:42 am

  5. One more thing regarding competitiveness. You may be interested in the Global Competitiveness Report, a yearly report by the world economic forum which ranks countries by market competitiveness, taking into account every aspect from education, to infrastructure, to corruption etc.. Russia’s overall rank is pretty decent for a post-communist country. It compares to countries like Italy, Poland, the Baltics, Turkey etc.. and does quite a bit better than the likes of Ukraine, Romania, the Balkans, Bulgaria etc.. Although that just goes to show, if they got rid of the unfortunate amounts of rampant corruption, they could easily become one of the most competitive major economies in the world. Hopefully all that talk about anti-corruption measures that Medvedev has been talking about over the past year hasn’t just been for show.

    Comment by Bob from Canada — February 14, 2009 @ 4:00 am

  6. No offense, Bob, but what you are saying is plainly demented.

    The performance of the Russian economy is wholly dependent upon the price of crude oil on world markets. When the price of oil fell, Russia’s stock market lost 80% of its value, its FOREX reserves fell by half and its currency fell by one-third. Russia is the opposite of a fundamentally strong economy, it’s a fundamental nightmare. Its economy has been among the very worst performers in the whole world over the course of the last year.

    Russians work for $4/hour and don’t live to see age 60. If you believe Soviet data, Russians lived MUCH longer in Soviet times — and in Soviet times, a KGB spy was never allowed to rule the country for as long as Putin has done.

    Throughout your ridiculous propagandistic diatribe, you don’t name a single significant manufactured product Russia has put into the stream of world commerce with its “competitive” economy. Meanwhile, Russia has seen a draconian crackdown on civil society and a massive concentration of power in the Kremlin, wiping out the flow of information, local government, opposition in the parliament and the independent media.

    Did you even read the report you link to? It shows the gap between Russian GDP and that of the OECD countries getting MUCH WIDER in 2007 than it was when the USSR collapsed.

    Frankly, I find your tone, implying that you have some special insights about Russia that other ignorant people don’t comprehend to be laughably bizarre and at the same time quite offensive. Not only do many of these readers know far more about Russia than you do, but your drivel is in essence an argument that Russia does not need massive reform and regime change, the same argument the Kremlin would make. As such, you are condemning the people of Russia to the ashcan of history.


    Comment by La Russophobe — February 14, 2009 @ 6:26 am

  7. La Russophobe, I read the last paragraph of your comment first and decided to skip the rest altogether. Not my style. I used to read your blog, but I stopped because it was plain to anyone with a bit of common sense that even you don’t believe half the things you say and you’re just looking for a reaction/hits/attention (ie. a troll). I already know you’re incapable of debating without using invented facts, purposeful misinterpretations and personal attacks, all with an attitude of seething contempt and incivility that could only come from an insecure pseudo-intellectual like yourself. But I don’t visit this blog (or any) for that sort of talk and I’m sure the blog owner doesn’t appreciate it much either, so enough of that. I’m sorry that you dedicate all of your spare time to hating an entire country and anyone who doesn’t hate it with you. I don’t think what you do is loathsome, just a little mislead, and a little sad, because there has to be an underlying cause for all that unmitigated hostility.

    Comment by Bob from Canada — February 14, 2009 @ 8:57 am

  8. Uh, Bob, the main comparison I was making was re geopolitical ambitions in the face of pressing economic difficulties, not a full-blown comparison of the Soviet and Russian economies. It was primarily a comment on the continuity of misguided priorities. Russia has pressing demographic, public health, infrastructure and institutional problems, not to mention a chronic dependence on raw materials–and even that sector of the Russian economy is in dire straits with declining output and desperate need for additional investment that grossly inefficient and corrupt state enterprises cannot make efficiently. Delusions of imperial grandeur, derzhavnost, are clearly something Russia cannot afford. And you will see that’s the only explicit comparison I made. The fact that Russian economic woes are less severe than Soviet ones is not sufficient to justify indulging geopolitical wet dreams.

    There is no doubt that the Russian economy is in better shape than the Soviet. BFD. Damning with the faintest praise. Even given its growth post-98, Russian per capita GDP only reached 1991 levels in ’06 or ’07 (can’t remember which). All during a time when Western economies were growing 2-3 pct per year.

    Certain aspects of Russian macro policy post-98 have been pretty prudent. But, at best, Russia under Putin as gone from an economic hell to economic purgatory. As Michel notes, and as I have written about extensively (mostly well before you started commenting, in posts going back to 2006 and 2007), Russia has severe institutional deficiencies (e.g., poor property rights, lack of rule of law, corruption) that will severely hamper its future growth prospects. The same World Bank and IMF reports that you quote praising Russia’s macroeconomic management also point out that the country’s rate of investment is far below that observed for high growth economies (e.g., the Asian tigers). That is a direct consequence of poor property rights and heavy-handed state intervention in the economy.

    Russia’s economic performance in the past decade has reflected two things. First, the rebound that would be expected when a massively distorted economy is freed up somewhat, permitting the flow of resources to higher valued uses. Second, a dramatic rise in raw material prices (e.g., a rise in oil prices from around $10 to as high as $140+). Macro/currency management (at least until recently) has been fairly professional. The first source of growth–really, a return to 1991 levels during a time when the US economy grew about 40 percent, as LR notes–is about tapped out. The second is not a reliable foundation for long term growth, as the country’s current travails demonstrate. And Russia has wasted the last seven plus fat years indulging its imperial dreams rather than addressing its pressing–and painfully obvious–needs: improving property rights, securing the rule of law, improving a shambolic infrastructure, fixing a nightmarish health care system, addressing a crushing demographic implosion.

    Your distinction between internal and external factors is wrong, and for two reasons. First, contra your diagnosis, the Soviet economic collapse was in fact largely due to external factors, and ones that should seem quite familiar–the most important of which was a collapse in oil prices post-1986. This is deja vu all over again. Second, one measure of the health of an economy is its resilience to shocks. Putin and Medvedev crowed about how Russia was an island of stability, and would be immune to the world’s travails. Wrong. In fact, like the Soviet Union, due to its acute dependence on raw materials, Russia was unduly susceptible to world economic conditions, and has suffered more from the crisis than has the US.

    That’s my point. The fact that current Russian economic problems are less severe than late-Soviet ones is cold comfort. The Russian economic problems are severe, and were at best masked by a raw materials price boom that the government essentially squandered. Russia cannot afford its outsized geopolitical ambitions. Or, it couldn’t if it the government cared a whit about the population’s genuine needs. The fact that the Soviet Union could afford them even less is about the most limp-wristed a defense imaginable.

    The ProfessorComment by The Professor — February 14, 2009 @ 9:36 am

  9. “Hopefully all that talk about anti-corruption measures that Medvedev has been talking about over the past year hasn’t just been for show.”

    To date Medvedev’s talk has been nothing but show. He hasn’t cleaned up one thing including the corrupt courts. He hasn’t unmuzzled the state controlled airwaves. He has done nothing because he is part of the corruption. Why exactly, Bob, would he have to wait to initiate any of those measures? There would be a backlash from the public? Hardly.

    And, Bob whatever positive economic stats Russia had in the past don’t matter with oil below $40/barrel. During the fat years nothing was done to improve infrastructure which will catch up with them.

    Comment by penny — February 14, 2009 @ 9:49 am

  10. Good catch Penny–I’d missed that one. Ha! I mean really, Bob.

    The ProfessorComment by The Professor — February 14, 2009 @ 10:56 am

  11. Bob you write: “The condition of roads has nothing to do with how banks hold up, nor did they have anything to do with the Soviet Union collapsing.”

    Clearly you have never been to Russia. Let us take a hypothetical case based on my observations while in Russia. You are a small farmer in rural Russia growing potatoes or raising pigs. However, as much of Russia, the roads where you live are impassable much of the year and it is impossible to actually bring your potatoes or pigs to market (i.e. the big cities such as Moscow and St. Petersburg). What will you do? You can break your back growing potatoes that will end up rotting in a pile as you have nowhere to sell them. At some point, you will also have too many pigs and as everybody in your village raises their own, they won’t buy them either, and because of the poor roads and transportation infrastructure those pigs won’t survive the trip to any distant market.

    What do you do? At some point you will simply give up. You will grow enough potatoes to feed yourself, you will keep one pig that you will kill in the fall once the temperatures are below freezing, and as for those city folks that bought imported potatoes from Belgium and imported pork from Argentina, deep down you may secretly hope that they starve when they can’t afford their imported potatoes and pork due to inflation and a devalued ruble 😉

    Mikhail Khazin has a brilliant analysis that demonstrates quite effectively that the crisis that Russia will have to live through was truly made in Russia: He writes:

    Надо отдавать себе отчет, что все это не случайно. Закономерное следствие экономической политики последних лет. Запад к этому не имеет никакого отношения. Это наша политика, это наши результаты. Были же у нас экономисты, которые кричали громким криком еще 2 – 3 года, 5 лет назад: «Так жить нельзя, надо развивать собственное производство. Иначе будет катастрофа!» Но их объявляли «маргиналами» и «алармистами». Вот и дождались катастрофы, хотя не все еще ее осознают.

    Simply put, Russian policies effectively strangled local production on the altar of oil and gas production and enriching the elites to the detriment of local production. Now that oil prices have fallen, Russia does not have the money to import all the potatoes and pork that it needs or wants, and the small producers in the villages certainly haven’t seen the roads or the investments needed to actually get their good to market, as would be the case in a “fundamentally strong, capitalist economy.”

    Comment by Michel — February 14, 2009 @ 11:45 am

  12. P.S. Bob, where are you from in Canada? I grew up in northern Alberta on a farm. We grew a lot of wheat when I was a child, much of it was exported to, guess where, the Soviet Union. And, this was the Soviet Union that was much larger with much better agricultural lands. Why did they have to buy wheat? Well, pretty much for the same reasons Russia now buys potatoes from Belgium. They could grow it, but could not effectively store, transport and process what wheat they did grow, and much ended up rotting in the fields. It was thus easier (and likely cheaper) to import wheat grown on a very distant farm in northern Canada where they do have the necessary infrastructure in terms of storage and transportation, than actually getting their own wheat to their own market.

    Comment by Michel — February 14, 2009 @ 11:58 am

  13. The Professor, it seems that you’re more voicing your opinion against Russia’s geopolitical policies (wet dreams as you put it) and expressing hope that they won’t be able to succeed, rather than making a real argument for why they won’t be able to do it. You say that it wasn’t a direct comparison of the two economies, but then how can you call their decisions similarly misguided when the scenarios are admittedly completely different? Yes, Russia has geopolitical ambitions now similar to when it did back then, but the situation is different now, meaning their decisions are being made with this new scenario in mind. This new scenario is much more in their favour. Their old mistake was that they were trying to win back influence while their own economy was collapsing, not that they were trying to win back influence period. So they’re not, as you say, making that same mistake again. When a country has nearly $400 billion at their fingertips, a $2 billion loan here and there is virtually nothing. It’s not like they’re taking funds out of their budget and sacrificing funding for more important things to afford these loans. Now that’s not to say they can squander their riches, but you’ll have a good reason to complain about their mismanagement of their reserves if they run it dry before the crisis ends. Right now your criticism is just highlighting the fact that you have no faith in their administration, but we already know that. Also, don’t forget that these are loans which will be payed back, they’re not free handouts. That money will come back into their hands and eventually (hopefully) be used to address internal problems in the future such as the various ones you pointed out.

    Regarding your comments on Russian economic success being tied to oil prices, all I have to do to counter this claim is point out Russia’s yearly GDP growth and compare it to oil prices for each year. If their economy was unable to achieve the same levels of success without high oil prices, then how do you explain 2000-04, where the economy averaged 6.8% growth over 5 years while oil barely went higher than $40/barrel, and averaged a modest $25/barrel. And Russia’s combined average growth for Putin’s combined two terms? Virtually the same as the first, 7%. My point being, oil prices didn’t have a significant effect on economic growth. What it did was give the government loads of revenue which is where the huge reserves came from. I’m not going to deny that high oil prices were superficially helpful for the economy and the country as a whole, but trying to dismiss every aspect of their economic success over the past decade with the mere mention of oil prices is a stale tactic that I get tired of refuting time and time again. And certainly you must agree with me on at least one point, that this forced weaning will in the long run benefit the economy and help it develop properly.

    “rather than addressing its pressing–and painfully obvious–needs: improving property rights, securing the rule of law, improving a shambolic infrastructure, fixing a nightmarish health care system, addressing a crushing demographic implosion.” – To deny that these things are big problems would be ignorant, but to say they haven’t taken any steps towards fixing any of them is nonsense. Namely, what has the mafia been up to lately? What about the criminal oligarchs who were responsible for much of the rampant poverty during the 90s? The rule of law is far from satisfactory, but it was virtually non-existent during the 90s, and pretty much every Russian I speak to says that the country isn’t nearly as dangerous as it used to be. On top of that we have statistical improvements for proof. The nation-wide murder rate, for example, has dropped from about 20 to 16 murders per-capita since 2000. Yes, hate crimes have gone up at an alarming rate, but that’s sort of a new problem, not an unfixed old one. Corruption has gone up, so they say, but I’d take corrupt politicians over mafia wars any day. Not to sound apologetic, it is still a huge prolbem and I’d take neither a day before that, but one step at a time is better than standing still.

    Regarding the demographic situation, this wasn’t an issue that Putin denied or ignored, rather he fully acknowledged that it was the greatest threat the country faced. I’ve been keeping a close eye on the situation for a few years now and over the past 3 years it has been visibly improving. According to the latest official figures, the population decline in 2008 was 0.08% (113 thousand). It was 0.16% in 2007, something like 0.4% (half a million) in 2006, and even worse from 00-05. This slowdown can be directly attributed to three things: Immigration, and a baby boom, the result of improved social policies and the booming economy. There’s still the issue of high mortality rates, but that can be expected to slowly decline as healthcare improves over the years. Speaking of healthcare, they just released a draft for a new healthcare plan that covers the next 12 years, in case you’re interested:

    Going back to the Soviet Union, if you’re trying to pin the collapse on oil prices, that’s beyond simplification and bordering on historical revisionism. There are plenty of books and essays out there that could better explain it than I can. Main point being, it would have come crashing down, low oil prices or not. You’re trying too hard to find paralells that just don’t add up.

    “Russia was unduly susceptible to world economic conditions, and has suffered more from the crisis than has the US.” – Now we’re just getting silly here. Unless you’re just talking about the decline in billionaires…you don’t seem to appreciate the seriousness of the situation in America.

    The US’s crisis is on a whole different level with completely different factors involved, namely the housing market and credit sector, which affects 100% of the population, unlike Russia where most people don’t use credit or have mortgages etc.. I don’t want to start a stupid America Vs. Russia debate, but lets be honest here. Russia is entering a severe slowdown, a recession. America on the other hand is watching its housing market collapse and its economy sink into an actual depression (even the IMF has come out with the D word recently). The people in Russia most effected by this crisis are investors and the wealthiest classes. It’s the exact opposite in America, the poorest are getting hit hardest. The ones who can’t pay their bills, their mortgage payments or use their credit cards. People, families are losing their homes en mass. Those same people are losing their jobs at record rates, and by now almost no one is predicting a 2009 recovery.

    It just boggles my mind that you would try to make that argument in the first place.

    Comment by Bob from Paraguay — February 14, 2009 @ 12:48 pm

  14. I just spent about an hour writing a response to The Professor, and it appears to have been deleted. What’s up with that? Even Putin doesn’t censor the internet.

    Comment by Bob from Canada — February 14, 2009 @ 1:31 pm

  15. Hold on to your britches Bob. For crissakes, if you know anything about blogs you’ll know that they do have spam filters, and believe it or not, people who post under names like “Bob from Paraguay” sometimes get caught in them. And you might also find it hard to believe that I don’t sit by the computer waiting for your next missive, just to make sure that it’s released to a world waiting with breathless anticipation the instant it appears.

    I don’t censor. And next time, maybe you could inquire politely without making baseless accusations.

    Just a thought.

    Oh, and BTW, you might want to check your facts on the Putin stuff.

    The ProfessorComment by The Professor — February 14, 2009 @ 5:03 pm

  16. Bob–

    You say you spent an hour composing your response. An hour wasted that you’ll never get back. Sorry about that. Not wanting to waste my own precious time, I’ll limit myself to pointing out a few of your especially silly remarks, and leave it at that.

    1. Re Soviet Union and oil price collapse, I suggest Gaidar’s book. He makes it painfully obvious that the event that precipitated the USSR’s decline was the collapse in oil prices in 1986. Certainly their structural problems inherent in socialism made them vulnerable, but that’s true today too.

    2. Re growth. You see, Bob, growth means change in economic output. You say the economy grew 6.8 percent 00-04, when the oil price was $40 and averaged $25. Presumably you’re suggesting that’s a low price by comparison to today’s price. That’s a nonsensical comparison. You should look at the change in the price of oil over the same period of time as which you are calculating the growth. If you do, you see that was a time the oil price rose substantially too. Around 98-99 is was $10/bbl (10 December 1998, 10.72 NYMEX front month WTI). By the end of 04 it was $43.45, and had traded as high as $55.17. That’s a four (and at times five) fold increase over the period of time you are calculating the growth comparison. Comparing the oil price in 04 to that in 08 makes no sense when evaluating the 00-04 growth. Moreover, that cherry picking of dates reflects badly on you. Due in large part to the oil price collapse of the late-90s, the Russian economy collapsed too; and imagine my surprise when I note that that’s when the oil price fell by 60 percent. The “growth” in the time frame you mention was not a growth in potential output (that’s the measure of the health of an economy); it was a recovery from a precipitous collapse in income in 98-99. That’s not comparable to secular growth over a long period of time. That recovery was facilitated by a sharp devaluation in 98–and the aboveforementioned increase in the price of oil. And, it should be noted, it was also encouraged by a relatively liberal tax policy introduced by Putin. He soon turned his back on that kind of enlightened policy however. Read up on what Illarionov has to say about that.

    3. Re demographics. The “baby boom” is widely recognized by demographers–including Russian demographers, including government demographers–as an artifact of the last baby boom of the Soviet era–women born in that period are now of child bearing age. The birth rate is anticipated to fall dramatically as that cohort ages, and is replaced by a very small cohort. Moreover, the death rate and the life expectancy for males is atrocious. Yeah, it’s not as bad as it’s been, but that’s not saying much, is it? Certainly even the improved situation isn’t the demographic foundation for a growing society. Especially when you consider that the highest birth rates are concentrated in low education, low income cohorts. And Bob, just when is that improvement in healthcare supposed to kick in? If you haven’t noticed, Putin et al have plans out the wazoo. All of which have target dates well beyond when they can be held accountable. I’m sure that’s a coincidence.

    4. I’m not talking about the decline in billionaires. The economy is tanking. It is hitting ordinary people very, very hard.

    5. Bob, you have a very bad case of what Edward Lucas calls “whataboutism.” It’s a well-worn Soviet, and now Russian, response to criticism. Inspired by a Bill Murray movie title, I suggest you change your screen name to “Whataboutism Bob.” I’ll make sure it gets through the spam filter.

    The ProfessorComment by The Professor — February 14, 2009 @ 5:40 pm

  17. I find it interesting that Prof’s posts about Russia almost always produce fireworks without fail, whereas the posts on the economy draw a much more subdued response, although I can see that he puts in much more thought and analysis into those!

    Comment by Surya — February 14, 2009 @ 8:06 pm

  18. The Professor, I understand how spam filters are supposed to work. My post went through and I had a chance to re-read it immediately after it was posted, and then it was gone 30 minutes later when I checked back. It has now miraculously re-appeared. Amazing. That’s one intricate and confusing spam filter. I apologize if you didn’t in fact delete my response and I jumped to the wrong conclusion, however you must admit that it’s a little strange. Almost like it’s…alive!

    I have no doubt that Gaidar’s book says oil prices caused the Soviet Union to collapse. I have no doubt he’s wrong. Oil did contribute to their financial problems which is obviously what ultimately lead them to collapse, but like I said, there would have been a collapse one way or another. The problem wasn’t that they were suddenly short on income, it was that they were spending it like idiots and had been for decades. The arms race and the disproportionate amount of GDP spend on military, the futile war in Afghanistan, the bureaucracy, the poor planning of the planned economy, the disastrous reforms…I’ve studied the topic extensively and there’s no one book that’s going to convince me that one single factor was the main cause. Your book was written in 2007 and titled “Lessons for Modern Day Russia”, and it was written by not a historian, but a politician. Are you kidding me? That’s a perfect example of historical revisionism shaped to parallel current day Russia. Pick up a real history book written by a real historian, or take a university course on the subject if you want the truth of the matter. Things are never so simple.

    Regarding demographics, you fail to recognize that the brunt of the population decline has been slowed by immigration, not the baby boom itself. Natural growth has indeed been slowly improving thanks to the baby boom, but there are still 1.2 deaths for every birth, meaning the population would still be seeing a yearling decline of some 0.3% without that significant increase in immigration. Mortality rate is the real problem. Immigration is a quick fix, and as you said, it’s unlikely the baby-boom will sustain itself for an extended period of time. But are you so stubborn that you can’t even admit Putin did one thing right?

    Regarding the economy tanking, I thought that’s what I said. No doubt everyone in every aspect of life is feeling the effects to some extent. I only said billionaires were getting hit the hardest, which is a fact, and that it’s the opposite in America, which is another fact. People aren’t losing their homes en mass in Russia. What’s happening to regular people is what normally happens to regular people in a recession. Job losses and declining real wages. It’s not near the same level as what’s happening in America, which is an unprecedented even compared to the other most hardest hit economies like Latvia, Ukraine, and Britain. Well, maybe Iceland has an argument.

    In summary, I’ve read your response and I remain unchanged in my views. I’ve heard every explanation and argument regarding these topics from all sides of the spectrum, and yours is the run of the mill “everything in Russia is so terrible and nothing is improving or ever will improve with Putin in power” response, as opposed to the patriotic “everything in Russia is perfect and Putin did everything perfect” argument which is equally simplistic and unconvincing. I’ll call you “everything-is-terrible-you’re-wrong-if-you-disagree Professor”. I always find it strange that my middle of the road way of looking at things is always attacked from both the hardcore patriots and the hardcore Russophobes (or Putinphobes, whatever you want to call it). No one on either side seems satisfied with a common sense stance that doesn’t take on an extreme view.

    I have no reason or motive to be biased, do you? I do this because I always come out a little more knowledgeable and a little more secure in my own views after a good debate, not because I’m actually trying to convince people of my own views. I well know that people like La Russophobe, as with religious zealots in the face of science, would and do deny the truth as it’s staring them in the face. And that’s fine with me, but unfortunately, people like LR don’t make me think, because that’s not their goal.

    I enjoyed your post(s). You do make some very good points. One thing I’d like to point out is that only a very small portion of Russia’s economy is agricultural based today. 10% or so. It’s true that road conditions do contribute to the health of an economy, I know this better than most, having three truck drivers in my extended family and having heard all their stories about bad roads and such, but I don’t think that negates what I was trying to say about the macroeconomic situation.

    I grew up in suburban southern-Ontario by the way. No farm stories here. I’m curious, you say you grew up in Alberta, to what extent did you live in and do business in the SU/Russia and when?

    Comment by Bob from Canada — February 14, 2009 @ 10:20 pm

  19. Oh man, so many post scripts. Well, what I found interesting was that there so fewer people who can post “meaningful” comments on the economy posts. But of course the term “meaningful” is so subjective (almost everyone invariably thinks their own comments are meaningful – no offense rytb ;-)). Does it simply mean that fewer percentage of the average blog reader understand economic matters well enough to supply insightful comments, or that the average blog reader finds it more interesting to comment on posts where a lively discussion is going on (which usually happens in the Russia posts), or may be it is just a reflection of the demographic makeup of the SWP blog readers. I simply like to ruminate and speculate on random things without worrying about the gravitas. I am finding opinion and consensus formation in the blogosphere particularly fascinating.

    Comment by Surya — February 14, 2009 @ 10:33 pm

  20. Bob, it is true that agriculture is only a small portion of the economy, but then again so is everything else other than oil, gas and other mineral resources. If I remember the statistics off the top of my head, but small and mid-sized businesses in Russia only account for 15% of the GDP/GNP whereas they represent 50-70% of the GDP/GNP in North America and Europe. Feel free to correct me if I you find any more precise data. This is an indicator of the preeminence of a couple dozen big businesses in Russia, those very same businesses that are being hit the hardest by the crisis and the plunge in the Russian stock market.

    As for the banking sector, they used the availability of easy credit from the West to fund their expansion. They owe massive sums and it is unlikely they will be able to pay it back. If the crisis lasts, hundreds of banks are likely to go belly up in Russia in the next year or two. This is hardly a healthy sector of the Russian economy.

    Comment by Michel — February 14, 2009 @ 11:07 pm

  21. Michel, regarding the economy, non-tradable services and goods for the internal market is where the majority of Russian GDP comes from, about 55%. That’s about 10-20% lower than most developed economies, (15% lower than Canada for example):

    Industry accounts for about 40%, energy exports a decent sized fraction of that. Energy exports do make up a significant chunk of the economy, but definitely not as much as people try to make it out to be. The biggest problem they’re facing due to the collapse of oil prices isn’t economic slowdown (this is caused by a combination of everything plummeting at once), it’s the lack of revenue. They’re facing a huge deficit in 2009 if oil prices stay where they are. Of course their reliance on oil prices for revenue can be overcome in the long run, and that would be desirable, but if they will be is another story.

    By the way, I made a mistake, agriculture is actually 4%, not 10. A good overview of figures, though not the most accurate source, can be found on the CIA world factbook:

    Comment by Bob from Canada — February 15, 2009 @ 12:15 am

  22. Bob,

    This is what one economist wrote about small business in Russia in 2003:

    The economic transition in Russia has been characterised by the limited development of small business which has been particularly disappointing when compared with the leading transition countries, Poland, the Czech Republic and Hungary. Poland had 2,000,000 small firms in 1997,1 while Russia had less than 900,000
    despite having a population three and half times as large. In Poland the newly established private sector (mostly small businesses) has been the main force behind the economic recovery and has led to a strong growth in the manufacturing sector (although growth has been slower than in services). By the late 1990s, small and medium enterprises (SMEs) accounted for two-third of GDP and more than half of manufacturing output according to Gomulka (Meth-Cohn, 1999, p. 15). Even in the Czech Republic, growth has been strongest in small industrial firms, while the contribution of large industrial enterprises has decreased (Borish and Noel, 1996, p. 34). The share of the former in total industrial production has increased from 3.8% in 1991 to 22.6% in 1997 (Bohata and Mladek, 1998, p. 168). The evidence from Hungary suggests that industrial restructuring can be largely ascribed to foreign investment. However, small industrial firms expanded their share of total output quite considerably. By 1996 small firms (up to 100 workers) accounted for 28% of manufacturing employment. As far as the total economy is concerned SMEs (up to 250
    workers) accounted for 64% of total employment; small firms (up to 100 workers) accounted for 41% of the total (OECD, 2000, p. 132). In Russia small business accounted for just 12.8% of total employment in 1999 and its share of GDP was around 10–12% during the 1990s (Goskomstat, 2000, p. 9).

    Source: Alessandro Kihlgren. Small business in Russia—factors that slowed its development: an analysis. In Communist and Post-Communist Studies 36 (2003) 193–207.

    As I remembered, small business is quite insignificant in Russia as compared to North America and Europe. This article highlights that Russia is quite far behind the Former Communist Eastern European such as Poland and Hungary. Though the research was looking at material from the 1990’s and early years of the millennia, I have yet to see any evidence that there was an exponential grown in small businesses in the last 8 years. A recent article or opinion piece in The Moscow Times noted as well that small and mid-sized businesses accounted for less than 15% of the GDP (i.e. virtually unchanged from the 1990s). If anything, the last few boom years strangled the growth of small business in many ways. The effects of high oil prices and the concomitant Dutch disease would have suffocated any growth in small business through a higher ruble making it difficult to compete and inflation.

    Comment by Michel — February 15, 2009 @ 12:04 pm

  23. Regarding the spam filter, I already apologized, no need to get defensive. The same thing happened to my last post, it appeared and then later disappeared, only to reappear now. Strange system.

    Our views aren’t so different on the USSR collapse as it first seemed, it sounded like you were trying to pin it on just that one factor. Oil prices very well could have been the straw that broke the camels back, but I think you’re overplaying the significance of a single factor. Oil prices didn’t cause the collapse, that’s my point. That you can draw parallels to prices between then and now doesn’t mean much when you’re forcing other parallels that don’t fit just to try and stress your personal view (I almost want to say personal hope). Russia isn’t the Soviet Union. They’re not communist, they’re not holding together an empire, they’re not a superpower.

    On spending, when I say they were spending like idiots, that can’t be compared to today, even if they are spending like idiots today (which I don’t think they are). What did the Georgian or even the second Chechen war cost compared to the Afghanistan war? What did the nuke buildup and the massive buildup of military hardware cost compared to the reforms and slow but steady approach to improvements they’re making now? It’s not comparable. Russia is currently spending 4% of its GDP on military. That’s 1% less than America, but more notably, 11-13% less than the SU. I stress the word disproportionate. Every great power needs its military funding.

    The fact is that the Russian military is and has been in shambles, which was quite evident after the loss of the first Chechen war, and still evident to a lesser extent in their latest Georgian venture where they were caught using old T72s and dropping inaccurate dumb bombs. They’re not overspending now, they’re playing catchup for a lost decade. It’s in the best interest of their and the world’s national security for them to have a strong ground, naval and air force. The stronger those things are, the less likely they’d ever be desperate enough to use nukes. With a schizophrenic country like China next door and all that empty territory, all those resources, it’s a scary thing to think about.

    On demography, I don’t recall “pooh-poohing” about anything first of all (whatever that means). I was just pointing to the improvements, and the fact that they could be attributed to government policy which was in contrast to what you said about the government “doing nothing” to help the situation. I only claimed the baby-boom was one of three factors that was contributing to the improving situation. I didn’t say it was the biggest factor. You’re putting words in my mouth.

    And no doubt there are new tensions arising because of the increased immigration. So what do you suggest? Two-three years ago it was people like you who were complaining that Putin was a nationalist and it was his unwillingness to increase immigration that was going to drive the country under. Now that he’s increased it, suddenly the ethnic tensions are issue #1 and increasing immigration was a big mistake and blah blah blah Putin can’t do anything right, same old story with you people. You would deny the moon exists if Putin claimed it did. Immigration is necessary right now. There’s no two ways about it. What needs to be done is some good ol’ fashioned bleeding heart “equality” indoctrination, and some further stomping out of extremisim and nationalism from the mainstream. (Of course then people like you will be whining about anti-democracy and anti-freedom measures, just like you (your type) did when they banned the National Bolsheviks from the elections and still do when they stomp out their little nationalist parades/protests). They need to take lessons from countries like Canada and Britain on how to properly indoctrinate their people to, well, not be racist. To accept everyone as equal and all that. Clearly their attempts at doing that during Soviet times ended up backfiring, I only pray that a similar scenario never happens to my country. The sesame street generation is all grown up now, and I can already see some negative consequences of this liberal indoctrination arising.

    Back to the economy, comparing these unemployment rates from country to country is as pointless now as it has always been. Europe always seems to have higher unemployment, but that’s not because they actually have that many more people out of the job market (some do, some don’t). It’s how they calculate it. What you need to look at is the rise in unemployment. Russia’s unemployment is .6% higher now than it was one year ago. At the same time, America’s is 2.8% higher. The rise in the number of unemployed is what’s so alarming, not the number itself. 7.7% unemployment for a country like Russia is pretty average and in fact still much lower than average if you look at the past decade. Not so for America. America’s unemployment hasn’t been this high since the early 90s, and there is still a long ways to drop. The problem is going to get worse everywhere. Your implication that America is somehow at or near the bottom is in complete contrast to what every expert, every politician and every credible economist is saying. Even Obama himself is saying that there won’t be a recovery this year, and he’s being optimistic, just repeating what his advisors tell but trying to prevent panic.

    Re billionaires, I was being sarcastic.

    Regarding real disposable income, that’s entirely a result of the inflation situation in both countries, in no way is comparing these numbers indicative of economic health. Plummeting inflation in America has been caused by a collapse in consumerism, which has resulted in a slight rise in real disposable income. This is nothing to be bragging about, it’s just evidence of how messed up things are. And on the contrary, Russian wage growth has slowed from a much quicker pace, but since there has been no collapse in consumerism and for a variety of other reasons, inflation is still high, so even if wages rise a little, inflation eats up the real gains. As I’ve been saying, these are two completely different crises, I don’t understand why you’re trying to compare them in the first place.

    Comment by Bob from Canada — February 15, 2009 @ 12:43 pm

  24. Bob–

    1. Re Russian military=shambles. No dispute here. I’ve posted on that numerous times over the past 3 years. Hit the military link on the category to see a variety of posts on the subject.

    2. Re “in the best interest of their and the world’s national security for them to have a strong ground, naval and air force”: (a) agree to the extent that it is quite scary to have a government with borderline paranoics in charge relying almost exclusively on nuclear weapons, but (b) I doubt that given the Russian gov’t’s imperial tendencies (e.g., its insistence on its privileged status in the post-Soviet space) that your view is widely shared in Ukraine, the Baltics, Georgia, Azerbaijan, etc.

    3. Re Gaidar, you might want to read my review of his book. I think you might find you agree with him–and me–more than you might imagine. Gaidar’s book was also a plaintive cry against the folly of renewed Russian imperial ambitions, especially when predicated on a misdiagnosis of the collapse of the USSR.

    4. The implication I drew from your original statements re demography were that you were arguing that the problems were overstated because of 3 sources of improvement: immigration, baby boom, and improved public health. I drew this conclusion as well because you raised the point in opposition to my original one about the futility of a dying nation trying to recapture past imperial glories. (Glories, by the way, that occurred in an era when Russia’s very different demography frightened Europe.)

    5. Comparisons of unemployment levels are indeed difficult, as there are long term structural differences as you note. Again, however, looking at changes in unemployment is useful to measure the relative impact of an economic shock in two countries as changes take these country “fixed effects” into account. (Indeed, empirical economics uses such difference measures to control for country-specific effects.) The fact that Russian unemployment will likely rise by a greater amount than in the US peak-to-trough (the US coming off the trough far earlier than RF) is a legitimate metric of whether the world economic crisis will hit ordinary Russians harder than ordinary Americans.

    6. Real disposable income is also a legitimate measure of economic well being, as it takes measures purchasing power into account. You are getting hung up on the accounting, i.e., how do you break down the sources of real income changes between nominal income changes and price level changes. If my nominal income goes up 10 percent but the price level goes up 20 percent, I’m hurt as badly as if my nominal income goes down 10 percent but the price level stays the same.

    7. You say a couple of times “people like you” and “you people.” Just who would those people be, Bob? Do they have names? And better yet, since you are attributing views to me, rather than engaging in ad hominem attacks based on assuming that my views on a particular issue must be the same as those of others (asserted, not documented) with whom I may be in agreement at times, I suggest the following: I have written 255 posts on Russia, and numerous comments and replies to comments on those posts. I also tend to write long. Therefore, I would imagine that I have written in the vicinity of 500K words on Russia, on a variety of political and economic subjects. If you can find in that onslaught of words an expression of the views you attribute to me, give me chapter and verse (or URL;-). Otherwise, refrain from attributing views to me based on your extrapolations and assumptions.

    8. Count me out on the virtues of Canadian and British PC indoctrination and “tolerance.” Speech codes, restrictions on the expression of political views, etc., are an anathema to me. And it is perfectly consistent to oppose restrictions on the peaceful expression of loathsome views like those of the NatBols, and to criticize those who use those beliefs to justify violence. But that’s really not the main point. All that I meant to convey by raising this point is that immigration is no panacea for Russia’s demographic problem because (a) the replacement of relatively well educated individuals who are dying at a horrific rate by low-education, low-skill immigrants is hardly the recipe for robust future growth, and (b) it also contributes to highly divisive social tensions. Increased immigration is just the best of bad choices for Russia.

    9. Agree that Russia is not as insane as the USSR. Very low bar to clear (and another example of your whataboutism). Economists look at things at the margin. In my view, at the margin, Russia has far better use for its resources than trying to recapture past imperial glories. That is, even though it is not overspending as much on geopolitical aggrandizement as the USSR did, it is still overspending relative to what would be in the interests of a nation with desperate domestic problems that faces no realistic threat of invasion from those it demonizes most (who lie west, not east). The Soviet example should illustrate to them the folly of their ways. The fact that their imitation has been half-hearted counts only a little in their favor. Reasonable and realistic leaders would recognize that the Soviet example is one to be avoided altogether, not emulated on a budget.

    The ProfessorComment by The Professor — February 15, 2009 @ 6:15 pm

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