Streetwise Professor

September 23, 2010

Still on the Hamster Wheel from Hell: Protecting Putin’s Purgatory

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 12:13 pm

Back from France, and just in time too: massive transport strikes today.  (So what else is new, I can hear you saying.)

Reading through my usual sources, I came across this article from Reuters about Russia and the WTO.  Over the last couple of days, there have been some stories about Russia’s desire to proceed with the WTO process, but this article claims that Putin is trying to put the kibosh on that:

Prime Minister Vladimir Putin’s drive to revive Russian industry with the help of handouts and protectionist measures is casting doubt on Moscow’s push to join the World Trade Organization in the near future.

Russia has declared its commitment to completing a 17-year bid to join the WTO, with backing from the United States. But liberals in the Russian cabinet appear to be in retreat along with their policies that resist state investment.

“It looks like Russia is consciously trying to postpone the WTO accession, and is trying instead to experiment with different methods of industrial policy,” said Erik Reinert, professor at Tallinn University of Technology in Estonia.

. . . .

During Russia’s deep recession, Putin’s cabinet identified promising sectors such as petrochemicals, the motor industry, shipbuilding, aerospace and agriculture, and moved to support them with the mix of handouts and protectionist measures.

Generous state support has helped to push car production up 88 percent so far in 2010. Output at struggling Soviet-era firm AvtoVAZ, in which Renault has a 25 percent stake, has risen 56 percent.

“I am convinced that time will show that the path we have chosen — a formation of strong competitive industrial production in the auto, aviation and shipbuilding industries — is the right one,” Putin said in a speech last week.

. . . .

The cabinet liberals led by Finance Minister Alexei Kudrin, a vocal supporter of WTO membership, have found their fiscal and monetary policies resisting state investment in the economy coming in for heavy criticism.

Putin said that growth in the motor industry should be a model for other sectors. Leading global car makers have opened assembly lines in Russia and are gradually increasing the share of components made locally

I said months ago that substantially freer trade is incompatible with Putinism’s natural state.  To maintain the political equilibrium in Russia, it is necessary to be able to control the distribution of rents among competing factions, clans, and industries.  Protectionism is an important tool that Putin can utilize to maintain equilibrium: opening trade would weaken his ability to control the allocation of rents, and jeopardize the system’s stability.

Yes, there are some, mainly associated with Medvedev and Kudrin, that favor WTO accession.  But it is evident that their political hand is weak.  Extremely weak.  So just like Russia constantly plays footsie with OPEC (and Putin whispered sweet nothings about that last week), it will continue to play footsie with the WTO.  But it will not go beyond first base.  Open trade is an anathema to the entire structure of Putinism.

Regarding protectionism, it is informative and wildly entertaining to read Putin’s remarks regarding the auto industry:

It is true that the global automotive industry has built up excess capacity. And it was bound to decline during the economic downturn, as explained by experts in the global automotive industry. At whose expense is this excess capacity reduced? It is reduced as a result of inefficient companies going bankrupt. Following this logic, only the laid-off workers should be supported, through unemployment benefits and retraining programs, for example.

And we do this, to a certain extent. But first of all, there is no excess car production in Russia. Even producing almost 1.5 million cars per year, we were and still are a major importer of automobiles. And secondly, there is absolutely no explanation as to why a problem facing the global automobile industry should be resolved at the expense of Russia. Why should our manufacturers give up their own market, where they hold a 70% market share? Why should Russian auto industry workers be the ones to end up in the street?

Besides being economically ignorant (the existence of imports does not imply that there is not excess car production in Russia: if you read the rest of the material about the auto industry in this speech you’ll see numerous economic inanities), this is a pitch perfect demonstration of Putin’s–and Russians’ more generally–paranoid world view: “there is absolutely no explanation as to why a problem facing the global automobile industry should be resolved at the expense of Russia.”  Yes, the world is ganging up on poor Russia, and conspiring to resolve its problems at Russia’s expense.

What tripe.

There is a simple answer for why the Russian industry suffered most: it is the least efficient.  Period.  In an industry plagued by overcapacity, the least efficient producers will bear the greatest burden of adjustment.  In other words: looking for the explanation, Vladimir?: look in the mirror.

But the speech illustrates Russia’s problem, and why Putin can’t abide free trade:

While supporting the company, we did not forget about our obligation to help the people. These tasks complement each other. It would be impossible to solve the problems of Togliatti in any other way. Everything in this city of 700,000 people is linked with the car plant.

The city has implemented a large-scale programme to support employment. Social programmes at AvtoVAZ have been funded from the municipal budget. Togliatti was the first city to launch a pilot project for the comprehensive development of single-industry towns. This involves new infrastructure and sites for modern industrial facilities. We allocated funds for major housing repairs from the Housing and Communal Services Reform Fund.

Last month the government decided to establish a special economic zone in Togliatti, which will provide about 10 thousand new jobs for residents of the city.

Today AvtoVAZ is on the rise. It is profitable again, and production has almost returned to pre-crisis levels. The increase is about 56%. Additional weekday and Saturday shifts have been introduced. But we’re well aware, of course, what lies behind the numbers. It’s our car scrappage programme, first of all, and also expanded manufacturing lines for so-called classic models.

In other words, the monotowns are a major problem.  In the last 19 years many sectors of the Russian economy have adjusted  substantially to world prices, but numerous industries cannot compete internationally, and cannot survive at world prices.  These industries are concentrated in cities that are almost completely dependent on them.  Putin knows that the country’s stability cannot survive more wrenching adjustments.

So Putin’s purgatory will continue.  The legacy of the past, the Soviet past, makes the adjustments required to integrate Russia more fully into the world economy–in particular, to integrate anything beyond energy and a few consumer goods sectors–far too costly socially and politically.  And that means–no WTO today, no WTO tomorrow, and no WTO for the foreseeable future. Protectionism will perpetuate the lock-in of the patterns and structures inherited from the past, meaning that it will never be the right time to change.  Again: the hamster wheel from hell.

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  1. Why should our manufacturers give up their own market, where they hold a 70% market share?

    Because their cars are utter shite?

    Comment by Tim Newman — September 23, 2010 @ 12:49 pm

  2. The rise in protectionism seems to be in vogue in the great recession world. As Michael Pettis wrote: “I wonder what will be the effect of the announcement yesterday that Larry Summers is leaving the White House. My impression is that he has been a real bulwark against rising US protectionism, and his departure may change the tone in Washington substantially”

    Comment by a.russian — September 23, 2010 @ 12:59 pm

  3. @a.russian–sadly true. Another disturbing similarity to the 1930s.

    @Tim–yup. Can’t have the Russian consumers make up their own minds, can you? Putin: “you’ll buy this crap, overpay for it, and like it.”

    The ProfessorComment by The Professor — September 23, 2010 @ 4:15 pm

  4. Well Procrustes, being off the wheel seems to be far, far worse than being on it, considering how many millions of lives the last attempt to get off cost. Russia just might, long term, survive that last attempt.

    One more attempt to fit on that bed of yours may very well be fatal to the culture that produced the transcendence and achievements you claim to admire.

    Comment by rkka — September 24, 2010 @ 6:13 pm

  5. @rkka–you have serious problems distinguishing cause from effect. Once you learn which is which, get back to me.

    The ProfessorComment by The Professor — September 24, 2010 @ 6:22 pm

  6. SWP has a serious problem remembering that even he admits that he is at a loss for solutions to even Latvia’s problems, let alone Russia’s.

    Why should people believe in his approach to Russia’s?

    As for cause and effect, stripping the state of revenues appears to cause catastrophic declines in just about every indicator of human well-being. Wresting those revenues back seems to have the opposite effect.

    Comment by rkka — September 24, 2010 @ 8:02 pm

  7. @rkka-I have no idea what you are talking about in your first paragraph, and it is clear you don’t either.

    And you are still completely at sea re cause and effect. The “stripping of state revenues” you refer to, by which you presumably the asset stripping (primarily by “red directors” of state firms) during and after the collapse of the USSR, was simply the jackals feeding on the corpse. The system was bankrupt, collapsed–dead. The robbery was just one of the consequences of the bankruptcy/collapse/death of a failed system. The “stripping of state revenues” didn’t cause the problem. Again, you have issues with time lines, cause-effect, etc.

    And I always find it enormously entertaining to see people, and you in particular, defend the Russians by pointing at Russian depravity, for who, after all, was doing the “stripping.” Russians, of course. (And don’t bother to tell me about Andrei Shleifer and Hays from Harvard. Round error whataboutism. The thieves were almost to a man–and woman–Russian.)

    The ProfessorComment by The Professor — September 25, 2010 @ 11:03 am

  8. You admit the West are at a loss for dealing with little Latvias problems, while vituperating PutVedev for how they are managing Russia’s.

    You rightfully criticize Russians who looted State revenue, but heaven forfend that they be clawed back by the State, or that Westerners who backed Chubais’ band be criticized.

    You make no sense at all, unless you wish the Russian state to remain in it’s crippled late-1990s condition, under which the die-off would likely have continued, Procrustes.

    Comment by rkka — September 25, 2010 @ 2:54 pm

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