Streetwise Professor

November 3, 2008

Roger That

Filed under: Economics,Politics,Russia — The Professor @ 8:22 pm

From the Economist:

Beyond crisis response, Russian state officials are hinting at some of the steps they would like to take to avoid a repeat of the current difficulties. One measure, given the pain inflicted of late by the dollar’s surge, is to conduct more trade in currencies other than the US dollar. Another theme, to which several officials have alluded, is the need to build up a strong national financial centre, so that the country is not unduly reliant on the foreign finance that has proved so flighty in recent months.

There are many reasons why so much capital has been exported in recent years; one of them is the ambition of Russian companies to become global players. Another, however, is that Russia’s rich do not feel their wealth is fully secure in the country. In this sense, Russia is suffering acutely because of the chronic political risk attached to property rights in the country. Domestic and foreign investors might hope that the authorities will conclude that there is a need to strengthen property rights. Yet for the moment, other considerations must take precedence.

The diagnosis of the root of Russia’s long term problem–political risk and the resultant insecurity of property rights, is spot on. But “Hope” for an official recognition that property rights must be strengthened? “Fantasize” is more like it. Beyond a few verbal flourishes (“legal nihilism”) there has been virtually no recognition by the powers that be (and there is even reason to dispute that the man who uttered “legal nihilism” can be called such) that attacks on property rights need to cease, or that Russia’s long term future is dependent on protecting property from the predation of the state, or its favored interests.

“Other considerations” will take precedence, for this moment, and for all moments into the foreseeable future. A system predicated on the unchallenged supremacy of the state will never credibly concede autonomy to individuals or individual companies. In such a system, and under such an ideology, every interest and every individual must bow before the state–but property rights are a bulwark against the state, and so are inconsistent with the fundamental character of the system. Thus, strengthening of property rights is not in prospect, and consequently, a strong, independent “national financial centre” is a pipe dream.

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  1. That’s funny. From what all the Russophile propagandists had been saying, I’d thought that the Russians had abandoned the dollar long ago, and indeed that no foreign currencies were interesting to Russians, who now loved their mighty ruble and had no need of buying anything from foreigners.

    Guess I was misinformed.

    Comment by La Russophobe — November 4, 2008 @ 8:50 am

  2. Yup. Anybody who bought that bilge was huffing, smoking, snorting, or drinking something. Or all of the above.

    The ProfessorComment by The Professor — November 4, 2008 @ 12:38 pm

  3. Today: 1 U.S. dollar = 26.2653324 Russian rubles
    25.659 (2007), 27.19 (2006), 28.284 (2005), 28.814 (2004), 30.692 (2003)

    So unless they bought it within the last year, whatever they were smoking must have brought enlightenment!

    Comment by Da Russophile — November 4, 2008 @ 3:37 pm

  4. Well, according to, the dollar closed at 27.0610 today. However, the true test of the ruble will be what happens once the central banks stops spending billions to prop up the ruble.

    Comment by Michel — November 4, 2008 @ 4:43 pm

  5. Oh, I just Google it –

    Currencies are all relative to each other. It’s still far from clear what will happen to the $ as the “flight to safety” abates and the effects of the Fed’s opening of the monetary sluice-gates will have in 2009.

    Comment by Da Russophile — November 4, 2008 @ 5:08 pm

  6. Well, if oil prices stay low, money certainly won’t be flowing to Russia 😉

    Comment by Michel — November 4, 2008 @ 8:46 pm

  7. If only if…

    Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.

    Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

    The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term de-mand. The effort will become even more acute as prices fall and investment decisions are delayed.

    The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn (£230bn) each year until 2030. The agency says even with investment, the annual rate of output decline is 6.4 per cent.

    Comment by Da Russophile — November 4, 2008 @ 10:51 pm

  8. Ironically enough, in a few years oil-importing Russophobes may yet come to rue their celebrations when oil fell to 60$, squeezing Russian energy companies and cutting their long-term investments…

    Comment by Da Russophile — November 4, 2008 @ 10:54 pm

  9. The problem is that even though production may be declining, demand is also dropping. This from today’s Financial Times: “Commodities prices yesterday rose across the board, with oil surging above $70 a barrel, supported by producers cutting output in response to falling prices and lower consumption. But traders said the gains could be short lived as demand remained subdued.”


    Comment by Michel — November 5, 2008 @ 1:00 pm

  10. That’s called short-termism, Michel. Demand will recover once economies recover from the coming recession, perhaps by late 2009. And that’s when the difference between new oil production capacity added and output decline is due to drastically widen.

    Comment by Da Russophile — November 5, 2008 @ 7:36 pm

  11. Short-termism 🙂 Well, that is certainly what Soviet officials were saying when the price of oil crashed in the early 1980s.

    Comment by Michel — November 5, 2008 @ 10:43 pm

  12. In the early 1980’s there was still plenty of oil to be exploited outside OPEC. The oil spike was artificially engineered by OPEC, but was then increasingly undercut by the majors in Alaska, the North Sea and Norway. Eventually they threw down the towel around 1986 and prices crashed.

    Today it’s different because quite simply, the rate of capacity projected to be brought online is exceeded by the depletion rate from 2010 on, for the world as a whole. All the world’s super-giants are entering a phase of rapid decline. We are currently almost certainly at the peak of oil production. Furthermore, any energy efficiency improvements in the West will be swallowed by increasing demand from China and other emerging markets. And after that, gas will also start rising rapidly in price.

    So yeah, add false analogies to short-termism. 🙂

    Comment by Da Russophile — November 6, 2008 @ 2:22 am

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