Streetwise Professor

October 7, 2010

That 70s Show Goes to Russia

Filed under: Uncategorized — The Professor @ 2:06 pm

Yale’s Aleh Tsyvinski is bearish on Russian economic prospects. In particular, he argues that 3 percent growth in Russia is actually tantamount to stagnation that could have serious social and political consequences:

Russia is facing a “significant” slowdown in economic growth, which will strip away the government’s popularity, said Aleh Tsyvinski, co-director of the macroeconomics program at Yale University’s Cowles Foundation.

“There will be a significant slowdown in growth,” he said today in an interview in Moscow. “This is fraught with serious political and economic problems. It’s no secret that the popularity of the people in power greatly hinges on the big increase in the standard of living of average Russians.”

. . . .

Russia’s economy will “face stagnation” similar to that experienced during the reign of Leonid Brezhnev, who led the Soviet Union from 1964-1982, if oil prices remain around $70 to $80 a barrel, said Tsyvinski, 32, who is a professor at Yale in New Haven, Connecticut, and Moscow’s New Economic School.

Tighter Regulation

For Russia, economic expansion of around 3 percent constitutes stagnation and is comparable to the U.S. economy contracting 1 percent, he said.

“When oil prices were increasing and investors were expecting significant growth, Russia was an interesting country for them,” Tsyvinski said. “With oil prices between $70 and $80 a barrel, Russia becomes a lot less attractive.”

There will be tighter financial regulation after the global economic crisis, so less money will flow to emerging markets, Tsyvinski said. Russia will have to compete against Brazil and China for investment and it’s looking less attractive, he said.

Foreign direct investment into Russia, the world’s biggest energy exporter, fell an annual 11 percent to $5.4 billion in the first half, according to the Federal Statistics Service.

This fall in FDI in 2010 from already scary 2009 levels is particularly damning–especially inasmuch as other emerging markets are concerned about too much foreign money flowing in.  The world is hungry for yield.  They ain’t getting it in the US or Europe, so they’re headed to emerging markets in droves–except for Russia, that is.  That is very telling.

The government is forecasting a 4 percent growth rate in 2010-2011–if it runs the table on energy prices.  If not . . . As Tsyvinski notes, it’s unimpressive compared to the 6-7 percent growth of the mid-2000s (which, truth be told, wasn’t all that remarkable given the runup in energy prices, and by comparison to other FSU countries).

The Brezhnev metaphor is getting traction.  Discussions of Russian domestic politics frequently compare the present situation to the relatively unrepressive but suffocatingly constrained 1970s and early-1980s.  And now the comparisons of Russia’s current economic situation to the stagnation of the Brezhnev years are also becoming far more common.

However, I think it’s worth pointing out that although genuine politics are absent from Russia today, things are a far cry from the Brezhnev years in terms of the government’s ability and willingness to crush dissent.  Moreover, in part due to the relatively heady days of the mid-2000s, and Russians’ better understanding of the way the world lives and how they could live, expectations are much higher today.  This could foreshadow greater political instability, although it will take something to overcome the atomism and apathy of the Russian populace, and their (understandable) fear of another descent into chaos.

In the linked article, as is the case with virtually every article on the Russian economy, there are voices calling for Russia to diversify away from energy.  These calls are, in my view, highly unrealistic, and for several reasons, especially under the current political system.  First, it would require swimming upstream against the currents of comparative advantage.  Second, it would require a complete change in the mindset of the powers that be.  Said powers are highly comfortable siphoning off the rents of a resource intensive economy.  They are the bulwark of the natural state.

Thus, the Russian dilemma.  Overcoming economic stagnation would require a political change.  But no such political change is likely forthcoming because the existing system works to the benefit of those in power, who have the will and the means to defend their position.  As is all too tragically typical of Russia, if it were to come, change would likely be convulsive and chaotic, which would hardly be conducive to the transition to a modern economy.

This is a recurring theme of Russian history.  The 19th century tsars were far more comfortable in an extractive economy, and were highly suspicious of the development of a modern industrial one, recognizing that it would bring on massive social changes in its wake.  Today’s powers that be are similarly suspicious.  There may be talk of modernization, but true modernization is incompatible with the existing political, economic, legal, and social institutions.  When forced to choose between modernization and the political status quo, self-interest, and indeed, self-preservation make the choice obvious.  They won’t choose to be the next Gorbachevs.

There are remakes of American TV shows on the air in Russia–Married With Children, for instance.  That 70s Show might be on for real, for many years to come.

Print Friendly, PDF & Email


  1. For Russia, economic expansion of around 3 percent constitutes stagnation and is comparable to the U.S. economy contracting 1 percent, he said.

    How does this work? (Furthermore, note that Russia’s population is stagnant while the US is growing at 0.9% / year).

    Comment by Sublime Oblivion — October 7, 2010 @ 2:20 pm

  2. Actually, according to official Russian statistics, Russia’s real production output has been falling for 3 months straight now.

    Comment by Ivan — October 7, 2010 @ 2:47 pm

  3. Russia is facing a “significant” slowdown in economic growth

    During the boom prior to 2008, little attention was paid to productivity, with most companies focused on growing as fast as possible.

    However, productivity in Russia is just 16pc of that in the EU.

    Fat margins in a young market made the issue of efficiency irrelevant until now, but gains to be made from small improvements in management are huge.

    “If as little as 10pc of the working population worked at the average productivity level in the US, then the total output of the Russian economy would increase 1.4 times, and GDP 1.5 times,” claims Alexander Idrisov of Strategy Partners.

    In this new age of restricted financing, it’s dawning on companies that Russian workers may cost a fraction of those in the West, but those savings are lost when you consider that it takes Russians many times longer to make a single car than Western factories can manage.

    Climbing out of the hole

    In the long term, the only way for Russia to keep growth on track is to improve output. The good news is that this should be surprisingly easy.

    Most assume that low productivity is due to outdated factories, but Mr Idrisov says blaming old technology is a “myth” and the main problem is simply bad management.

    This is supported by a recent report from McKinsey, which claims that 80pc of the productivity gap with the US is simply due to inefficient business administration. In other words, the changes companies need to make to massively boost their productivity are simple things that make better use of the resources they already have.

    McKinsey also found that some sectors of the Russian economy are already on a par with international peers – particularly the steel sector. While issues remain in construction, retail banking and electricity production – in which productivity stands at between a fifth and a quarter of US levels – these sectors are still more productive than most of the economy.

    It’s only once Russian management gets a grip on these issues that technology – the glamorous star of President Medvedev’s drive to modernisation – can start to play a proper role. At that point the traditional pillars of economic growth – capital and labour – will have the chance to feel the turbocharged benefits technology can offer.

    Comment by Oleg Primakov — October 7, 2010 @ 4:57 pm

  4. […] This post was mentioned on Twitter by Daryl Hall, JasonG. JasonG said: Streetwise Professor » That 70s Show Goes to Russia […]

    Pingback by Tweets that mention Streetwise Professor » That 70s Show Goes to Russia -- — October 8, 2010 @ 1:11 am

  5. “In the linked article, as is the case with virtually every article on the Russian economy, there are voices calling for Russia to diversify away from energy. These calls are, in my view, highly unrealistic”

    It is also the work of decades. The incessant demand that this be done yesterday indicates that the demand is intended to be destructive to Russia, not constructive.

    Comment by rkka — October 8, 2010 @ 4:58 am

  6. Long ago, the great economist Joseph Schumpeter highlighted the role of innovation in powering the rise of new industries, the creative destruction of existing ones, and the growth in prosperity of economies.

    Joseph Schumpeter, With his “creative destruction” under capitalism, was an opponent of Marxism. But he had a great appreciation of Marx’s method of analysis and his achievements. “There is … one thing of fundamental importance for the methodology of economics which he [Marx] actually achieved,” he wrote. “Economists always have either themselves done work in economic history or else used the historical work of others. But the facts of economic history were consigned to a separate compartment. They entered theory, if at all, merely in the role of illustrations, or possibly of verifications of results. They mixed with it only mechanically. Now Marx’s mixture is a chemical one: that is to say, he introduced them into the very argument that produces the results. He was the first economist of top rank to see and to teach systematically how economic theory may be turned into historical analysis and how the historical narrative may be turned into histoire raisonnée.”

    Robert Solow won the Nobel prize for identifying the role of technology in economic growth and development. Paul Romer has shown how the accumulation of scientific and technical knowledge is the central force in endogenous economic growth. Michael Porter and AnnaLee Saxenian, among others, have shown how clusters of high-tech companies and other economic assets have propelled the rise of new firms like Intel in semiconductors, Apple in computing, Genetech in biotech, Google in search, and countless others that have introduced not just new innovations but whole new industries and epochs of regional growth.

    Patents are the conventional measure of innovation. Despite their various weaknesses, patents represent a systematic, quantitative measure of innovation and are used by economists as the single dominant measure of innovation. But, as with other measures, economists tend to measure them on a per capita basis.

    Reagan possessed the strategic vision to brush aside the objections and plunge ahead. His economic policies embodied “creative destruction”, the chaotic emergence of new firms and methods to challenge the old. Conventional economics thinking restricted its attention to large corporations that depend on the debt markets. Under Reagan, employment at the 500 largest US corporations shrank, but the explosion of small businesses more than made up for it. After the first round of Reagan tax cuts, which nearly halved the top tax rate, the value of the American stock market doubled in 1984. Creative destruction transformed the landscape of the American economy. The microchip transformed domestic life as well as warfare, and America regained a dominant position in the global economy. Reagan’s strategic policy stemmed from a similar kind of creative destruction. Under the old containment doctrine, the United States sought to maintain stability while the Soviets stirred the pot.

    Comment by Oleg Primakov — October 8, 2010 @ 6:04 am

  7. Oleg, “Most assume that low productivity is due to outdated factories, but Mr Idrisov says blaming old technology is a “myth” and the main problem is simply bad management.”

    This is probably true. I know nothing about Russian industrial management. Yet, it’s easy to imagine that there is a lot of room for improvement regarding formal (structure, incentives) and informal management (the culture and social system of the firm).

    Changing how firms and operations are managed is decidedly non-trivial. It’s very difficult to do a good job managing if the system you work in isn’t supportive.

    Comment by David Hoopes — October 8, 2010 @ 12:52 pm

  8. Sublime, I think that is because the 3% “growth” is due to oil income that does not require “real” production. You pump more oil out of the ground (or the oil is simply worth more), but it doesn’t lead to any extra jobs or productivity. Thus the non-oil economy is still contracting. If you strip out oil, the economy would be seen to contract by -1%. But the increase in oil shows growth of 3%.

    Presumably only a higher price for oil would lead to a spillover that would vitalize other sectors of the economy.

    If I’m wrong, I’m sure the Professor will correct me.

    Comment by Chris Durnell — October 8, 2010 @ 3:45 pm

  9. With all due respect, that doesn’t sound right because (1) Russian oil production by volume has been increasing very slowly since the mid-2000’s and (2) oil prices have no effect on the real GDP (which is what GDP growth measures) but high oil prices do tend to appreciate the ruble which hurts domestic manufacturing.

    Comment by Sublime Oblivion — October 8, 2010 @ 5:07 pm

  10. I know nothing about Russian industrial management.

    From what I’ve seen, it is bloody awful.

    Comment by Tim Newman — October 8, 2010 @ 5:57 pm

  11. Chris Durnell wrote: “You pump more oil out of the ground (or the oil is simply worth more), but it doesn’t lead to any extra jobs or productivity.

    Really? So, increased oil production doesn’t create jobs? It takes the same number of employees to pump and transport 100 barrels of oil as to pump 10 billion barrels? Wow.

    If so – wouldn’t that mean increased productivity per employee?

    Comment by Ostap Bender — October 8, 2010 @ 7:49 pm

  12. “Russia is facing a “significant” slowdown in economic growth, which will strip away the government’s popularity, said Aleh Tsyvinski…”

    IMO, Aleh Tsyvinski is smoking something.
    Most people in Russia don’t even know what economic growth means.
    Even I am not sure what real economic growth means.
    Here in the US we have, what… 40,000 pages of the tax code?
    If we add another 10,000 pages, and tax lawyers provide more services, our GDP will increase. Is that real economic growth or not real?
    If we produce more chickens, that’s real. But what about lawyers?
    The problem, as I see it, is that we don’t eat tax lawyers.

    There is a housing problem in Russia. Putin promised to build more housing. People are happy to hear that. People there need an apartment, a chicken in every pot, and a bottle of vodka. That’s all. Why would slowdown in economic growth strip away the government’s popularity? And these clueless people like Aleh Tsyvinski get hired at Yale University. It’s fascinating.

    Comment by Michael Vilkin — October 9, 2010 @ 2:19 am

  13. “People there need an apartment, a chicken in every pot, and a bottle of vodka. That’s all.” One should add bears in the streets of Moscow. Too simplistic view of our country IMHO. With such a level of analysis it is hard to understand the logic of Aleh Tsyvinski that is true.

    Comment by a.russian — October 9, 2010 @ 3:00 am

  14. “However, productivity in Russia is just 16pc of that in the EU.”

    Really? Russian workers are only 16% as productive as their six weeks paid vacation Spanish or Greek counterparts? That number seems fishy, sorry. I might believe 65 or 75%, but that sounds like it came from the neo-Soviet Freedom House school of made up statistics and the Fed’s ‘unexpectedly rising’ unemployment numbers, which we should all start ridiculing as the new Gommstat.

    “If as little as 10pc of the working population worked at the average productivity level in the US, then the total output of the Russian economy would increase 1.4 times, and GDP 1.5 times,” claims Alexander Idrisov of Strategy Partners.

    The only increase I see in American productivity right now are Americans taking second jobs or third jobs on weekends to make ends meet, and HR managers getting more productive in blasting out ‘Nos’ and reposting ‘zombie jobs’ online that somehow never get filled but create the illusion that the HR people are doing something useful. In Russia lots of HR folks have masters degrees, or at least believe that their job is to y’know, actually hire someone. In America they stick the most incompetent folks whom the corporation deemed not fit for sales and senior management into those roles. And you see the results.

    As for comment no. 8, it’s hilarious to me to see all the gains in Russia’s economy attributed to pumping more oil out of the ground. Tell me, where would America be if we were not having the present shale natural gas boom? Sure it doesn’t need a huge amount of warm bodies to pump that stuff, particularly once the wells are ‘fracked’. But think about it. If we really were sending even more printed money abroad to import LNG on top of all the oil we import that makes Canadians stable if not rich and props up there housing market a bit longer than ours.

    Comment by Mr. X — October 9, 2010 @ 5:30 am

  15. Like I said, show me the real industries where Americans are getting vastly more productive, please. I keep seeing these numbers and they’re meaningless. Are the robots on the GM assembly line really twice or three times better in terms of output than the ones we had the 1980s? Ok, I can believe that. We’re more productive because we now have Indians doing all the back office work while non-South/East Asians need not apply in many IT companies?

    Joseph Schumpeter did indeed posit the theory of capitalism as creative destruction. But right now all I see is demand destruction, not much new being created.

    Comment by Mr. X — October 9, 2010 @ 5:32 am

  16. Mr. Vilkin is a racist, anti-Semitic / Holocaust-denying idiot.

    Comment by Sublime Oblivion — October 9, 2010 @ 6:15 am

  17. Mr. X, productivity is a measure on production efficiency. We can compare GDP with labor force, and we have a statistic. As you surely know, “there are lies, then there are damn lies, and then there are statistics”.
    There are quite a few factors that may distort the picture.
    For example, if we make our tax code larger and more convoluted, we can create thousands of high-paying jobs for tax lawyers and tax accountants. GDP will rise, as well as productivity per worker, but will it increase our living standards?
    Another easily understandable factor is currency exchange rates. Consider a simplified example. GDP of the US is $100, GDP of Russia is 100 rubles, and exchange rates are $1 for 10 rubles.
    Now Goldman Sucks started to buy thousands of oil futures, price of oil moved up. Then “retail” speculators arrived and moved the price of oil still higher.
    Russia now sells the same amount of oil at higher price and is paid a much higher amount of dollars. Those dollars are exchanged for rubles, and ruble now is exchanged at a rate, say, $1 for 5 rubles.
    Now let’s calculate productivity. If measured in dollars, productivity in Russia doubled, even though in reality it is the same.
    The point is that if measured in other than in native currency, too much is lost in translation.
    Standard of living would be a much better measure to consider.
    It’s also not an exact science, but it would be much easier to measure quantity and quality of housing and other essential things.
    Productivity, both total and per worker, is just a misleading statistic, IMO. Unless, of course, we start eating tax lawyers.

    Comment by Michael Vilkin — October 9, 2010 @ 11:45 am

  18. A.Russian wrote:

    “Too simplistic view of our country IMHO. With such a level of analysis it is hard to understand the logic of Aleh Tsyvinski that is true.”

    I did not claim to present a complete and comprehensive analysis of Russian personality.
    Most people in Russia drink too much vodka, and they don’t know and they don’t care about economy growth statistics. What effects them most is their own living standards, and not economy growth statistics which is a pretty abstract and misleading measure. I’ve made a couple of points above about statistics.
    Most important, an economist should not make statements like “slowdown in economic growth will strip away the government’s popularity…”
    Why? Simply because an economist, even from Yale, is not qualified to make predictions about government’s popularity. For that, you need a good sociologist.
    Russian propaganda is of the highest quality in the world. In comparison, Nazi propaganda was innocent. That is why predictions about falling government’s popularity in Russia look very much speculative.
    In my opinion, Putin will be elected as president in Russia for the next 12 years, till 2024, and after that he will become an emperor. All he needs to do is to give them “bread and circus”. And vodka.
    Russia travels in circles, and is not likely to break out, IMO. Well, I’ve made a prediction. Now let’s look for falling government’s popularity in Russia.

    Comment by Michael Vilkin — October 9, 2010 @ 12:17 pm

  19. Sublime Oblivion is a racist gulag/holodmir/(insert one of dozens of Russian crimes against humanity) denying idiot who trots out the accusations of fascism and antisemitism when he finally gets it through his thick skull he is losing the argument.

    Comment by Andrew — October 11, 2010 @ 7:20 am

  20. Those who speak russian can check here about the popularity of putinoids

    Comment by a.russian — October 12, 2010 @ 1:03 am

  21. Andrew obsesses over a very flexible number of Ukrainians dead almost 80 years, while ignoring Ukrainians dying now.

    Andrew, when “Soviet genocide” ended in Ukraine in 1991, there were 52 million Ukrainians. There are now 46 million, and deaths still exceed births there by ~200,000/year.

    Obviously, Ukrainian independence is worse for people in Ukraine than “Soviet genocide”.

    Comment by rkka — October 12, 2010 @ 5:51 am

  22. By rkka’s “communist logic” it will be no big deal if somebody murders him one day, since many people will die of natural causes that day anyway.

    Comment by Ivan — October 12, 2010 @ 1:15 pm

  23. Rkka, given that your moniker is the old name of the Red Army, one does not expect you to show any logic, or intelligence for that matter, but Ukraine’s drop in population is mainly driven by emigration.

    A big difference from the deliberate and planned mass starvation and executions carried out by Russia against an independence minded population in the 1930’s.

    Like the Georgians, the Latvians, the Estonians, the Lithuanians etc, the Ukrainians were left with a country that was deeply damaged by years of Russian abuse, including the genocidal Russian policy of Russification, being the deliberate policy of destroying local cultures and the Russification of the population through linguistic genocide, through the mass execution of cultural figures, and so on.

    And to this day, most Russians, including RKKA, are too stupid to understand why their country is hated by most of those it occupied, both in the USSR and in Eastern Europe.

    Comment by Andrew — October 16, 2010 @ 9:56 am

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress