Streetwise Professor

July 23, 2009

The Dynamic Duo

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 7:13 pm

It had been a slow news week or so, Russia wise, but today a bunch of interesting stuff came down the pike, so here it goes.

First on the hit parade.  After his triumphs at  Pikalyovo and Pork Chop Hill, Vladimir Putin strode into the offices of Sberbank, and ordered Russian bankers assembled there to lend more.  And, as a bonus, he dictated the interest rate: 14 percent:

Russian Prime Minister Vladimir Putin on Wednesday ordered banks to dole out more loans at lower rates to get the economy out of recession, but the country’s biggest lender said such cheap credit was unrealistic.

Russia’s government is looking to banks to help restart economic growth with affordable loans. In return, the sector has received billions of dollars of state funds to boost capital as bad loans rise and asset values fall.

“Of course you need to improve the quality of loans, but you cannot close your portfolio either,” Putin said at a meeting of bankers at the headquarters of state-controlled Sberbank. (SBER03.MM) “It’s very easy to just shut the box. It is harder to work with clients and understand which of them are reliable.”

In a bid to encourage banks to offer more affordable loans, the central bank has slashed interest rates by 200 basis points since April, taking the benchmark refi rate to 11 percent.

Putin told bankers that a loan interest rate at 14 percent “is quite acceptable in current conditions”, but Sberbank Chief Executive German Gref told journalists such demands were unrealistic.

Apparently, no pens were thrown.

Consider this part again:

“Of course you need to improve the quality of loans, but you cannot close your portfolio either,” Putin said at a meeting of bankers at the headquarters of state-controlled Sberbank. (SBER03.MM) “It’s very easy to just shut the box. It is harder to work with clients and understand which of them are reliable.”

. . . .

Putin also ordered Sberbank not to close branches.

“A significant part of the (branch) network is not profitable but you cannot abandon it. This is your payment for the state support,” he said.

What great advice!  Make more loans, but make better loans.  What a great banker he would make!  I mean, the guy is just amazing, he knows everything about everything.  I’m sure all the bankers in the room slapped their heads in a collective I-coulda-had-a-V8 moment and said as one: “Why  didn’t I think of that!?!”  And of course Putin knows just what the interest rate should be.  14 percent is Just Right.  Pretty amazing to watch a bald guy do a Goldilocks impersonation.

Actually, reading this and other articles about the performance brought to mind visions of the Red Queen from Through The Looking Glass.  I can just imagine the self-control that the assembled bankers had to exercise, forcing themselves not to roll their eyes–in full knowledge that the eyes of Putin’s creatures were watching for any sign of disrespect for The Great Leader.

At least German Gref had the stones to rain some reality on Putin’s fantasy:

“With today’s price of central bank money, I do not think banks can reach 14 percent (on loans),” Gref said, noting that the central bank offers funding to the sector through collateral free loans at rates of 12 to 13 percent.

“That is the real cost of money. Then you need to add the bank’s margin of at least 3 percent and the result is that minimum (commercial loan rates) are 15 to 16 percent,” he said.

And some fun facts and figures to spoil the fun:

Putin’s comments came minutes before Sberbank published its first-half results to Russian accounting standards, showing its profit tumbled 92 percent year-on-year to 5.3 billion roubles ($170.6 million).

Sberbank’s bad loans rose to 2.8 percent of its portfolio by the end of June from 2.6 percent at the start of the month.

Bankers reckon bad loans for the system as a whole have already reached 10 percent according to international standards, MDM Bank chairman Oleg Vyugin said after the bankers met with Putin [ID:nLM83854].

So, in his desperation to stave off the immediate crisis that is besieging him and his government, Putin is going to crater the banking system.  The end results will be that: (a) he will damage Russia’s longer term prospects, and slow recovery from the current depression, and (b) the state will need to commit more funds to bail out the banking system.

Funds, as it turns out, that  were draining away rapidly as he spoke:

Russia will transfer 1.36 trillion rubles ($43.7 billion) from the  Reserve Fund, one of its two sovereign wealth funds, in the third quarter as the government tries to plug its first budget shortfall in a decade.

The Finance Ministry will use the cash to finance spending during the quarter, according to a decree signed by Prime Minister Vladimir Putin and published on the government’s  Web site late yesterday.

The Reserve Fund, which  contained 2.96 trillion rubles as of July 1, will have 1.6 trillion left by October. The government started tapping the stockpile in March to cover the deficit that’s expected to reach about 8 percent of gross domestic product this year.

Russia will exhaust the 3.6 trillion-ruble Reserve Fund by the end of next year if the deficit is 5 percent, Finance Minister Alexei Kudrin said on May 25. Rising crude oil prices may help the country reduce the use of the fund, Putin said last month.

Russia’s  budget deficit widened in the first half to the equivalent of 4.2 percent ofgross domestic product as the government spent 753.6 billion rubles more than it collected.

In this environment, Kudrin and the rest of the Russian government must be stressed out in the extreme by the substantial volatility in the price of oil over the past six weeks, given the dependence of government finances on oil taxes.  But even if the price of oil strengthens, the dismal situation in the real economy, and the increasingly likely prospect that the banks will require a large injection of state funds, will put the Russian budget under extreme pressure.  And Putin is just intensifying that pressure by forcing these already shaky banks to shovel rubles out the door in a desperate attempt to businesses and consumers afloat.  This is just deferring the day of reckoning, and increasing the price to be paid when that reckoning comes.

The next thing that caught my eye is the story about a group of Russian “entrepreneurs” pleading for the government to ban Skype:

Russia may curb the development of VoIP telephony, notably  Skype, in the country. The Russian Union of Industrialists and Entrepreneurs (RSPP) intends to propose amendments that would regulate internet telephony in Russia and protect the interests of Russian mobile operators. One of the arguments that the RSPP has taken up is that calls through Skype cannot be wiretapped.

Mr Valery Yermakov, first deputy director general of the Russian mobile operator, MegaFon, pointed out that VoIP calls can be made without any control by state authorities whatsoever. In particular, he mentioned software like Skype, which are not connected to Russia’s state wiretapping system (SORM).

RSPP will draft proposals for regulating IP telephony in Russia that would give precedence to Russian telecom operators. Mr Yermakov said local telecoms have two options: either to fight against VoIP services or begin providing those services themselves. While MegaFon has chosen the second option, one can be sure that its VoIP service will meet the RSPP’s requirements…

What a cosmic convergence of sleazebags from government and business.  First, a set of obviously self-interested telecom operators wants to impede competition from VOIP.  Second, it realizes that the best way to achieve this is to appeal to the intense desire of the Russian government to exert control over its citizens.  VOIP is “not connected to Russia’s state wiretapping system.”  We can’t have that, can we? Jeez, what kind of country HAS a state wiretapping system that is specifically directed at its citizens?  That tells you all you need to know about Russia.

Note that the telecom jackals leapt into action immediately following the government’s move to empower the security services (seven of them, in fact, if memory serves) to open everybody’s mail and packages.  There is clearly a trend to clamp down on every means by which Russians can communicate and express themselves.

But that’s relatively benign, as compared to what the Russian state can do to you if it really sets its mind to it.  Consider this horrifying story from the Washington Post:

A Russian police official conducting research under the auspices of Virginia’s George Mason University has been arrested after he reported obtaining evidence incriminating influential figures in Moscow and the far eastern city of Vladivostok, colleagues and local authorities said this week.

Col. Alexander Astafyev, 50, a senior anti-corruption investigator affiliated with a GMU research center in Vladivostok, had been working on an academic paper about “raiding,” or the criminal takeover of businesses with the help of corrupt officials, police or judges, when he was detained last month.

. . . .

Astafyev worked closely with FBI agents investigating organized crime, and he visited Washington last year at the invitation of the State Department, said Louise Shelley, director of the Terrorism, Transnational Crime and Corruption Center at GMU, which operates research and training institutes in Vladivostok and three other Russian cities.

“I think it’s very disturbing,” she said of his arrest. “It’s U.S.-Russia relations without the reset.” [Louise, you are a sucker indeed if you believe this reset thing is a two-way street.]

Shelley said Astafyev had a “long-standing reputation for integrity” and has been affiliated with the Vladivostok center for several years. He was conducting research on the criminal raiding of businesses under a $3,000 grant when he was arrested June 16, she said.

In a draft paper he submitted to the center, Astafyev estimated that 10,000 cases of criminal raiding occur every year but that fewer than 100 are prosecuted and result in convictions. “Law enforcement organs today are either participants or spectators of the takeovers,” he wrote.

In his letters, Astafyev suggested that his research had been a factor in his arrest, noting that he had submitted his paper shortly before he was detained and had included information about the criminal group that he thinks framed him. He also noted that police seized photos of him with American colleagues.

In his paper, Astafyev outlined cases of criminal business raiding in Vladivostok. In the process of seizing a trucking firm, he said, one outfit killed a senior executive of the company and injured several people, including a judge and a prosecutor.

In his letters, Astafyev said that the same group seized a major fishing enterprise and was deeply involved in smuggling. He linked it to officials in the Interior Ministry and the Federal Security Service, the domestic successor to the KGB, as well as to an adviser to the mayor, a former deputy governor of the region and a law enforcement official in Moscow, all of whom he identified.

Just consider the outrages packed into a few brief paragraphs.  10,000 corporate “raids” a year.  10,000 businesses extorted and stolen.  Resist–and die.  Multiple tens-of-thousands of lives ruined. And to think, every other business owner in Russia lives with this specter hanging over his or her head.  All with the active involvement of national and local politicians, law enforcement, and security services.  Not to mention the omnipresent cop, or fire inspector, or building inspector, or tax inspector, all with their grubby mitts extended.  Is it any wonder that small business represents such a small fraction of Russian economic activity, as compared to eastern Europe, not to mention the US.

I was going to say that Russia is like Sicily with snow, but even the Mafia was never that connected.

These last two stories give the lie to all the fine things that Medvedev supposedly advocates.

A knowledge-based, entrepreneurial economy?  Creative endeavors cannot flourish in a society where success is likely to result in extortion by armed thugs–including thugs employed by those ostensibly there to protect you.  Moreover, stifling free communication and expression, and surveilling all means of communication, is hardly conducive to creative, entrepreneurial endeavors–especially when it is well-known that those in the employ of the state routinely use commercial espionage for competitive advantage and to facilitate extortion.

Entrepreneurial?  Make me laugh.  Entrepreneurial, in a country a large organization that supposedly represents entrepreneurs appeals to the state’s basest instincts in order to stifle competition?

The end of legal nihilism, and the establishment of a rule of law?  With tens of thousands of businesses harassed by all levels of law enforcement?  The abolishment of corruption?  Tell it to Colonel  Astafyev.

Dmitri Medvedev is either the world’s biggest fool, or the most mendacious bastard in eleven time zones–which would be saying a lot.

Thus endeth a post bracketed by Russia’s Bobbsey Twins, Putin and Medvedev.  Which is worse?  Is death an option?  Sadly, in Russia, the answer to that question is all too often: Yes.

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14 Comments »

  1. Dmitri Medvedev is either the world’s biggest fool, or the most mendacious bastard in eleven time zones…

    I’ll pick “mendacious bastard”. He could take some risks. What’s stopping him as a patriot from pulling a fast one on Putin. He has access to the airwaves. One act of defiance would have meaning. Stopping the ludicrously offensive and thoroughly mocked Khodorkovsky show trail would be a cheap and easy start. It is the symbol of judicial corruption.

    The impression I have of Medvedv is an elegantly tailored, well scripted little weasel word lackey. Anti-Putin Russians have no illusians about him.

    Russia is more like Haiti with snow.

    Comment by penny — July 23, 2009 @ 9:48 pm

  2. Weasel–that’s a good description. Whenever I see pictures of him, I think “elf.” It is especially weird to see the many photos of him handling military weapons (e.g., assault rifles), inspecting military hardware, etc. He is so un-military looking it is almost comical. Indeed, seeing the little elf so often in these settings makes me wonder if the intent is actually to make him seem comical, and less of a “man” than Putin. These displays certainly fail in the ostensible purpose of making him appear to be a masculine, commanding figure, leading me to conclude that the hidden agenda is to demonstrate his inferiority to Putin. Which raises the questions: is he so clueless that he doesn’t understand?, or is he just too craven and cowardly to refuse to go along with the charade?

    The ProfessorComment by The Professor — July 23, 2009 @ 10:59 pm

  3. Putin’s comments came minutes before Sberbank published its first-half results to Russian accounting standards, showing its profit tumbled 92 percent year-on-year to 5.3 billion roubles ($170.6 million).

    Sberbank’s bad loans rose to 2.8 percent of its portfolio by the end of June from 2.6 percent at the start of the month.

    I fail to see how this is (particularly) bad. It actually managed a profit while most of the big Western banks, with the exception of Goldman, are losing money and going bankrupt to boot.

    Comment by Sublime Oblivion — July 23, 2009 @ 11:07 pm

  4. […] momopeche: I am utterly in love with the Vancouver Winter Olympics mascots: http… The Dynamic Duo – streetwiseprofessor.com 07/24/2009 It had been a slow news week or so, Russia wise, but today a […]

    Pingback by Ладушки.Net » Blog Archive » Posts about Putin as of 24/07/2009 — July 24, 2009 @ 2:19 am

  5. SUBLIME DURAK:

    Let me explain it to you then, sweetie:

    (1) That increase, which you consider tiny, was enough to wipe out HUNDREDS OF MILLIONS OF DOLLARS IN PROFITS from Sberbank’s books.

    (2) Russia’s domestic subprime crisis HASN’T EVEN STARTED YET. It’s just the beginning. EVERYONE agrees on that. If it’s this bad now, what’s going to happen next year?

    (3) Since you’re illiterate, you didn’t notice Putin telling Sberbank to go right on lending regardless of its cash flow issues, and setting the price. Combine that with the rest, you have the formula for implosion.

    (4) Did it ever occur to you that facts and figures published by the Kremlin might not honestly reveal all the horribly embarrassing facts about the Russian economy? Think about it, stupid.

    Just curious: Are you vying for some type of award as the most idiotic clown on the entire Internet? Or are you just aping the mendacious bastard, hoping for a higher spot in the Kremlin power structure?

    Comment by La Russophobe — July 24, 2009 @ 6:49 am

  6. Which raises the questions: is he so clueless that he doesn’t understand?, or is he just too craven and cowardly to refuse to go along with the charade?

    It makes sense that Medvedev was picked by Putin because he had the desirable qualities of cluelessness and cowardliness. It’s what made Obama’s attempts in Moscow to triangulate so senseless. And clueless.

    Comment by penny — July 24, 2009 @ 11:44 am

  7. The V8 moment, great line. Hadn’t thought of that one for a while! I share your incredulity of Putin’s actions. The guy actually walks into a room full of bankers and tells them what interest rate to charge? It’s… well, I don’t have the literary skills to express it. I also still can’t believe what level of detail he gets involved in. He supervises Eurovision, pork prices, and has even commented a few years ago that the Russian professional hockey league needs more Russians instead of foreigners on their teams. How can a leader of a large nation bother with such trivialities? (But then again, how can a U.S. President comment on the actions of a policeman in Massachusetts, but I digress) Of course, the U.S. has it’s own versions of magical price fixing like minimum wage, but I digress again.

    As ludicrous as these actions by Putin, et al are to us, they are more appreciated in Russia… and Ukraine, than you might know. I had one of the most depresssing conversations I’ve ever had last week with Ukrainians in Odessa. A large percentage of Odessans are very pro-Russian and specifically applauded Putin’s “leadership and decisiveness” in Pikalyovo. They loved it and dreamed that they could have such a leader. A large percentage of Russians would reply in the same manner. After that conversation, I captured my thoughts about it in a journal entry and was almost in tears while writing it.

    As for the Vladivostok story, oh, lord have mercy. I’ve been there and it is sad, sad, sad. The rule of law is non-existent there and if you regret missing out on seeing the Soviet Union before it collapsed, just go there and you’ll get the gist of it. The Russian government is so weak that they can’t defeat the mafia and criminals who have completely taken over the government there. Since they can’t defeat them, they just put them in charge. It’s actually Chechnya without the Islam. Vladivostok’s location is a curse. They are discouraged from getting too close to China, Japan, and Korea even though it is a natural fit for trade, but they get virtually nothing from Moscow since it is so far away and disinterested.

    Regarding Sberbank, specifically, there’s one tough issue about this in relation to closing unprofitable branches. It isn’t as easy as it sounds. Just about every small town and even village across Russia has a Sberbank branch. In many cases, they are the ONLY link to the outside world and the only way millions of people can do anything of a financial nature. These branches must be a huge financial burden for Sberbank, but if they closed them, millions of people would be cut off from civilization even more than they already are. Yes, I suppose the private sector could find a way to fill the gap, but in Russia, I’m always skeptical. These branches do more than typical banking, they also serve as the payment center for electricity, water, telephone, etc. (if they even have these services in particular towns!). Sberbank is basically forced to provide a social service as if it is a government agency. Despite this, it is hardly obligatory for them to charge a government-controlled lending rate per Putin’s desire.

    Lastly, regarding Astafyev. I have a feeling this guy is in deep doo doo. He has found the soft underbelly of corruption in Russia, has “collaborated” with the FBI, and has received foreign funding for his work. Not a good combination in today’s paranoid Russia. I think he’ll be the new treason/spy poster-child in no time. Imagine, the guy is paid by his own government to do an investigation and gets arrested for finding the answer. Real nice.

    P.S. Can’t wait to watch the Skype issue unfold!

    Comment by Howard Roark — July 25, 2009 @ 4:44 am

  8. Howard–Glad you liked the V8 thing.

    Re the popularity of the macho Putin. No, I am not surprised at all. Indeed, that is one of the reasons to despair for Russia ever changing. It is a reflection of their submissive, hierarchical mentality. Always looking for somebody to tell them what to do. And it reflects their pathetic understanding of the way the world actually works. They don’t understand the concept of a spontaneous order, where myriad individuals with little pieces of knowledge interact to create something more complex and productive than any individual could imagine, let alone create. (Not that appreciation for the spontaneous order is that widespread in the US or Europe. It’s just that we don’t fetishize its opposite in the same way as the Russians–or should I say Slavs, apropos your Ukrainian point.)

    Perhaps that mentality is a realistic response to a society completely lacking in the props for a functioning spontaneous order–a functioning legal system, trust/social capital. They are stuck in a bad equilibrium. An autocratic system undermines the rule of law, etc., thereby making civil society and spontaneous order impossible, and encouraging the flourishing of a corrupt and venal “elite”, leading to popular craving for a strongman that cracks down on the little demons that torment them daily. The strong man undermines the rule of law . . . They’ve been on that hamster wheel for centuries, and aren’t about to get off any time soon.

    And, apropos Medvedev’s supposed desire for an entrepreneurial, knowledge-based society, how can that possibly occur given this slavish mindset?

    Point about Sberbank well taken. Just another manifestation of the hollowing out of the Russian countryside.

    Yes, Astafyev has crossed just about every red line conceivable. This will end badly for him.

    I think I’ll skip Vladivostok, thanks. No regrets on missing the USSR. Reading/imagination enough for me.

    The ProfessorComment by The Professor — July 25, 2009 @ 9:03 am

  9. The reason the role of the state is so strong is largely tied up in Russia’s climate and geography, and the cultural traditions derived therein. Since life was (is) uncertain and precarious, this necessitated the centralized accumulation of surpluses and greater reliance on the community. The results were substandard compared with the West, but nonetheless better than the times when Russia dipped into anarchy. SWP may believe this is a “pathetic understanding of the way the world actually works”, but old history, the 1990’s and Ukraine today indicate that that is the way the world works in their region.

    If anything, as Vladivostok and Astafyev illustrate Putin has not gone far enough. The pre-Brezhnev USSR would have known how to put the crooks and mafia where they belong. That is my main bone of contention about his leadership.

    Comment by Sublime Oblivion — July 25, 2009 @ 12:45 pm

  10. Skip the climate excuse, S.O., Canada is just as cold as Russia.

    And, here’s the best laugh, the old pre-Brezhnev USSR would have shot Putin in the shadows on a dark cold night after examining his bank accounts. You’ve made no points on that one. Putin may yet exercise the mass murder of enemies of the state option so don’t count him out just yet on your S.O. approval index.

    Comment by penny — July 25, 2009 @ 7:40 pm

  11. S/O–

    Climatic theories of social evolution are rather unpersuasive. For most of human existence, life has been precarious–brutish, nasty, and short. So, Russians lived a subsistence existence–as did virtually all of humanity until just a few mere centuries. WIth Russian climate, and the consequent low agricultural yields, Russians achieved subsistence with higher land-labor ratios than further west where the wether was better. Scandinavians and Finns lived in equally brutal climatic conditions, but their societies evolved quite differently.

    But, that’s neither here nor there. I agree completely that collectivist Russian peasant mindsets, whatever their origin, live on in Russia today. And those mindsets will be a huge impediment to Russia moving beyond its current pathologies. It is a prisoner of its past.

    The ProfessorComment by The Professor — July 25, 2009 @ 7:56 pm

  12. Skip the climate excuse, S.O., Canada is just as cold as Russia.

    No, it’s not. Most Canadians live around the east maritime / Great Lakes / Vancouver regions; very few live in the cold, deeply interior regions. Furthermore, Canada has better transportation links to the dynamic US heartlands and it does not have to concern itself much with security. Most Finns live on the south coast, around where St.-Petersburg is – one of the more climatically benign regions, with good maritime connections to mainland Europe. Even more so for the Swedes.

    Neither of these have anything close to the numbers of people living in totally remote areas like deep continental interiors, or the High Arctic. As such I am convinced that moving to the US model of free enterprise will result in total catastrophe (from the perspectives of most Russians). There’s no need for 140mn Russians to occupy Eurasia, 20mn will be more than enough to service the oil and gas pipelines. Otherwise, there’s no reason for industry or agriculture to exist at all. The 120mn others are free to die out, as indeed happened with great rapidity during the era of market fundamentalism.

    Its “pathologies” (to survival) have thankfully resurfaced and are saving it from Western-imposed extinction, yet again.

    Putin may yet exercise the mass murder of enemies of the state option so don’t count him out just yet on your S.O. approval index.

    There’s a difference between “mass murder” and cracking down on bureaucrats guilty of large-scale corruption in lawful trials, like the Chinese. Unfortunately Putin is far too humane, and beholden to useless European organizations to contemplate this, though ironically this does not stop SWP or penny from condemning him.

    Comment by Sublime Oblivion — July 25, 2009 @ 10:17 pm

  13. “As ludicrous as these actions by Putin, et al are to us, they are more appreciated in Russia… and Ukraine, than you might know. I had one of the most depresssing conversations I’ve ever had last week with Ukrainians in Odessa. A large percentage of Odessans are very pro-Russian and specifically applauded Putin’s “leadership and decisiveness” in Pikalyovo. They loved it and dreamed that they could have such a leader.”

    Indeed. Ukraine needs a Putin, because the Orange crown has no clue about how to, you know, govern.

    hence, Ukraine’s numerical rate of population decline is about twice that of Russia, and Ukraine’s percentage rate of population decline is about 6 times hat of Russia. Russia is pulling out of the demographic disaster of the 1990s. Ukraine not so much.

    Comment by rkka — July 26, 2009 @ 5:39 pm

  14. In a certain sense, Ukraine is more Russian than Russia.

    Then again, it has been said that Ukrainians are the “real Russians.”

    In case anyone didn’t know, Putin would win the Ukrainian presidency against any Ukrainian or non-Ukrainian politician.

    Comment by Cutie Pie — July 31, 2009 @ 7:34 am

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