Streetwise Professor

September 15, 2009

Some Russian Quick Hits

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 12:24 am

A few stories that caught my eye:

From Edward Hugh’s Facebook group page:

Russia’s central bank lowered its main interest rates again today – by a further quarter percentage point – hard on the heels of the announcement of a record economic contraction in the second three months of the year and the growing recognition that the country now faces a painfully slow recovery.

Russia’s economy contracted at the fastest rate on record in the second quarter as rising unemployment and stagnant bank credit lead to a sharp drop in consumer demand.Gross domestic product fell 10.9 percent in the quarter from a year earlier, after a 9.8 contraction in the previous period.

The monthly GDP indicator data suggested the Russian economy continued to contract in August. However, the annual rate of decline slowed further from May’s revised record -9.9%. In August the GDP Indicator registered -3.9%, the highest reading in 2009 so far. The Indicator has now spent nine months in negative territory, a longer sequence than the previous seven-month spell from September 1998 to March 1999. The currentaverage rate of decline is also much sharper than in the previous downturn, at -6.4%.

In other words: Not out of the woods yet, by a longshot.  To put things in perspective, Russia’s best monthly reading of -3.9 percent is between the US first quarter contraction of -6.4 percent and the second quarter contraction of -1.0 percent.  In output gap terms, however, the Russian performance is even worse given Russia’s substantially higher pre-crisis growth rate. The unfavorable comparison to 1998–the supposed nadir of Russian economic fortunes, and the standard by which Putin wants to be evaluated–is particularly dreary.

Lest you think that it’s just me, note that the Russian central bank’s rate cut demonstrates quite clearly and credibly that it is concerned by the economy’s state.  Very concerned.

Also keep in mind that Russia’s performance looks especially bad given that (a) oil prices are more than double their lows of the first quarter, and (b) other emerging markets to which Russia is often compared are doing far better.  China is growing at 8 percent–although as I’ve written repeatedly, I consider that to be 9 parts mirage, 1 part reality.  India is growing at about 6 percent.  Brazil is contracting at about a 1 percent rate and may eke out 1 percent growth for 2009.

Another story that piqued my interest is the latest episode in the Russia-Turkmenistan soap opera.  In brief: despite much happy talk, and a Medvedev visit to Turkmenistan, the gas standoff between the two countries is nowhere close to being resolved:

“Most technical issues, related to the usage of pipelines, have been solved… In the next weeks, Gazprom will contact Turkmen authorities to agree on the parameters to continue cooperation,” said Prikhodko.

When asked whether the date of supply resumption has been discussed, he said : “No such task has been set (ahead of talks)”.

. . . .

“As far as the liquidation of this accident is concerned, I would like to say that (Turkmen state firm) Turkmengas will take a time out with its contacts with Gazprom,” Berdymukhamedov told Medvedev on Sunday.

Pipeline blasts are regular on former Soviet Union territory due to the equipment’s age, but it rarely takes more than a week to restore flows.

“I don’t think we have outstanding questions… I think it is obvious that pricing will be done under a formula,” Berdymukhamedov said.

On Saturday, Medvedev and Berdymukhamedov spent a day in a Kazakh Caspian Sea resort of Temberli and on Sunday attended a truck rally in the Turkmen desert.

In spite of the failure to agree on gas flow resumption, both Medvedev and Berdymukhamedov hugged before and after the talks, with the Russian leader talking up bilateral ties.

“Our trade and economic relations are not just good, but very good,” said Medvedev.

Tell me another one, Dmitri.

Through all the diplospeak smog, it is pretty clear that there has been virtually no progress at resolving a standoff that is going into its 6th month.  This is not a technical issue, but an economic one.  Every day that the gas doesn’t flow provides further evidence, as if any was needed, that the explosion was a deliberate economic act by Gazprom to avoid paying for gas that it couldn’t sell in the teeth of the economic slowdown at the prices it had agreed to.

The next story is a priceless tale of the brazeness of corruption in Russia:

Russian prosecutors opened a criminal investigation into the possible embezzlement of funds earmarked for the restoration of Moscow’s  Bolshoi Theater, founded in 1776.

Auditors uncovered violations in a probe of the  Office for Construction, Redevelopment and Restoration, the federal agency that’s in charge of the Bolshoi project, the Investigative Committee of the Russian Prosecutor General’s Office said on its  Web site today.

In August 2003, the agency signed a contract with  ZAO Kurortproekt to design the second phase of the Bolshoi renovation for 98 million rubles ($3.2 million), investigators said. Under an addendum to the contract, Kurortproekt’s fee rose to 164 million rubles.

“From 2003 to 2009, however, the agency paid Kurortproekt three times for the same design work and documents,” investigators said. The agency paid a total of about 957 million rubles, including 581 million rubles for drawing up documents, investigators said.

When something this blatant can occur in one of the most high-visibility projects in the heart of the nation’s capital, just think what transpires in the country’s darker corners.

The last story is an update on the ongoing Telenor saga:

Telenor ASA’s appeal of a $121 million fine in Russia was rejected by a Moscow court, Telenor spokeswoman Anna Ivanova-Galitsina said by text message today.

The fine was imposed on Telenor for not voluntarily paying $1.7 billion in damages to OAO VimpelCom after a lawsuit brought by a minority shareholder, which Telenor is also contesting.

In other words, Telenor is going to get squeezed every which way until it cries uncle.  No relief while the wheels of “justice” turn in Russia.

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  1. So, who got to 3000? Any winners announced?

    Comment by Surya — September 15, 2009 @ 9:27 pm

  2. Interesting that the Prof quoted Edward Hugh. EH recently published a letter to the editor of Foreign Policy magazine critiquing Edward Lucas for not seeing the elephant in the room concerning the Baltic states economies – namely their labor shortage due to falling demographics and emigration to the rest of the EU.

    Comment by Steve J. Nelson — September 15, 2009 @ 11:24 pm

  3. Yes, SWP really should talk more about the Baltics, the depth of whose economic collapse make Russia’s troubles seem no more a slight grazing of the knee. That’s not going to happen, however, because the Baltics are pro-Western, Russophobic, economically liberal and “transparent”.

    PS. I’m S/O / DR, but from now on will be posting under the more inspirational name “poluchi fashist granatu”.

    Comment by poluchi fashist granatu — September 16, 2009 @ 6:10 pm

  4. In fairness to Lucas, the Baltic states don’t have oil and gas to cushion the blow. Russia’s loans, however ill advised they may have been, still remain smaller compared to overall GDP than the Baltics though.

    Hugh is right on about the best and the brightest (or even just warm bodies capable of helping nurses) getting sucked out to the rest of the EU. Most Ukrainians want EU membership but not the full package of NATO membership because a sizeable number would like to emigrate, though I don’t think it would be so huge as many people think.

    Still, I think the Baltic example should prompt so more soul searching among all those wonkish pundits in London and Washington (here’s looking at you Cato Institute) who enjoyed the cushy junkets to Talinn in the boom times. If there was a Balticophobe blogger should “she” would be screaming about their “spectacular failure” and stubborn refusal to come clean about their behavior during WWII, etc.

    So I suppose we’ll have to settle for Stanislav Mishin, the Russian who won fifteen minutes of fame in The American Spectator and elsewhere by declaring that it was America, not Russia, that was now dominated by Marxism.

    Comment by Steve J. Nelson — September 16, 2009 @ 11:20 pm

  5. I don’t see how NATO membership would particularly affect migration flows…

    Re-Baltics. Funny story. Latvia had a commission tasked with calculating Soviet-era “damages” and working out a bill of reparations to send to Russia. Just the usual lowly Russophobic Baltic nastiness. It was forced to cease its work this year because of lack of funds. 😉

    Comment by poluchi fashist granatu — September 17, 2009 @ 12:49 am

  6. “Still, I think the Baltic example should prompt so more soul searching among all those wonkish pundits in London and Washington (here’s looking at you Cato Institute) who enjoyed the cushy junkets to Talinn in the boom times.”

    The examples of the Baltics and Ukraine are a dead giveaway on Western Russophobes for two reasons. First, they show that the West has no solutions for the problems these countries have in common with Russia. Second, they show that the US government are willing to defend Baltic and Ukrainian independence to the last Balt/Ukrainian. The 1990s showed that the USG care not how, or even whether Russians live, only that the Russian government submit. The 1990s and 2000s show that the USG cares not how, or even whether Balts/Ukrainians live, only that their governments are hostile to Russia. Russians, apart from Latynina et. al., learned something from the 1990s. We’ll have to see about the Balts/Ukrainians.

    Comment by rkka — September 17, 2009 @ 4:19 am

  7. rkka, i’m not good at coming up with analogies early in the morning, but also the one about how the us and eu dont care if a country is democratic, peaceful, and behaves humanely with its citizens or not, as long as it is anti-russian (georgia) or can be used against russia (the resource-rich central asian states).

    and how about the one where the us is now concerned that russia is about to sell massive amounts of weapons to saudi arabia? hello, according to the article, “Up to now, American and European military suppliers have provided some 90 per cent of the weapons sought by Saudi Arabia and the Gulf countries.” why are we so afraid of competition lol? and why do we think so much in zero sum game mentality?

    also, rouble skyrocketing, wtf right?

    got to get ready to go to work. geopolitics is SO lame, i don’t care about any of this but i’m just bored right now.

    Comment by lisa — September 17, 2009 @ 6:40 am

  8. “Russia’s loans, however ill advised they may have been, still remain smaller compared to overall GDP than the Baltics though.” I meant Russia’s corporate debt, which indeed Putin may have wanted some relief from at Davos in January 2009 but got rebuffed.

    I’ve long been watching for some quid pro quo between the Obama Admin and Russia to emerge in the financial arena, where I think the Prof has misunderestimated Russia’s reach. They were the 4th largest holders of Fannie and Freddie paper (in the $70-$100 billion ballpark) as recently as July 2008, about the same time Paulson went to Moscow (and according to RBC) asked the Russian Central Bank to keep buying U.S. debt securities.

    I wouldn’t say the ruble is skyrocketing. More like all fiat currencies slowly going down together, in a civilized, coordinated way.

    Comment by Steve J. Nelson — September 17, 2009 @ 1:19 pm

  9. And on the subject of fighting Russia to the last Georgian, it’s a darn shame Commentary doesn’t permit comments on Max Boot’s latest lame post about Obama’s “appeasement” of Russia.

    Comment by Steve J. Nelson — September 17, 2009 @ 1:21 pm

  10. Lisa, it’s not like the whole EU is Russophobe. A number of major countries, like Germany, France, Italy, and Spainmaintain civilized relations with Russia, and benefit quite a lot from that.

    Comment by rkka — September 17, 2009 @ 4:06 pm

  11. Steve, don’t clueless, powerless neocon russophobes bleat and whine entertainingly when things don’t go their way? I can just see Bolton’s walrus mustache bristling with impotent rage!

    Comment by rkka — September 17, 2009 @ 4:10 pm

  12. Max Boot can get quite absurd.

    Comment by Cutie Pie — September 22, 2009 @ 6:21 pm

  13. rkka

    Bolton is by no means a standard neocon.

    Comment by Cutie Pie — September 22, 2009 @ 6:23 pm

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