The Unz Review - Mobile
A Collection of Interesting, Important, and Controversial Perspectives Largely Excluded from the American Mainstream Media
Email This Page to Someone

 Remember My Information



=>
Publications Filter?
AKarlin.com Da Russophile
Nothing found
 TeasersRussian Reaction Blog
/
BRICs

Bookmark Toggle AllToCAdd to LibraryRemove from Library • BShow CommentNext New CommentNext New Reply
🔊 Listen RSS

The latest US-Russia.org Experts Panel discussion was about Russia’s burgeoning partnership with China. I especially recommend Mercouris’ contribution which – although unfortunately titled by VoR’s editorial staff)) – is otherwise quite brilliant. My own effort follows below:

First of all, let me preface that I’m one of the biggest China bulls around. Its economy in real terms will overtake that of the US by the mid-2010’s, if it hasn’t already. It’s already bigger in a range of industries, from traditional heavy industry (steel, coal) to consumption (car sales, e-commerce). Its manufacturing wages have caught up with Mexico’s, which is a quintessential middle-income country. If the average Chinese is now about as prosperous as the average Mexican, then the PRC’s total GDP – taking into account its vast population – is now well ahead of America’s.

Nor is it a house build on sand, as many Sino pessimists would have you believe, but on solid, steel-reinforced concrete. Its economic growth is NOT dependent on cheap exports. And fantasies about its “exploited” cheap labor force, which will become increasingly uncompetitive as it develops, belie the fact that the average Chinese now scores higher in international standardized tests than the OECD rich country average. Given the centrality of human capital to economic growth, China’s rise to the top tables of world power is all but assured.

It would be very worrying if China’s ascent was accompanied by the bellicose rhetoric and militaristic posturing adopted by other rising Powers of the past, like the Kaiser’s Germany. But “yellow peril”-type hysteria aside, this does not seem to be the case. China spends a mere 2% of its GDP on its military, i.e. about twice less in proportional terms than both Russia and the US. This is a most fortunate confluence of events, especially for Russia, as competing with China is unrealistic in the long-term – not when its economy is an order of magnitude bigger. On the other hand, deep engagement with China hold out a number of benefits.

First, China gets access to Russian energy resources, bypassing the vulnerable routes past the Strait of Malacca (either overland via Siberia, or across the top of the world via the thawing Northern Sea Route), while Russia gets access to Chinese capital and technologies – much of the latter purloined from the West, true, but so what? Second, both countries secure their frontiers, allowing them to focus on more troubling security threats: The Islamic south and possibly NATO in Russia’s case, and disputes with Vietnam, Japan, and a USA that is “pivoting” to the Pacific in China’s case. Third, resources can be pooled to invest in Central Asia and root out Islamist militants and the drug trade – an issue that will assume greater pertinence as the US withdraws from Afghanistan.

Frankly, the West is too late to the party. It had an excellent chance to draw Russia into the Western economic and security orbit in the 1990’s, but instead it chose the road of alienation by pointedly welcoming in only the so-called “captive” nations of East-Central Europe. Putin’s reward for his post-9/11 outreach to the US was a series of foreign-sponsored “colored revolutions” in his own backyard. While in rhetoric both he and Medvedev continue to affirm that Russia is a European country, in practice attitudes towards them have come to be based on practicalities, not lofty “values” that they don’t even share. So it is only natural that with time Russia came to be more interested in pursuing a relation with the BRICS (“The Rest”) in general, and China in particular.

The West’s response hasn’t been enthusiastic. The BRICS are written off as a bunch of corrupt posers with divergent geopolitical ambitions that will stymie their ability to act as a coherent bloc. Russia and China come in for special opprobrium. While there’s a nugget of truth in this, it misses the main point: The BRICS might be poorer but by the same token they are growing faster and converging with the West, or at least China and Russia are; and while they don’t see eye to eye on all things, they agree on some fundamentals like multi-polarity, a greater say for developing nations in the IMF and World Bank, and the primacy of state sovereignty.

Here is a telling anecdote from an online acquaintance of his recent experiences with the European news channel, Euronews: “A feature of this site is that there’s a world map with happy and sad smileys on it to indicate good news and bad news. And there on Moscow I spotted a sad smiley, so I focused on it, thinking there would be a report on the already day-old and forecast to last another day blizzard that is raging right now across the Ukraine and European Russia… And the “bad news” that I read? The meeting between the Russian president and his Chinese counterpart together with a report and an analysis of the increase in trade between those two states. That’s really bad news, it seems, for some folk.”

And this is not so much an isolated incident, but a metaphor for the general state of West – Russia relations: While the former expects a certain degree of respect and even submission from the latter, it doesn’t tend to make reciprocal gestures, and then acts like a jilted lover when Russia gives up and goes to someone else’s bed. But that’s the reality of a globalized world, in which the West isn’t the be all and end all, and countries have choices. It is high time that the West mustered the humility to finally accept that it has been dumped.

(Republished from Da Russophile by permission of author or representative)
 
🔊 Listen RSS

My latest for VoR and US-Russia.org on Russia’s recent Foreign Policy Concept:

The new foreign-policy concept is a long-overdue adjustment to international realities. There can be no meaningful “strategic partnership” between Russia and the US or indeed Russia and the West in general, when their respective core values have diverged from each other so much.

Ironically, this divergence has occurred at a period in history when Russia has retreated from ideology; it now embraces a doctrine of national sovereignty and moderate social conservatism that a generation ago would have made it part of the European mainstream. But today it has been “left behind” as the West has moved on to democracy fetishism and pushing concepts such as gender feminism and criticisms of “heteronormativity” that sound alien to most Russians. Hence the disconnect between Russia and the West on a whole host of issues, from the Arab Spring to the Pussy Riot affair.

So even as Russia converged with Western civilization of the 1970′s, the West – in particular its Anglo-Saxon, Scandinavian, and Gallic constituent parts – has “transcended” itself, and we are again left with a gulf of mutual incomprehension as deep as in Soviet times. As such, the best that can be realistically hoped for, at least in the medium term, is mutually beneficial economic relations (i.e., oil and gas in exchange for machines and modernization). Anything “deeper” or more heart-felt will require cultural concessions on the part of either Russia or the West, and it is unclear how that could be made to happen even were it to be acknowledged as desirable in and of itself.

Given these cultural clashes, it is probably a good thing for relations to become more defined by markets, which peace theorists believe have a moderating effect on animosity and inter-state conflict. Fortunately, prospects in this sphere are good, the specter of the Great Recession notwithstanding. Russia’s GDP per capita in purchasing power parity (PPP) terms is now well above half the EU average and close to convergence with the likes of Portugal and Greece. Russia has joined the WTO, and will probably join the OECD in another year or two. De Gaulle’s vision of a unified space – at least in the economic sphere – from Lisbon to Vladivostok has a real chance of coming into being within the next decade.

China doesn’t see eye to eye with the West either culturally or geo-politically, but it too is rapidly converging with the developed world; wages in its manufacturing sector have recently surpassed Mexico’s. It is now for all intents and purposes a middle-income country, and its GDP in terms of PPP may already have overtaken America’s. Opting for a closer relation with China is a wise play on Russia’s part. Its economic dominance in one or two more decades is all but assured, and with an (economistic, non-ideological) exploitation of high-speed trains and the melting Northern Sea Route, Russia can make a fair bit of money by being a “bridge” to the Orient.

(Republished from Da Russophile by permission of author or representative)
 
🔊 Listen RSS

Not often that you see Russia in some color other than bloody red on a world map of corruption or institutional quality. But according to the Open Budget Index (2012 results), the Russian budget is actually pretty transparent as far as these things go.

Of the major countries, only the UK (88), France (83), and the US (79) are ahead. The other major developed countries in the survey like Germany (71), Spain (63), and Italy (60) are all behind Russia (74), as are its fellow – and supposedly far cleaner – BRICs fellows Brazil (73), India (68), and China (11). Of perhaps greater import, only the Czech Republic (75) edges above Russia in the CEE group, whereas all the others – Slovakia (67), Bulgaria (65), Poland (59), Georgia (55), Ukraine (54), Romania (47), etc. – lag behind it. Also noteworthy is that Russia’s typical neighbors on Transparency International’s CPI, such as Zimbabwe (20), Nigeria (16), and Equatorial Guinea (0), reveal almost nothing in their national budgets.

Now of course the Open Budget Index is not the same thing as corruption. You can have an open budget but still steal from it (and this does happen in Russia frequently), and you can also have a closed budget from which few people steal, at least directly (as was the case in the USSR… or to take a more modern example, while Russia’s OBI is now higher than Germany’s, it is inconceivable that state corruption is even in the same league in these two countries).

Nonetheless, there is surely a very significant degree of correlation between the two. Having an open budget means that it is can be subjected to scrutiny; were Russia’s budget closed like China’s or Saudi Arabia’s, Navalny’s work to expose corrupt state tenders would be simply impossible (as it is, the latest ploy corrupt bureaucrats have been forced to resort to is to sprinkle Latin characters into the Cyrillic texts of state tenders so as to confound search engines).

Second, a high OBI score demonstrates the state’s commitment to fighting corruption. If Putin and Co. really didn’t care and were truly the kleptocrats they are repeatedly labeled as by the Western media, they would instead do everything in their power to hide the budget so as to remove the possibility of scrutinizing it. But they don’t. To the contrary, Russia’s OBI has increased from year to year.

As we can see above, Russia’s budget transparency in 2006 was… about middling; consistently below developed world standards, but higher than plenty of Third World countries and even quite a few CEE countries. But by 2012 it was 10th out of 100 countries. If Russia’s government were truly only committed to stealing as much as it possibly could why would it bother with the legislative and institutional improvements that enabled such a change in rankings?

It is now the most transparent of the BRIC’s, having overtaken both (consistently transparent) Brazil and (also rapidly improving) India in 2012.

Of most pertinence, Russia has massively improved its relative position to other CEE countries; only the Czech Republic and Georgia under Saakashvili have registered such appreciable improvements. To the contrary, both Poland and Romania actually registered declines in their overall levels of budget transparency.

Russia no longer even trails the developed world in this regard.

I would also note that this chimes with the findings of the Revenue Watch Index, which found Russia to be one of the world’s best countries at reporting information about revenue from the extractive sector. This in particular goes against the widespread trope of shady siloviki appropriating all the proceeds from Russian oil and gas and murdering the investigative journalists who go after them.

Conclusions

Once again I would like to emphasize that the OBI does not measure corruption. For instance, China is nowhere near as corrupt as the numbers indicate here; FWIW, my own impressions from perusing various indices and reading comments boards from both countries is that “everyday” corruption is somewhat higher in Russia and elite-level corruption is comparable. Nonetheless, the OBI is an objective measure, drawn from concrete metrics, and that alone makes it superior to Transparency International’s CPI, which is a measure of corruption perceptions.

To remove any possible insinuation that I only castigate the CPI because it ranks Russia abysmally low, I would ask the following question: Is it really plausible that Italy is more corrupt than Saudi Arabia, as implied by the CPI, when there is such a vast gulf in their levels of budget openness and other objective assessments of institutional quality?When we actually pretty much know that a substantial chunk of Saudi Arabia’s budget goes into feeding the country’s 15,000 odd princes… that the very country is named after the family that rules it? I find that very improbable. I would suggest it is somewhat more likely that the “experts” and businessmen asked to assign CPI ratings simply bumped up the Gulf states for their (admittedly) very generous and sumptuous hospitality and their pro-Western policies; all factors that would work in the reverse direction in the cases of countries like Russia, or Venezuela.

Still, all that is speculation. Much like the CPI itself. Back in the world of concrete statistics and facts, I think this further confirms my basic thesis on Russian corruption, which goes something like this:

  1. It was extremely high during the 1990′s.
  2. It declined at a steady if not breakneck rate (media narrative – it keeps getting worse every single year under Putin).
  3. The state itself is moderately but not extremely interested in curbing corruption (media narrative – Russia is a “mafia state”).
  4. Today, Russia is not an outlier or an anomaly on corruption when compared against Central-Eastern or Southern Europe. To the contrary, it is comparable to the worst-performing European countries (e.g. Hungary, Romania, Greece), and about middling in the overall global corruption ratings. (media narrative – “Nigeria with snow”).
  5. It continues to improve at a slow but steady pace.

For more information see my Corruption Realities Index, which I developed in 2010 and takes into account the OBI when computing corruption levels.

(Republished from Da Russophile by permission of author or representative)
 
🔊 Listen RSS

My latest contribution to the US-Russia.org Expert Discussion Panel this one focusing on whether the West foregoes “incalculable benefits” by continuing the Cold War. Unlike previous Panels, on which I aimed for balance, here I make no apologies at pointing a finger straight to where I believe the blame belongs:

I recently began reading Martin Malia’s Russia under Western Eyes. One of the key points he makes early on is that the Western view of Russia has rarely corresponded well with its objective strength or the actual threat it posed. To the contrary, it is when “institutions and culture” converge that the West’s “evaluation of Russia tends toward the positive”; when they diverge, the reverse. So by that theory, relations should be pleasant: After all, not only is it no longer a military threat, but in terms of political systems and values, the West and Russia are far closer now than they have even been in history.

This makes it all the more puzzling that half the US foreign policy establishment remains entrenched in Cold War thinking. Romney belongs to them. A man who now has a 39% chance of becoming President, according to Intrade, declared Russia to be a “our number one geopolitical foe.” But unlike the case in the Cold War, it is a divergence that now most afflicts the US and its satellites – namely, the idée fixe that it is globally “exceptional”, and thus called forth to express global “leadership.” This translates into the belief that it can dictate its terms – from support for the Iraq War to the pursuit of Wikileaks – to other powers without negotiation (anything else is appeasement!), and woe unto the VIRUS’s that oppose it (a cute neocon acronym standing for Venezuela, Iran, Russia).

Needless to say, such attitudes make mockeries of any genuine democracy promotion. As long as you pay the requisite cultural tribute, you get off scot free – “Bahrain’s bosses understand modern symbolism about minorities so well that the Arab kingdom’s ambassador to Washington is a Jewish woman.” They might not understand the Hippocratic Oath near so well, imprisoning doctors for treating wounded protesters, but that is of little consequence next to anti-Iranian orientations and the US naval base there. Meanwhile, Venezuela is demonized by the Cold Warriors for daring to elect a socialist to power in Latin America, even though it has some of the structurally freest and fairest elections in the world. Their hatred of Russia ultimately boils down to the same roots: It resists.

There are three ways this impasse can end. The first, and most incredible way, would be for the residual Cold Warriors to stop thinking of the world in Manichean terms, with themselves playing God’s role. The second would be for Russia to become a client state of the US. This is not going to happen short of the likes of Gary Kasparov and Lilia Shevtsova coming to power.

The third possibility is by far the likeliest, as it is already occurring. Back in the 1990’s, Western Diktat politics in relation to Russia typically worked because it was in crisis, and had no other powers to work with. They believe this is still the case, and not only the neocons: In 2009, Biden said Russia had a “shrinking population base… a withering economy”, and a banking system unlikely to “withstand the next 15 years.”). This would presumably give Russia no choice but to fall in line. They are wrong. In real terms, the Chinese economy may have overtaken the US as early as in 2010; a constellation of other sovereign, non-Western powers such as Brazil, Turkey, India, and South Africa are attaining new prominence. With the EU in permaslump, the US and Japan under accumulating mountains of debt, and oil futures now permanently sloped upwards, a new world is arising in which modernization is no longer synonymous with Westernization. Russia is one of its key players, just like the other BRIC’s.

One can’t resist gravity forever. Once the requisite relative political, economic, and cultural mass is no longer there, ideological Cold Wars will become as unsustainable as Western hegemony itself.

(Republished from Da Russophile by permission of author or representative)
 
🔊 Listen RSS

Just when I thought the paper of Luke “I Plagiarize Off The eXile” Harding and Miriam “Putin Stole My Dry Cleaning Ticket” Elder could get no more incompetent, vindictive, and mendacious in its Russia coverage, it did. I present: Putin calls in Darth Vader to tighten his grip on Russia’s energy assets by Alex Dryden, who seems to be the Guardian’s new Moscow correspondent. How many tropes and outright lies can you, dear reader, identify in that 800-word diatribe? I could find at least a dozen or so.

Manichaeism: Apparently Sechin is “Darth Vader” and “the scariest man in Russia”, according to Russians. That’s certainly news to me. I have never heard Sechin called any of that. The blogger Mark Galeotti did alert me to the fact that he’d used the moniker in a blog post, but did say that “joking aside, I haven’t seen Russians call Sechin Vader.” I searched on Russian Google for these associations and all I could find was references to Dryden’s own article, an article from Forbes a few years back that also called Sechin a Darth Vader, and a few bloggers. However I doubt that a majority of Russians even know who Sechin is let alone think of him as Emperor Palpatine’s Putin’s enforcer.

Inconsistency. Sechin is apparently the “greyest of his éminences grises”. I always thought that title belonged to Surkov? Make up your minds already! But this isn’t all. Not only will Darth Vader help Putin “tighten his grip on Russia’s energy assets”, he is at the same time – according to the subtitle – to “begin a potentially tycoon-terrifying reprivatisation programme.” This is a logical consequence of the traditional view of the Western media that Putin / Russia can do nothing good: If he increases restrictions on party registrations, it is authoritarianism, if he loosens them, it is a Kremlin plot to crowd out genuine liberals with fake Kremlin parties, etc. But at least up till now Putin’s inevitably evil and mercenary choices were at least mutually exclusive. Alex Dryden goes one step further, adopting a kind of multi-universe perspective in which Putin both “tightens state control” and “reprivatizes” at the same time, with both serving to reinforce his dominance and enrich his corrupt cronies.

Outright lies: What IS actually being discussed is privatization of state controlled companies, however there is debate over the pace (it is likely to be slow and gradual) and final extent of this privatization. How that amounts to tightening “state control of the economy” must remain a Schrödingerian mystery.

Tinpot Russia: “But the “r” in the Bric nations looks increasingly vulnerable… Should Russia even be included as one of the Brics? As the American economist, Nouriel Roubini, says, Russia is “more sick than Bric”.” And Jim O’Neill, the inventor of the BRIC’s concept, is a consistent defender of Russia’s place in the BRIC’s. Indeed on most indicators Russia is at least as good as the BRIC’s average or better. It has the highest human capital and the highest GDP per capita (both in nominal and PPP terms). Its per capita growth over the past decade lags only China and is about equal to India (which is many times poorer), and its present growth trajectory is likewise superior to Brazil and about equal to India’s. It is also the fiscally strongest of the BRIC’s, despite the relatively high dependence of its budget on minerals revenue (which is not a sin: See Australia, Norway, etc).

Anonymous sourcing: “Oleg says”, “Oleg’s wife Veronika says”, “Oleg and Veronika are just two of the many young people in Russia considering leaving”, “Sources close to Putin”, “An officer in the economic department of the FSB, the KGB’s successor organisation”, “the head of a small Moscow oil company”, “A partner in AAR”. All of whom conveniently back the Guardian line on Russia, from its economy being a cash machine for the ominously anonymous “them” (that is, the siloviki, as Dryden helpfully clarifies for us) to “mafiosi methods” being the only possible way to do business there. I wonder why Dryden didn’t cite the voices in his head. It would at the very least be more credible for its honesty.

Dying Russia: “Russia’s population is in drastic decline. Much of this is due to emigration, nearly all of which is of the younger and smarter elements of the population. The rest is caused by a falling life expectancy and birth rate.” Four lies in three sentences. First, the population has been stable since about 2008, and has started to appreciably increase since 2011. In the first four months of 2012, the time of the year when it was usually declining the fastest, the population INCREASED by 42,000 people. This was helped by a 90,000 POSITIVE migration balance; a migration balance that remains positive even when just countries in the Far Abroad, i.e. the destinations of the “younger and smarter” emigrations, are considered (and this balance will remain positive EVEN if we assume that Russian statistics underestimate emigration by 50%). The life expectancy and birth rates aren’t decreasing; to the contrary, they are increasing at unprecedented rates, and in fact the former broke the Soviet-era record in 2011. Where does the Guardian get its fact-checkers? Do they even bother with them?

Mafia state: “…however, if you were one of the few who made outlandish amounts of money and commanded influence within the siloviki elites, life has been good in the past 10 years”. Unable to deny the truly undeniably realities of improving across the board statistics on everything from GDP per capita to automobile ownership, the Guardian goes back to the old anti-Putin cliche of ascribing all the benefits of this prodigal economic growth to a small coterie of (inevitably corrupt and slimey) pro-Putinist apparatchiks. Statistics that show massive gains in real median wages, as reflected in broad surveys of consumer power or the number of Big Macs a McDonald’s worker can afford per hour of labor, is of course unmentioned.

Lack of context: Russia is the weakest and most pathetic of the BRIC’s. It should be kicked out. It’s 120th on the World Bank’s Ease of Doing Business ranking for goodness’ sake! Except that Brazil is 126th, and India is 132nd.

If a freshman handed in this dross excuse for an op-ed to a journalism or political science in any halfway respectable institution, he would get an F. (For his own sake I hope this is something Dryden wrote up on a tight deadline, maybe while hungover from partying with Ioffe and Shawn Walker and their likes, to keep his paychecks flowing). But as it’s a Guardian journalist writing about Russia all is par for the course.

PS. I am not on good terms with the Guardianistas, them having mostly banned me from commenting on their pages like the upstanding democraticians they are, so I would appreciate it if one of my readers could write a complaint to them about Alex Dryden’s post, feeling free to cite this post as evidence.

PSS. I noticed towards the end of writing this post that Mark Adomanis had already done a similar rebuttal, making most of the same criticisms. In fact even Alexey Kovalev, a hardcore liberal who occasionally writes for The Guardian, says that Dryden is “spectacularly clueless” and a “total ignoramus” not to mention anecdotally confirming my points on demography and emigration.

PSSS. A few corrections from Kovalev. (1) “Fine, but calling me a ‘hardcore liberal’ is a bit far-fetched. The fact that I wrote for G doesn’t make me one.” (2) “Also I said that one is entitled to an opinion that makes them look like an ignoramus, not called Dryden one.”

(Republished from Da Russophile by permission of author or representative)
 
🔊 Listen RSS

When I cited TI figures showing that Russian everyday corruption is middling by global standards (percentage paying bribes: 26%, compared to 15% in Latvia, 18% in Greece, 24% in Hungary, 28% in Romania) – as opposed to being on the same plank with Zimbabwe or Liberia – one of the most common counter-arguments was that corruption in Russia is especially concentrated in the upper commercial/political social crust.

However, as Vedomosti recently covered (h/t Nils), the acceptability of corruption in Russia has basically converged to global averages. According to the table below from the original study by Ernst & Young, Russia in fact now appears to perform slightly better than the global average (and vastly better than low-income countries like India, Indonesia, and Vietnam, all of which are nonetheless ranked higher than Russia in the Corruption Perceptions Index).

Furthermore, the last year has seen significant improvements, e.g. whereas now only 16% see cash payments as acceptable to win or retain business, this figure was 39% in 2010. This is practically equal to the global average of 15%, which unlike Russia rose from 9% in 2010.

Power summary: Russia is a normal country in the sense that its level of corruption, as reported by ordinary citizens and businesspeople, is what you would expect of a middle-income country. However, it is near rock bottom as perceived by various self-appointed experts. I wonder who’s more reliable.

(Republished from Da Russophile by permission of author or representative)
 
🔊 Listen RSS

It’s been a great year! To recap, in rough chronological order, 2011 saw: The most popular post (with 562 comments and counting; granted, most of them consisting of Indians and Pakistanis flaming each other); Visualizing the Kremlin Clans (joint project with Kevin Rothrock of A Good Treaty); my National Comparisons between life in Russia, Britain, and the US; my interview with (now defunct) La Russophobe; interviews with Craig Willy and Mark Chapman; lots of non-Russia related stuff concerning the Arctic, futurism, Esperanto, and the Chinese language; possibly the most comprehensive analyses of the degree of election fraud in the Duma elections in English; TV appearances on RT and Al Jazeera; and what I hope will remain productive relationships with Al Jazeera and Inosmi. Needless to say, little if any of this would have been possible without my e-buddies and commentators, so a special shout out to all you guys. In particular, I would like to mention Alex Mercouris, who as far as I can ascertain is the guy who contributed the 20,000th comment here. I should send him a special T-shirt or something.

In previous years, my tradition was to review the previous year before launching into new predictions. I find this boring and will now forego the exercise, though in passing I will note that many of the defining traits in 2010 – the secular rise of China and of “The Rest” more generally; political dysfunction in the US; growing fissures in Europe, in contrast to Eurasian (re)integration; the rising prominence of the Arctic – have remained dominant into this year. The major new development that neither I nor practically anyone else foresaw was the so-called “Arab Spring”, as part of a pattern of increasing political stress in many other states: Occupy Wall Street and its local branches in the West; the Meetings for Fair Elections in Russia; Wukan in China and anti-corruption protests in India. I don’t disagree with TIME’s decision to nominate The Protester as its person of the year. However, as I will argue below, the nature of protest and instability is radically different in all these regions. I will finish up by reviewing the accuracy of my 2011 predictions from last year.

tsar-putin 1. There is little doubt that Putin will comfortably win the Presidential elections in the first round. The last December VCIOM poll implies he will get about 60%. So assuming there is no major movement in political tectonics in the last three months – and there’s no evidence for thinking that may be the case, as there are tentative signs that Putin’s popularity has began to recover in the last few weeks from its post-elections nadir. Due to the energized political situation, turnout will probably be higher than than in the 2008 elections – which will benefit Putin because of his greater support among passive voters. I do think efforts will be made to crack down on fraud so as to avoid a PR and legitimacy crisis, so that its extent will fall from perhaps 5%-7% in the 2011 Duma elections to maybe 2%-3% (fraud in places like the ethnic republics are more endemic than in, say, Moscow, and will be difficult to expunge); this will counterbalance the advantage Putin will get from a higher turnout. So that’s my prediction for March: Putin wins in the first round with 60%, followed by perennially second-place Zyuganov at 15%-20%, Zhirinovsky with 10%, and Sergey Mironov, Mikhail Prokhorov and Grigory Yavlinsky with a combined 10% or so. If Prokhorov and Yavlinsky aren’t registered to participate, then Putin’s first round victory will probably be more like 65%.

2. I will also go ahead and say that I do not expect the Meetings For Fair Elections to make headway. Despite the much bigger publicity surrounding the second protest at Prospekt Sakharova, attendance there was only marginally higher than at Bolotnaya (for calculations see here). So the revolutionary momentum was barely maintained in Moscow, but flopped everywhere else in the country – as the Medvedev administration responded with what is, in retrospect, a well balanced set of concessions and subtle ridicule. Navalny, the key person holding together the disparate ideological currents swirling about in these Meetings, is not gaining ground; his potential voters are at most 1% of the Russian electorate. And there is no other person in the “non-systemic opposition” with anywhere near his political appeal. There will be further Meetings, the biggest of which – with perhaps as many as 150,000 people – will be the one immediately after Putin’s first round victory; there will be the usual (implausibly large) claims of 15-20% fraud from the usual suspects in the liberal opposition and Western media. But if the authorities do their homework – i.e. refrain from violence against peaceful protesters, and successfully reduce fraud levels (e.g. with the help of web cameras) – the movement should die away. As I pointed out in my article BRIC’s of Stability, the economic situation in Russia – featuring 4.8% GDP growth in Q3 2011 – is at the moment simply not conductive to an Occupy Wall Street movement, let alone the more violent and desperate revolts wracking parts of the Arab world.

3. Many commentators are beginning to voice the unspeakable: The possible (or inevitable) disintegration of the Eurozone. I disagree. I am almost certain that the Euro will survive as a currency this year and for that matter to 2020 too. But many other things will change. The crisis afflicting Europe is far more cultural-political than it is economic; in aggregate terms, the US, Britain and Japan are ALL fiscally worse off than the Eurozone. The main problem afflicting the latter is that it suffers from a geographic and cultural rift between the North and South that is politically unbridgeable.

The costs of debt service for Greece, Portugal, Italy, and Spain are all quickly becoming unsustainable. They cannot devalue, like they would have done before the Euro; nor is Germany prepared to countenance massive fiscal transfers. The result is the prospect of austerity and recession as far as the eye can see (note that all these countries also have rapidly aging populations that will exert increasing pressure on their finances into the indefinite future). Meanwhile, “core Europe” – above all, Germany – benefits as its superior competitiveness allows it to dominate European markets for manufactured goods and the coffers of its shaky banking system are replenished by Southern payments on their sovereign debt.

The only way to resolve this contradiction is through a full-fledged fiscal union, with big longterm transfers from the North to the South. However, the best the Eurocrats have been able to come up with is a stricter version of Maastricht mandating limited budget deficits and debt reduction that, in practice, translates into unenforceable demands for permanent austerity. This is not a sustainable arrangement. In Greece, the Far Left is leading the socialists in the run-up to the April elections; should they win, it is hard to see the country continuing on its present course. On the other side of the spectrum, the Fidesz Party under Viktor Orbán in Hungary appears to be mimicking United Russia in building a “managed democracy” that will ensure its dominance for at least the next decade; in the wake of its public divorce with the ECB and the IMF, it is hard to imagine how it will be able to maintain deep integration with Europe for much longer. (In general, I think the events in Hungary are very interesting and probably a harbinger of what is to come in many more European countries in the 2010′s; I am planning to make a post on this soon).

Maybe not in 2012, but in the longer term it is becoming likely that the future Europe will be multi-tier (not multi-speed). The common economic space will probably continue growing, eventually merging with the Eurasian Union now coalescing in the east. However, many countries will drop out of the Eurozone and/or deeper integration for the foreseeable future – the UK is obvious (or at least England, should Scotland separate in the next few years); so too will Italy (again, if it remains united), Greece, the Iberian peninsula, and Hungary. The “core”, that is German industrial muscle married to Benelux and France (with its far healthier demography), may in the long-term start acquiring a truly federal character with a Euro and a single fiscal policy. But specifically for 2012, I expect Greece to drop out of the Eurozone (either voluntarily, or kicked out if it starts printing Euros independently, as the former Soviet republics did with rubles as Moscow’s central control dissipated). The other PIGS may straggle through the year, but they too will follow Greece eventually.

I expect a deep recession at the European level, possibly touching on depression (more than 10% GDP decline) in some countries.

4. How will Russia’s economy fare? A lot will depend on European and global events, but arguably it is better placed than it was in 2008. That said, this time I am far more cautious about my own predictions; back then, I swallowed the rhetoric about it being an “island of stability” and got burned for it (in terms of pride, not money, thankfully). So feel free to adjust this to the downside.

  • The major cause of the steep Russian recession of 2008-2009 wasn’t so much the oil price collapse but the sharp withdrawal of cheap Western credit from the Russian market. Russian banks and industrial groups had gotten used to taking out short-term loans to rollover their debts and were paralyzed by their sudden withdrawal. These practices have declined since. Now, short-term debts held by those institutions have halved relative to their peak levels in 2008; and Russia is now a net capital exporter.
  • I assume this makes Russia far less dependent on global financial flows. Though some analysts use the loaded term “capital flight” to describe Russia’s capital export, I don’t think it’s fair because the vast bulk of this “flight” actually consists of Russian daughters of Western banking groups recapitalizing their mothers in Western Europe, and Russians banks and industrial groups buying up assets and infrastructure in East-Central Europe.
  • The 2008 crisis was a global financial crisis; at least *for now*, it looks like a European sovereign debt crisis (though I don’t deny that it may well translate into a global financial crisis further down the line). There are few safe harbors. Russia may not be one of them but it’s difficult to say what is nowadays. US Treasuries, despite the huge fiscal problems there? Gold?
  • Political risks? The Presidential elections are in March, so if a second crisis does come to Russia, it will be too late to really affect the political situation.
  • Despite the “imminent” euro-apocalypse, I notice that the oil price has barely budged. This is almost certainly because of severe upwards pressure on the oil price from depletion (i.e. “peak oil”) and long-term commodity investors. I think these factors will prevent oil prices from ever plumbing the depths they briefly reached in early 2009. So despite the increases in social and military spending, I don’t see Russia’s budget going massively into the red.
  • What is a problem (as the last crisis showed) is that the collapse in imports following a ruble depreciation can, despite its directly positive effect on GDP, be overwhelmed by knock-on effects on the retail sector. On the other hand, it’s still worth noting that the dollar-ruble ratio is now 32, a far cry from what it reached at the peak of the Russia bubble in 2008 when it was at 23. Will the drop now be anywhere near as steep? Probably not, as there’s less room for it fall.
  • A great deal depends on what happens on China. I happen to think that its debt problems are overstated and that it still has the fiscal firepower to power through a second global crisis, which should also help keep Russia and the other commodity BRIC’s like Brazil afloat. But if this impression is wrong, then the consequences will be more serious.

So I think that, despite my bad call last time, Russia’s position really is quite a lot more stable this time round. If the Eurozone starts fraying at the margins and falls into deep recession, as I expect, then Russia will probably go down with them, but this time any collapse is unlikely to be as deep or prolonged as in 2008-2009.

new-eurasia 5. Largely unnoticed, as of the beginning of this year, Russia, Belarus, and Kazakhstan became a common economic space with free movement of capital, goods, and labor. Putin has also made Eurasian (re)integration one of the cornerstones of his Presidential campaign. I expect 2012 will be the year in which Ukraine joins the Eurasian common economic space. EU membership is beginning to lose its shine; despite that, Yanukovych was still rebuffed this December on the Association Agreement due to his government’s prosecution of Yulia Tymoshenko. Ukraine can only afford to pay Russia’s steep prices for gas for one year at most without IMF help, and I doubt it will be forthcoming. Russia itself is willing to sit back and play hardball. It is in this atmosphere that Ukraine will hold its parliamentary elections in October. If the Party of Regions does well, by fair means or foul, it is not impossible to imagine a scenario in which accusations of vote rigging and protests force Yanukovych to turn to Eurasia (as did Lukashenko after the 2010 elections).

6. Russia’s demography. I expect births to remain steady or fall slightly (regardless of the secular trend towards an increasing TFR, the aging of the big 1980′s female cohort is finally starting to make itself felt). Deaths will continue to fall quite rapidly, as excise taxes on vodka – the main contributor to Russia’s high mortality rates – are slated to rise sharply after the Presidential elections.

7. Obama will probably lose to the Republican candidate, who will probably be Mitt Romney. (Much as I would prefer Ron Paul over Obama, and Obama over Romney). I have an entire post and real money devoted to this, read here.

The US may well slip back towards recession if Europe tips over in a big way. I stand by my assertion that its fiscal condition is in no way sustainable, but given that the bond vigilantes are preoccupied with Europe it should be able to ride out 2012.

8. There is a 50% (!) chance of a US military confrontation with Iran. If it’s going to be any year, 2012 will be it. And I don’t say this because of the recent headlines about Iranian war games, the downing of the US drone, or the bizarre bomb plot against the Saudi ambassador in the US, but because of structural factors that I have been harping on about for several years (read the “Geopolitical Shocks” section of my Decade Forecast for more details); factors that will make 2012 a “window of opportunity” that will only be fleetingly open.

  • Despite the rhetoric, the US does not want to get involved in a showdown with Iran due to the huge disruption to oil shipping routes that will result from even an unsuccessful attempt to block of the Strait of Hormuz. BUT…
  • While a nuclear Iran is distasteful to the US, it is still preferable to oil prices spiking up into the high triple digits. But for Israel it is a more existential issue. Netanyahu, in particular, is a hardliner on this issue.
  • The US has withdrawn its troops from Iraq. In 2010, there were rumors that the US had made it clear to Israel that if it flew planes over Iraq to bomb Iran they would be fired upon. This threat (if it existed) is no longer actual.
  • The US finished the development of a next-generation bunker-busting MOP last year and started taking delivery in November 2011. But the Iranians are simultaneously in a race to harden and deepen their nuclear facilities, but this program will not culminate until next year or so. If there is a time to strike in order to maximize the chances of crippling Iran’s nuclear program, it is now. It is in 2012.
  • Additionally, if Europe goes really haywire, oil prices may start dropping as demand is destroyed. In this case, there will be an extra cushion for containing fallout from any Iranian attempt to block off the Strait of Hormuz.
  • Critically, the US does not have to want this fight. Israel can easily force its hand by striking first. The US will be forced into following up.

The chances of an Azeri-Armenian war rise to 15% from last year’s 10%. If there is any good time for Azerbaijan to strike, it will be in the chaotic aftermath following a US strike on Iran (though the same constraints will apply as before: Aliyev’s fears of Russian retaliation).

world-crude-oil-prodcution-and-fitted-growth-oil-drum

[Source: The Oil Drum].

9. Though I usually predict oil price trends (with great and sustained accuracy, I might add), I will not bother doing so this year. With the global situation as unstable as it is it would be a fool’s errand. Things to consider: (1) Whither Europe? (demand destruction); (2) What effect on China and the US?; (3) the genesis of sustained oil production decline (oil megaprojects are projected to sharply fall off from this year into the indefinite future); (4) The Iranian wildcard: If played, all bets are off. But I will more or less confidently predict that global oil production in 2012 will be a definite decrease on this year.

If investing, I would go into US Treasuries (short-term) and gold to hedge against the catastrophic developments; yuan exposure (longterm secular rise) and and US CDS (potential for astounding returns once SHTF). Property is looking good in Minsk, Bulgaria, and Murmansk. Any exposure to Arctic shipping or oil & gas is great; as the sea ice melts at truly prodigious rates, the returns will be amazing. I do think the Euro will survive and eventually strengthen as the weaker countries go out, but not to the extent that I would put money on it. Otherwise, I highly agree with Eric Kraus’ investment advice.

10. China will not see a hard landing. It has its debt problems, but its momentum is unparalleled. Economists have predicted about ten of its past zero collapses.

11. Solar irradiation was still near its cyclical minimum this year, but it can only rise in the next few years; together with the ever-increasing CO2 load, it will likely make for a very warm 2012. So, more broken records in 2012. Record low sea ice extent and volume. And perhaps 100 vessels will sail the Northern Sea Route this year.

12. Tunisia is the only country of the “Arab Spring” that I expect to form a more or less moderate and secular government. According to polls, 75% of Egyptians support death for apostasy and adultery; this is not an environment in which Western liberal ideas can realistically flourish. Ergo for Libya. I can’t say I have any clue as to how Syria will turn out. Things seem strange there: Russia and Israel are ostensibly unlikely, but actually logical, allies of Assad, while the US, France, the UK, and the Gulf monarchies are trying their best to topple him. These wars are waged in the shadows.

I've got some ways to go before I reach Navalny's demagogic stature.

I’ve got some ways to go before I reach Navalny’s demagogic stature.

13. As mentioned in the intro, 2011 has been a year of protest. As I argued in BRIC’s of Stability, in countries like China, Russia, or Brazil they will remain relatively small and ineffectual. Despite greater scales and tensions, likewise in Europe (though Greece may be an exception); these are old societies, and besides they are relatively rich. They won’t have street revolutions. I do not think Occupy Wall Street has good prospects in the US. By acting outside the mainstream (as part of a “non-systemic opposition”, to borrow from Russian political parlance) it remains irrelevant – the weed smoking and poor sartorial choices of its members works against its attaining respectability – and municipalities across the US are moving to break up their camps with only a few squeaks of protest. (This despite the arrests of 36 journalists, a number that had it been associated with Russia would have cries of Stalinism splashed across Western op-ed pages). I say this as someone who is broadly sympathetic with OWS aims and has attended associated events in Berkeley.

The nature of protest in the Arab world is fundamentally different, harkening back to earlier and more dramatic times: Bread riots, not hipsters with iPhones; against cynical and corrupt dictators, not cynical and corrupt pseudo-democrats; featuring fundamental debates about reconciling democracy, liberalism and religion, as opposed to weird slogans like “Occupy first. Demands come later.” Meh.

14. The world will, of course, end on December 21, 2012.

What about the 2011 Predictions?

1) My economic predictions were basically correct: “Today I’d repeat this, but add that the risks have heightened… The obvious loci of the next big crisis are the so-called “PIGS” (Portugal, Italy, Greece, Spain), and Ireland, Belgium and Hungary.”

2) Neither the Iranian war (chance: 40%) or an Azeri-Armenian war (chance: 10%) took place. If they don’t happen in 2012, their chances of happening will begin to rapidly decline.

3) Luzhkov still hasn’t been been hit with corruption charges, but merely called forth as a witness. Wrong.

Prediction of 3.5%-5.5% growth for Russia was exactly correct (estimates now converging to 4.0%-4.5%).

With headlines this December cropping up such as “End is nigh for Russia’s ‘reset’ with US“, my old intuition that US – Russia imperial rivalry couldn’t be set aside with a mere red plastic button may have been prescient: “In foreign policy, expect relations with the US to deteriorate.”

4) Pretty much correct about the US and the UK, though I didn’t predict anything drastic or unconventional for them.

5) “Oil prices should stay at around $80-120 in 2010 and production will remain roughly stable as increased demand (from China mostly) collides with geological depletion.” Totally correct, as usual.

6) China will grow about 9.4% this year, well in line with: “China will continue growing at 8-10% per year. Their housing bubble is a non-issue; with 50% of their population still rural, it isn’t even a proper bubble, since eventually all those new, deserted apartment blocs will be occupied anyway.”

7) 2011 was the warmest La Nina year on record, so in a sense thermometers did break records this year.

“Speaking of the Arctic, as its longterm ice volume continues to plummet and sea ice extent retreats, we can expect more circumpolar shipping. I wouldn’t be surprised to see up to 10 non-stop voyages along the Northern Sea Route from Europe to China, following just one by MV Nordic Barents in 2010.” If anything, I low-balled it. 34 ships made the passage this year! Sea ice cover was the second lowest on record, and sea ice volume was the lowest. So in the broad sense, absolutely correct.

“Likewise, expect the Arctic to become a major locus of investment.” This year, plans were announced to double the capacity of the Port of Murmansk by 2015.

8) Wrong on the Wikileaks prediction. The insurance file was released by The Guardian’s carelessness (whose journalists, David Leigh and Luke Harding, then proceeded to mendaciously lie about it), not by Assange. And the extradition proceedings are taking far longer than expected, though my suspicions that his case is politically motivated is reinforced by US prosecutors’ apparent pressure on Bradley Manning to implicate Assange in the theft of the State Department cables.

9) On Peter’s enthusiastic reminder, I did get my Russia Presidential predictions for 2012 wrong. Or 75% wrong, to be precise, and 20% right (those were the odds that I gave for Putin’s return back in May). I did however cover it separately on a different post, here. That said, I do not think the logic I used was fundamentally flawed; many other Kremlinologists ended up in the same boat (and most didn’t hedge like I did).

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

Иn the wake of the 2009 recession, declinist rhetoric has come to dominate discussion of Russia’s economic prospects. Jim O’Neill, the founder of the BRIC’s concept, has his work cut out defending Russia’s expulsion from the group in favor of Indonesia, Mexico, or some other random middle-sized country. Journalists in the Western media claim its economy is “not growing”, as do liberal Russian newspapers such as Vedomosti. Comparisons between Putin and Brezhnev (who presided over the Soviet Union’s period of stagnation, or zastoi) are piling up. Even President Medvedev isn’t helping the situation, telling a forum of international businesspeople that Russia’s “slow growth” hides stagnation (good job promoting your country, DAM! not….).

I don’t want to exchange rhetorical barbs in this post (which you may note is not tagged as a “rant“), and my skills at mockery and picking apart tropes aren’t nearly as well developed as those of Mark Adomanis or Kremlin Stooge, so I’ll do what I do best and go straight to the statistics. And so we have Fact #1: what is described as stagnation for Russia is a growth rate of 4%. It grew 4.0% for 2010. It was 4.1% in Q1 2011, and the government predicts it will be 4.2% for the whole year. The World Bank predicts 4.4% in 2011, 4.0% in 2012; the OECD expects 4.9% in 2011 and 4.5% in 2012; and the IMF forecasts 4.8% in 2011, 4.5% in 2012, tapering off to less than 4.0% in the “medium-term.”

This does not strike me as being particularly bad by global standards. This is obviously no miracle economy of Chinese-like 10% growth rates, but Russia (4.4%; 4.0%) does not compare badly to the World Bank’s projected growth for other typical middle-income countries such as Turkey (4.1%; 4.3%), Thailand (3.2%; 4.2%), Brazil (4.4%; 4.3%), Mexico (3.6%; 3.8%), or South Africa (3.5%; 4.1%). Facing real stagnation, many countries in the developed world such as the UK could only wish for Russia’s growth rate; though this is an unfair comparison, because Russia is poorer and can therefore find it easier to grow faster (see economic convergence), it is not less unfair comparing Russia to countries such as India (8.4%; 8.7%) or Indonesia (6.2%; 6.5%) because the latter are so much poorer than Russia in their turn.

This discussion suggests that CONTEXT is vital when discussing the degree of stagnation in a country. One of the two major factors here is the current GDP of the country in question; real GDP, that is, because that is what growth refers to (i.e. if a country devalues its currency by half but output remains constant, then nominal GDP will fall by half but real GDP will remain constant; as such, real GDP per capita is also the better proxy for living standards and economic sophistication). Now there are two major estimates by international organizations of Russia’s real GDP. The IMF estimates it at $15,800 as of 2010, whereas the World Bank believes it is $19,800 (relying on recent joint research by OECD-Eurostat-Rosstat). There are grounds to believe that the latter is more accurate because the international price comparison data that goes into real GDP estimates is much more recent for the World Bank*. But regardless of which one you use, Russia’s GDP is still much higher than the other emerging markets or BRIC’s with which it is so frequently compared to – Brazil has $11,100, China has $7,500, Indonesia has $4,400, and India has $3,600.

This is extremely important for two reasons. First, it is much harder to grow quickly when you are already a mostly developed country (like Russia, Poland, Korea) than when you are a mid-level developing country (China, Brazil) or a poor developing country (India, Indonesia). The most important reasons are: (1) The potential to achieve rapid growth by transferring your population from rural agriculture to urban industry and services becomes exhausted; (2) the services sector, where productivity can’t be improved as fast as in industry, assumes a bigger share of GDP; (3) most importantly, those countries are far closer to the technological frontier or “best practice”, and hence must increasingly innovate their way to growth instead of reaping low-hanging fruit by adopting and copying from elsewhere. All this isn’t debatable – there is a ton of economic literature on this, it passes the common sense test, and it is basically a given.

Second, when your starting base is low, fast economic growth is far more necessary to achieve real improvements in living standards and catching up to the West. 5% growth in the US would be remarkable and unprecedented for decades. 5% growth in a country like Egypt, with a GDP per capita of $6,000, will not transform it into a developed or even mostly developed country for the foreseeable future. Not only that, but it will be significantly swallowed up by a population growing at nearly 2%. This is no different from the growth rates in most fiscally healthy developed nations and so in effect virtually no “catch up” happens whatsoever.

This brings us to a second point, the importance of accounting of adjusting for population growth. India’s 8% growth rate in the last decade seems remarkable, prompting talk of “Shining India” and how it is the next big superpower. But considering its very low starting base, and the fact that its population was growing by nearly 2% per year, and you have the far less impressive figure of 6% per capita growth. This is still respectable, but it is barely higher than (much wealthier) Russia, and probably doesn’t warrant the glowing accolades heaped on its “tiger” economy.

At this point, I think it will be a good idea to consolidate all these statistics into a single graph that illustrates the arguments. GDP figures are taken from the World Bank’s 2010 estimates (there is reason to believe China’s GDP is underestimated, hence it has two estimates). GDP growth refers to the mainstream consensus on how fast these countries will be growing in the medium term (e.g. Russia “stagnating” at 4% a year; China following in the historical footsteps of Korea; India growing at the realistically highest rates projected by its proponents; Brazil and Mexico continuing to conform to both their historical rates and medium-term predictions; etc). Population growth is subtracted from the GDP growth to give a per capita figure. The last column are the projected totals for 2020. Figures are rounded off.

2010 GDP /c GDP % gr. Pop % gr. 2020 GDP /c
Brazil $11,000 4% 1% $15,000
China (1) $7,500 8% 0.5% $16,000
China (2) $12,000 7.5% 0.5% $25,000
France $34,000 2% 0.5% $39,000
India $3,600 8.5% 1.5% $7,000
Indonesia $4,400 6.5% 1% $7,500
Korea $29,000 3% 0% $39,000
Mexico $15,000 3% 1% $18,000
Russia $20,000 4% 0% $30,000

The results, as you can see, are fairly stunning. A low population growth and relatively high base – Russia’s GDP per capita of $20,000 is equivalent to that of Poland, Hungary, and Estonia – means that as soon as 2020 Russia will be where Italy is today, with a GDP per capita of $31,500. Now granted Italy may have grown as well, but given its dismal record for the past decade and the growing financial tremors in the Eurozone even this is far from certain. In other words, even at “stagnant” growth rates of 4% per year Russia will have converged to the lower ranks of Western Europe’s rich countries (having overtaken Greece and Portugal outright).

But this isn’t that surprising when you consider that 4% is equivalent to the trend rate at which Korea has grown from 2003, when its GDP reached Russia’s today; the IMF predicts that by 2013, a decade later, it will hit $35,000.

(Excuse the minor digression from the main topic of this post, but the graph also convincingly demonstrates why my Sino Triumphalism is not misplaced. Even under fairly rosy assumptions for India, it will have have barely converged to China’s 2010 level in a decade’s time – and that assuming that China’s GDP isn’t underestimated. The real question isn’t why Russia isn’t growing as fast as China, but why is China growing so damn fast? See other posts for answers).

Now what about unexpected downsides? Objectively, Russia has solid macro fundamentals – far better than the over-indebted, over-leveraged Western economies (with the partial exceptions of Canada and Scandinavia). This is a trait it shares with the other BRIC’s and many other emerging markets in what is truly an amazing and perhaps unprecedented reversal of places in the last decade. This isn’t grounds for complacency – the 2009 recession is argument enough for that.

Nonetheless, the main facts remain intact: (1) It is growing from a relatively high base; (2) In an environment of approximately zero population growth; (3) The strength of state finances preclude any fundamental economic cataclysm as happened/is happening in Ireland, Greece, Latvia, etc. Taking into account these adjustments, a growth rate of 4% is entirely respectable and better than many if not most countries in the same general income bracket.

* Those interested in the details can read here and here.

EDIT: This article has been translated into Russian at Inosmi.Ru (Российская экономическая «стагнация» в глобальной перспективе).

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

Not really arguing anything in this post, just sharing some interesting stats I found about the affluent class in Russia (as compared with BRIC’s and others).

First, as we know Russia is (in)famous for the opulence of it oligarchy. But according to the research firm Wealth-X, despite a relatively high number of billionaires, its overall share of Ultra High Net Worth Individuals (UHNW) is far more modest as you can see in the table below. As a percentage of GDP (caveat: this is comparing apples and oranges, but still instructive since national wealth is correlated to yearly output), the wealth of the Russian UHNW’s is equal to 43% of a 1.5tn GDP in 2010 (as compared with 28% in China, 43% in Brazil, 44% in the US, and 55% in India).

So, same picture as with income inequality – as I’ve noted before on this blog, Russia’s levels of inequality are in fact quite modest by world standards – with a Gini index of about 40, it is higher than most European countries (25-35) but lower than the US and China (45) and most Latin American countries (50+).

Now what’s really distinctive about Russia’s ultra-rich is that billionaires comprise a high percentage of all UHNW individuals – some 7% of them, as opposed to about 1% in the other countries; and those same billionaires control 84% of that group’s total wealth, as opposed to 33% in Brazil and China, 25% in the US, and 20% in India.

Is Russia’s concentration of wealth at the very top of the top good or bad? It’s hard to say. It ultimately depends on your view of the merits of the upper middle class and their values. If you believe it reinforces social stability and creates economic dynamism, then this is a weakness. If on the other hand restricting the emergence of a class system and enhancing state power are held to be important, then Russia’s structure is better (after all, it’s easier to influence 100 odd billionaires than keep track of thousands of multimillionaires).

One interesting (and puzzling?) thing I’ve noticed is that Sweden seems to have a similar structure of wealth ownership. This country of 9 million has 10 billionaires – that is almost as many as France (12) or Italy (13), whose populations are six or seven times bigger, and almost as many per capita as the United States. Considering that it’s one of the most equal countries in the world, this leaves very little room for the millionaire class (which I guess makes sense on account of its high income tax rates).

Second, I was trolling Forbes’ list of Russia billionaires for 2011 and counted up the wealth of those known to be friends of Putin (Gennady Timchenko of Gunvor, oil transport and Yury Kovalchuk, banking – through the Ozero dacha coop; and Arkady Rotenberg, of construction, inc. of the controversial Khimki route – through judo). It came up to around $8.1 billion of the total $432.7 billion.

That is a very comfortable sum, of course, but doesn’t really support the oft peddled line that friends of Putin are corruptly buying up most of the Russian economy. Little doubt that Timchenko et al. got by some or most of their wealth “unfairly” (and I assume they’ll be expected to return some of the favors to Putin & Co. once they retire) but that’s just really existing capitalism most places in the world for you.

* Kudos to those who got the Pelevin reference.

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

future-superpowers Most projections of future trends in national power fail to appreciate the importance of three crucial factors: (1) the declining EROEI of energy resources (including, but not limited to, “peak oil”); (2) the importance of human capital to economic growth, especially in developing countries’ attempts to “catch up” to the advanced world; and (3) the impacts of climate change, which are projected to be more and more catastrophic with every passing year. Disregarding these trends produces predictions such as George Friedman’s (STRATFOR) argument that Mexico – a low human capital country experiencing plummeting oil production and growing water stress – will become a superpower by 2100.

Using my current estimates of Comprehensive National Power as a base (an index of power that attempts to express a nation’s economic, military, and cultural power in a single number), I will specially stress the above factors in my analysis of future global power trends. Some results will look plausible and familiar (e.g. China overtaking the US as a superpower by the 2020′s); others will appear utterly bizarre (e.g. Canada becoming a major Great Power in by the end of the century, while India and Brazil plummet back into obscurity). But they are nonetheless all plausible and even likely outcomes, derived from bringing together worlds that all too often are considered independently of each other: the economy; human capital; geopolitics; energetics; and climate change.

There may of course be unexpected discontinuities – popularized as Black Swans by Nassim Taleb – that unravel these projections (the probability of their happening increasing exponentially over time). This will be covered in greater depth below. In the meantime, bear this caveat in mind as you read the rest of the post.

comprehensive-national-power

[Graph shows CNP of the greatest Powers 1980-2100; the "superpower" is always at 100 and all other Great Powers are shown relative to it. Click to enlarge.]

Phase 1: The End of Pax Americana (1980-2025)

The US is the current superpower, but China is rapidly making up ground. Its real GDP is now at $10 trillion, though according to some estimates it has already overtaken the $14.5 trillion American economy.

Some critics claim that nominal GDP is a better measure of power, even using these figures to claim that even at 10% growth it will be decades before China surpasses the US. This is a product of economic illiteracy, because it doesn’t take into account the convergence of Chinese price levels to those of developed countries (its nominal GDP has been expanding at more than 20% in the last 5 years).

There are a number of other factors that are often quoted to predict the doom of China’s rise, such as: (1) Growing regional disparities; (2) Income inequality; (3) Environmental degradation; (4) Bad loans and financial collapse, aka Japan; (5) Aging population; (6) Excessive export dependency; (7) Social unrest; (8) Authoritarian nature of its Marxist-Leninist political model.

Suffice to say that they are either common to most industrializing countries (1-3, 7); will only seriously affect it by the time its already developed (4-5); are overestimated (4, 6); or it is unclear why they should derail its economic ascent for long even if they lead to a democratizing revolution (7-8). I address all these points in detail here.

In any case, most of these are factors have yet to be realized, whereas many of the same trends undermining US power are already in evidence. You can point out the accumulating weight of China’s bad loans, but it is the Western financial system that had to be bailed out in 2008 at social expense; you can argue that the aging of China’s population will bankrupt its (minimal) social net, but it is the US that is facing a budget deficit of >10% of GDP and a national debt soaring into the stratosphere.

China is already the world’s largest manufacturing power. On current trends, it is due to overtake the US economy by the mid-2010′s (followed in nominal terms sometime in the 2020′s, as restrictions on the yuan are lifted and it appreciates). Since China produces its own military hardware, real GDP is what matters; consequently, it will take less relative effort for the PLA to match and overtake the US (especially in the crucial East Asian region and the Indian Ocean). As Paul Kennedy noted in The Rise and Fall of the Great Powers (of which, incidentally, the Chinese are great fans) military and political power follows naturally in the wake of economic power, whereas trying to achieve results from the opposite directions leads to the “imperial overstretch” that contributed to Soviet collapse and is now undermining American power.

Which brings us to the last point. China’s population is four times bigger than America’s, and human capital among the youngest generations is now as good as the US average. This makes its per capita convergence – and consequently, its ascent to economic primacy – almost inevitable.

But rather than assessing the situation dispassionately and preparing for a strategic retreat, the US is digging in all fronts: foreign wars, deficit spending, oil dependence, political gridlock, etc. This increases the probability that US decline will take the form of a sudden collapse, as of Argentina’s in 1999-2002, instead of fading away like the British Empire after 1945.

Phase 2: The Return of the Middle Kingdom (2020-2075)

The cultural decline will be slower. It took Latin more than a millennium after the collapse of the Roman Empire to lose its status as a lingua franca. Needless to say, the US will still retain a great deal of power by virtue of its large population and developed economy, it will remain in second place, almost no matter what, well into the 21st century. Furthermore, it will retain its deep ties – economic, cultural, etc. – with the Anglo-Saxon world (the UK, Canada, Australia, New Zealand) and, to a lesser extent, Europe. Hollywood, Silicon Valley, and the Ivy League will remain staples of global culture and technology.

However, there’s only so much power you can exercise through the English language, Google, or even Chuck Norris. For everything else there’s China – after a two hundred year break (a mere blip in its millennial history), the Middle Kingdom will have returned to its rightful place at the center of the world.

China is now roughly where South Korea was in 1990. A similar growth profile will by 2030 leave its economic power equal to 25 of today’s Koreas. Imagine that!

It’s unclear what political system China will have by then. Democratization on the Taiwanese model is not inevitable. The Chinese Communist Party (CCP) has studied the Soviet collapse in rigorous detail and is determined not to repeat its liberalizing mistakes. What I consider at least equally likely is an emergence of a “consultative Leninism”, in which the current NEPist model is opened up to democratic elements (e.g. competitive local elections; policy-making based on opinion polling) but under the continuing hegemony of the CCP. This could be China’s own, sovereign road to democracy.

Other possibilities are also possible, e.g. a Singaporean authoritarianism, or “managed democracy” in the style of Putin’s Russia. But short of a reversion to Maoism – which is exceedingly unlikely, given that China now has a commercial class that would strongly oppose it – it’s unclear how the widespread mantra that political change must be accompanied by a cessation of economic growth can be justified.

China’s rise will be accompanied by the flock of BRIC’s trailing in its wake: Brazil, Russia, and India. The first two will enjoy a massive resource windfall from selling their plentiful energy, mineral, and water (in the form of food) reserves to a world made increasingly ravenous by depletion elsewhere and the effects of an increasingly destructive and chaotic climate. Russia will remain a first-class Great Power, and India will join its ranks; Brazil will be the most prominent of the second-class powers, which will also include France, Canada, Germany, Japan, the UK, Turkey, and Korea.

As with China, there are many reasons cited to explain for why Russia will fail to achieve its promise, such as (1) demographic decline; (2) corruption; (3) resource-based economy; (4) crumbling infrastructure; (5) authoritarianism. All these factors are either exaggerated (1-5), typical of most middle-income countries (2, 4), or it is unclear why they are necessarily negatives at all (3, 5). But it also has great strengths. Russia combines the BRIC’s fiscal sturdiness and economic dynamism (both lacking in the West) with a GDP per capita that is almost twice that of the next richest BRIC, Brazil. Its human capital is on a par with the developed world’s, allowing for an easy convergence. Crucially, Russia is perfectly positioned for the coming age of “scarcity industrialism”, in which food, energy, and energy prices soar and global warming opens up vast regions of the country, including the Arctic, to shipping, energy production, agriculture, and habitation. Even at current growth rates of 4% per year, Russia should converge to European income levels by 2020-25 and spend the next few decades comfortably, its energy riches shielded by its nuclear umbrella.

Obviously Russia lacks the population mass, at least at this stage, to become a true superpower (even if it absorbs the other post-Soviet nations into a Eurasian union). This is not the case for India, which will overtake China to become the world’s most populous nation by 2025. But within that fast-growing population illiteracy is still rife and 47% of children remain malnourished. Though it suffers from many the usual ailments of low-income countries – creaky infrastructure, caste-based inequalities, sluggish courts and bureaucracy, etc. – it’s India’s low level of human capital that is the primary cause of its falling so far behind China (manufacturing output is an order of magnitude lower, and the poorest Chinese provinces are equal to the Indian average). Nonetheless, India has the coal to power itself, and temperatures will remain within acceptable bounds for producing stagnant grain harvests for at least the next few decades. And quantity counts. That is why India will become a first-rank Great Power, equaling Russia and approaching the US.

With its ample lands and resources (e.g. iron, oil), not to mention its successes with sugar cane-derived ethanol, Brazil is set to enjoy – much like Russia – a comfortable existence as a regional hegemon in a world of high prices for food, energy and minerals. Its military strength is paltry, but irrelevant given its distance from other Great Powers. It is also the least corrupt of the BRIC’s. However, its prospects for true superpowerdom are constrained by relatively low human capital; as its economy wasn’t distorted by a legacy of socialist mismanagement (as with China or Russia), its GDP per capita is already, more or less, “where it should be.” In the background, Canada will be getting very rich off supplying fuels and water to an increasingly parched and energy-starved US. However, for the time being its profile will remain modest.

The European Union is conspicuous by its absence. Europe is no longer united by the memory of war and the Soviet threat, and each country concerned above all for its own national interests. This is not a stable foundation for a union, and as such it will likely retreat into something like a glorified free trade area by the 2020′s. Real power will be concentrated among the big European Powers, which will carve out spheres of influence and compete with each other for neo-colonial influence: e.g. France (Maghreb); Germany (East-Central Europe); Turkey (Balkans, Azerbaijan, Arab world); the Scandinavian bloc; the Visegrad bloc. Arguably there is already evidence of this in the Anglo-French effort to oust Qaddafi. Read more here.

No European Power will have the mass to become a first-rank Great Power, though it may be (marginally) possible for France and definitely possible for coalitions of European Powers. By themselves, all the European nations will be lingering near the bottom of the CNP scale.

There is no point discussing any other country or alliance. NATO is becoming more irrelevant with each passing year. Japan is technologically advanced, but reliant on the US for its security and dependent on the same oceanic supply routes as China; as soon as the latter becomes the new regional hegemon, Japan’s effective sovereignty is history. Indonesia is similar India, but five times smaller. South Africa, Mexico, Australia, Nigeria, Iran, and Saudi Arabia are all some combination of (1) too underpopulated, (2) too underdeveloped, and (3) too vulnerable to climate change.

Phase 3: Towards a Russian Century? (2075-?)

Beyond 2050 we are getting into very foggy territory. Just think of an educated European observing the world one century ago, in 1911 – could he have predicted Germany’s utter collapse and occupation, and the rise of Russia (now known as the USSR) as a superpower along with the (vastly stronger) US superpower? And could that observer in 1951 have predicted that a China only recently consolidated under Communist control, after a century of stagnation, invasions and warlordism, would just fifty years later have overtaken a Russia that had become a basketcase?

Any number of black swans may have intervened by 2050, steering any projections wildly of course. Here are a few examples:

  • China and the US cooperate to build a massive global geoengineering project in the 2040′s that succeeds at checking global warming. This removes the conditions for Russia’s rise to a dominant position.
  • Facing desiccation in the West and flooding in the South, the US annexes Canada. As a result, it becomes the greatest Power in the world.
  • There is a total war between nuclear Powers, perhaps triggered by a Chinese land grab for the Russian Far East. Whoever “wins” (if that’s the right term), well, wins.
  • The development of nuclear fusion, space-based solar power, or some other technology, that reverses the secular trend towards declining EROEI. This massively undercuts the power of major resource exporters, such as Russia, Canada, and Brazil.
  • A transition to sustainable development. With global CO2 emissions setting a new record in 2010 (just one year after the deepest global recession in the past half-century), and setting the 2C warming target practically out of reach, there is little hope of that without geoengineering (after 2C the process is expected to display a runaway dynamic due to positive feedback loops). But miracles happen, sometimes.
  • A technological singularity. Perhaps this catapults the nation where it first appears into a dominant leadership position, much like Britain during the industrial revolution; or maybe it is so transnational and transformative in its scope that it makes the very idea of nations and national power obsolete. By definition, a technological singularity is beyond the “event horizon” of our limited imaginations, so there’s little more I can say on this.

For the purposes of completing the scenario to 2100, I will assume that the above don’t occur. Instead, the dominant forces in previous decades – economic convergence; declining EROEI and minerals accessibility; accelerating climate change – remain constants.

By the second half the century, climate change will start to dominate over everything else. The latest projections tend to lean towards the high end of the IPCC’s 1-6C warming range for the next century (the scariest of them show that by 2300 most of the world outside the Arctic may become downright lethal during summer). Warming of 4C is the point at which agriculture starts to not only experience difficulties but outright collapse throughout most of the equator and mid-latitudes.

http://youtu.be/MePAro1PsiI

[Map of global drought under aggregated runs of IPCC's models. Most of the US, southern Europe, the Middle East, Africa, and Latin America will be in an unprecedented mega-drought. Read more here.]

All the problems currently experienced by China and India with stagnant grain harvests will increase further, requiring very costly counter-measures. Now this is not to say that there will necessarily be mass famine and “dieoff”, as doomers like to predict. It is certainly a possibility, especially under the most severe warming scenarios, but growing food production in Russia, Canada, and even East Africa may make up the difference. In particular, China should be relatively safe, because by then it should be a developed country.

On the other hand, the Chinese state will have its hands full mitigating disaster after climate disaster. The spate of rebuilding after the flooding of New Orleans, which actually boosted US GDP, was one thing; when commercial metropolises like Shanghai are getting flooded and coastal property prices devaluing to nothing, it is economic and financial apocalypse.

What’s possible, then, is the following scenario. By the 2070′s, the Chinese state becomes so preoccupied with maintaining food stability, and the energy and mineral flows that enable industrial society in general, that the surplus resources and administrative capacity to do anything else diminish. This is not a new development in its history. For much of the 19th century, Qing China was the world’s biggest economy by GDP, even though Britain was becoming far more industrialized. This was because China was at its Malthusian limits; the population level was stable, but it was always on the edge of famine, and presided over by a government made weak by lack of taxable surpluses and unable to check the corruption and independence of its own public officials. The state was unable to defend itself, to modernize the country, or to guarantee its independence.

India is in a worse bind, and not just because it will likely remain less developed than China to that time. The Chinese, at least, have the reserve option of migrating some of their surplus population to Tibet (or East Africa, if they conquer it). India doesn’t have that, and faces the unwelcome prospect of a further flood of excess population – this time from a collapsing Pakistan (the Indus to run dry by late century, as Himalayan glaciers melt) and inundating Bangladesh.

A consequence is that states with far smaller populations and economies, but greater surplus resources – will emerge as new Great Powers. Primarily, this means Russia, but Canada would also be in this category, as will Scandinavia, Alaska, and (in one or two more centuries) whoever settles or controls Greenland. By virtue of their control over most of the world’s remaining critical resources – water (not only for food, but electricity); gas; coal; metals; whatever’s left of oil – they will wield unprecedented strategic power over the countries to the south.

Perhaps a colonial relationship will develop, in which the Arctic nations send resources and allow southern workers to farm their lands in exchange for selling off their industrial assets and eventually ceding political sovereignty. In the very long term, this will logically lead to the development of caste-based societies in Russia and Canada, as the sheer magnitude of climate refugees would mean that in any integration policy, it would be the indigenous inhabitants who would have to do most of the integrating (and hence politically impracticable).

By the end of the century – a world of two Arctic superpowers, Russia and Canada?

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

There’s been lots of fanfare over China’s GDP overtaking Japan’s in Q2 2010 (coming hard on the heels of a big ruckus over its DF-21 “carrier killing” ballistic missile and rising tensions with the US over North Korea and the South China Sea). The big debate is now whether China will overtake the US as the world’s biggest economy by the 2030′s (as originally argued by Goldman Sachs in their classic Dreaming with BRICs paper), or whether its nomenklatura authoritarianism, centrifugal tendencies and demographic problems will preclude it from ever challenging Pax Americana. My view is that China is underestimated even by many of its proponents: underlying tendencies in world economics and energetics indicate that China’s GDP will overtake America’s before 2020, enabling it to emerge as the last superpower by the 2020′s.

First, there is a major delusion that affects a disturbing amount of the commentary surrounding the size of the American and Chinese economies. Newsflash: nominal GDP and real GDP are different things! China overtook Japan in nominal GDP this quarter, but its real level of output has been the world’s second largest for almost a decade*. The reason China’s nominal, or market exchange rate, GDP is twice lower than its real GDP is because its currency is undervalued relative to the US dollar – simply put, living in China is a lot cheaper than in America. But it’s not an accurate proxy for the actual output of the Chinese economy, which is now at around 2/3 of the US level (IMF)**. The “purchasing power parity” GDP is better suited for gauging a country’s real living standards and economic strength.

Furthermore, many analysts are making the stunningly incompetent, sub-Econ 101 mistake of projecting Chinese’s 10% real growth rates to its nominal GDP. (Needless to say, this is totally absurd; China’s nominal GDP is growing much faster than its real GDP, because as it gets richer its price levels begin to approach those of the developed world). The convenient result of such calculations is to delay China’s sorpasso of the US economy decades into the far future.

Applying linear projections of 10% growth for Chinese GDP and 3% growth for US GDP sees the Middle Kingdom overtaking its superpower rival by 2017. By 2025, China’s economy is 75% bigger than the US.

china-usa-gdp-1

Now one may make the entirely valid observation that linear extrapolation of current trends is bad futurism. I agree. China’s GDP growth will like moderate in the years ahead, as China develops and gets less bang for each investment yuan. On the other hand, there is still plenty of scope for rapid catch-up. China today is where South Korea was in late 1980′s and its trend rate of growth is slightly higher at 10% relative to Korea’s 8% from the 1960′s to the 1980′s. As China gets richer, this growth rate can be expected to ease to 7-8% (Korea in the 1990′s) and 4-5% (Korea in the 2000′s).

The US cannot expect to see anything approaching 3% growth in the next decade. The realistic scenario is 1) a private sector deleveraging as households begin to rein back the debt-income ratios to some semblance of normality and 2) massive yearly budget deficits supporting a permanently weak economy at a 0-1% growth level. Think an American version of Japan’s Lost Decade.

In the graph below, China grows at 10% until 2015, 7% until 2020, and 5% thereafter – roughly replicating South Korea’s trajectory from 1985/1990. The US slugs along at 1% until 2020, then improves to 2%. In this scenario, China sails past the US in 2015 and is 60% larger by 2025.

china-usa-gdp-2

In reality, the world is far more complex than macroeconomics alone can describe. As I argued in Shifting Winds, American hegemony is metastable: though outwardly imposing, an interlinked failure in critical nodes such as energy (e.g. oil shock), finance (e.g. currency flight) and geopolitics (e.g. Iran) can lead to a cascading collapse of the entire system. Few will risk sticking their neck out with such predictions beforehand, but once the collapse becomes visible in our rear-view mirror, it will acquire the tinge of historical inevitability.

The American service-based economy is reliant on cheap and reliable petroleum supplies to keep the office plankton fed and mobile, but is put at critical risk by the imminent peaking of global oil supplies. The financial / credit system relies on trust and belief (“credo”) in future growth to keep functioning as an economic fertilizer, but it is threatened by awning US economic disbalances and the possibility of disruptions in energy supplies. Finally, both the energy and the financial crisis can be triggered by a single geopolitical event, such as a successful Iranian blockade of the Straits of Hormuz (e.g. in retaliation for an Israeli strike against its nuclear facilities).

The risk of cascaded collapse would not exist if Pax Americana faced fewer challenges, or if its foundations were still strong and wholesome. They are most definitely not in our era of permanent deficits, tight oil supplies and imperial overstretch. In the worst case scenario, this collapse could manifest itself in a fall in GDP of up to 30% to a new “steady state” output level.

But at least the US will recover quickly, right? Not likely. Though a US dollar collapse will restore competitivity to some of its older industries, global resource constraints will prevent it from ever fully recovering. Why should increasingly scarce energy sources continue feeding the office plankton of American suburbia, as opposed to Chinese factory cities whose products the entire world wants?

Contrary to popular commentary, China is unlikely to be hurt much by an economic collapse in its prime market. Net exports only account for 7% of China’s GDP, so though exports will decline, so will the imports used to assemble exports, and the overall effect will be modest. Though ebbing US demand for Chinese goods will hurt coastal regions, create unemployment and incite low-level protests, it is unlikely to reach a critical level since China can refocus development efforts on the interior and raising domestic consumption (there are numerous signs that this is already happening).

China’s biggest challenge will be the peaking of its coal production and AGW-induced declines in crop yields within ten to twenty years. Mitigating these developments will require a great deal of capital and ingenuity, things China is fortunate to have in abundance. Ultimately, with 20% of the world’s population but just 7% of its arable land, the Limits to Growth may cap China’s peak GDP at not much more than America’s current level.

On to our third scenario. From 2011, some combination of critical system shocks initiates a cascading collapse of Pax Americana, resulting in a cumulative US GDP decline of 30% from peak (this is similar to Latvia’s collapse in 2007-2009). After that, there is a permanent zastoi – unlike in previous emerging market crises, a significant recovery will be impossible in the new world of neo-mercantilism and energy constraints. China will be able to leap past the US sometime around 2013-15 and grow to more than double its size by 2025 – despite the slowing of China’s own growth due to peak exergy and the natural effects of economic catch-up.

china-usa-gdp-3

What is the probability of each of these scenarios happening? In my opinion, Scenario 1 is pure fantasy. Scenario 2 is what I’d vouch for in “respectable” conversation. Scenario 3 is what I really believe will happen (and what I tend to write about on this blog).

In any case, the general outline is clear: no matter which “prism” you see the world through – be it techno-cornucopian, “realist”, or peakist – it appears that China, by sheer virtue of combining 1.3bn souls with modern technics, is destined to soar past the US to become the leading pole, if not of the world system, then certainly of the Pacific region.

This breakout will be all the more dramatic under the American collapse scenario: wracked by internal decline and preoccupied with internecine politicking, it’s not impossible to imagine the US simply not noticing the ebbing of its influence in East Asia. Of course, there’s a perfect precedent for this: see how post-Maoist China managed to break past the seemingly impregnable Soviet empire that collapsed into anarchic stasis in the early 1990′s.

russia-china-gdp

[Angus Maddison's data adjusted to equalize with IMF 2008 data; note that "former USSR" is a very rough estimate].

* There’s a big debate on the reliability of official Chinese economic statistics. Are Chinese statistics manipulated? by Gao Xu is a recommended rebuttal h/t “in the loop”.

** That is also assuming that the 30% downwards revision to Chinese GDP by the World Bank and IMF a few years ago was well-founded and not undertaken out of political considerations to preserve America’s #1 status. If not, China’s real GDP may already be surging past America’s.

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

In the wake of the economic crisis in which Russia’s GDP fell by a stunning 7.9% in 2009, its status as a BRIC economy – with its connotations of promise and progress – was brought into question. After all, isn’t it a dying nation with rapidly degrading infrastructure? Isn’t it amazingly corrupt? Wouldn’t its contempt for liberal democratic values doom it to stagnation? And what happens now that oil production, the main locomotive of the Russia economy, has stalled thanks to the politicized persecution of “brilliant entrepreneurs” like Mikhail Khodorkovsky? Indeed, was not its economic collapse in 2009 a portent of things to come? And so on*.

There are many reasons to dismiss these arguments, as I will try to show in this post. First, the very inventor of the BRICs concept, Jim O’Neill of Goldman Sachs (who has probably thought more about it than anyone else) dismisses the argument that Russia is ineligible on the basis that is was the only country amongst them to show (highly) negative growth during the economic crisis as “rubbish”. He goes on to add that “the only reason that Russia was hurt so badly was unlike the others, it borrowed heavily on the international capital markets and, of course, it is dependent on the price of oil.” ** Of course, the Russian economy’s dependence on Western intermediation for its credit is a structural weakness, and one that was exposed in late 2008. But potential faultlines like this are hardly unique amongst the BRICs – its most promising member, China, critically depends on exports for continued growth***, and its banks are saddled with bad debts.

Second, many of these arguments from demography (“dying Russia”), infrastructure (“crumbling Russia”), and institutions (“Zaire with permafrost”) are both 1) exaggerated in severity and 2) exaggerated in their influence on economic development.

Take Russia’s plummeting population… except that it hasn’t been plummeting or even falling since 2009! (It is now stagnant). True, Russia is going to see a substantial fall in its labor pool – according to the Rosstat medium scenario, from 62% of the total population now to a truly apocalyptic 55% by 2030****. (Yes, that was sarcasm). And though its population will age substantially in the next few decades, there probably won’t be any problems with paying pensions thanks to its resource wealth. Basically, Russia’s demography is neither as bad as it is usually portrayed in the Western media, nor will it negatively impact on its future economic development in any significant way.

Now what about Russia’s crumbling infrastructure? Though Russia having no roads, only directions may be cliché*****, it does undoubtedly have an element of truth. But look at this from another perspective. Russia might have plenty of crumbling concrete and rusting iron carcasses, interspersed with the occasional modern highway or recently-built gleaming showpiece – but does it really, really need better infrastructure, or are its resources better spent elsewhere? At least unlike India, or even Brazil or China, Russia has a complete industrial infrastructure. Its “Khrushchevki” prefabricated concrete tower blocs and disused railway stocks may give it a decrepit, even post-apocalyptic air, but the equivalent scene in India or China may well consist of a village of peasant huts with dirt paths meandering through it! In other words, Russia needs new infrastructure relatively less than the other BRICs (yet even so, Merrill Lynch predicted it would spend more in the next three years than either India or Brazil, despite its smaller population)!

Finally, yes – Russian institutions are corrupt and its state is illiberal and (semi-)authoritarian, though arguably it is democratic****** (of course the degree to which this is the case can be subject to endless debate). However, the evidence indicates that institutions have historically had relatively little impact on economic growth or “convergence”. A multi-author NBER study in 2004 on Do Institutions Cause Growth? was summarized thus:

We revisit the debate over whether political institutions cause economic growth, or whether, alternatively, growth and human capital accumulation lead to institutional improvement. We find that most indicators of institutional quality used to establish the proposition that institutions cause growth are constructed to be conceptually unsuitable for that purpose. We also find that some of the instrumental variable techniques used in the literature are flawed. Basic OLS results, as well as a variety of additional evidence, suggest that a) human capital is a more basic source of growth than are the institutions, b) poor countries get out of poverty through good policies, often pursued by dictators, and c) subsequently improve their political institutions.

Russia seems to fit the above model reasonably well. It has high human capital – far better than China or Brazil, let alone India. As I wrote earlier, “Around 70% of Russians go into higher education, compared with just 20-25% of Brazilians or Chinese… in the 2006 PISA science assessment, only 15.2% of Brazilians possessed skills beyond those needed for purely linear problem-solving, compared with 47.6% of Russian and 51.3% of American students”. Already resembling a developed country in human capital and having pursued reasonably effective economic policies under Putin, Russia may now slowly be moving towards surmounting that last institutional hurdle, with Medvedev now taking aim at the MVD (police) and bureaucracy.

Finally, it would be well to point out one area in which Russia has a decisive advantage over the other BRICs – it is already a much more developed economy and society. As of 2009, and despite the economic crisis, Russia’s real GDP per capita was 14,900$, far higher than Brazil’s 10,500$, China’s 6,600$, and India’s 2,900$ (not to mention that Russia’s Gini index of wealth inequality, at 41, is lower than both China’s 47 and Brazil’s 57). Really, the most convincing reason to leave Russia out of the BRICs is not that it doesn’t belong there, but that it won’t grow as fast as the others simply because it is already substantially richer than them and as such no longer has as much space to catch up! (And hence would not be as attractive to investors)…

That said, Russia in the next decade will probably grow relatively fast nonetheless – not only because it is a well-educated nation with substantial room left for “catch up” growth to developed world levels, but because of a very favorable external environment. First, the (probable) peaking of oil production and China’s ravenous growth******* means that oil and resource prices will remain high, bringing in the hard currencies that would help Russia buttress its fiscal position and buy the technologies it needs to modernize itself from the West.

Second, in a dramatic turnaround from 1998, Russia today is now in a much stronger long-term fiscal position than practically any Western developed country. The article Rerating Russia by Ben Aris is worth quoting in extenso:

Russia’s credit rating is way too low, as it boasts some of the strongest fundamentals in the world, but it’s still tarred by its increasingly irrelevant “emerging market” moniker… The world has been turned upside down by the global financial crisis. Nowhere is this clearer than in [Greece's and Russia's] bond offerings. While Greece is sagging under a heavy public debt burden, Russia not only has almost no debt to speak off (Capital Economics predicts 9.5% of GDP by the end of this year), but also has well over $400bn in hard currency reserves. That’s five times more than either the US or UK, making it the third-richest country in the world in terms of cash. …

Russia is enjoying a mirror image of the problems its more developed peers are facing up to. For example, the UK is one of the most indebted countries in Europe now after it borrowed a massive €257bn last year, ratcheting up its leverage to borrow about €2.80 for every €1 that the Bank of England is holding in its vaults as a reserve. The US is in similar dire straits.

… Currently, Russian sovereign debt has a ‘BBB’ rating, which is only two notches above junk bond status. At the same time the US and UK have (so far) kept their ‘AAA’ ratings despite their worsening finances. Most economists are predicting Europe’s external debt to rise from 100% of GDP to 130% over the next five years, while that of Russia is expected to continue falling. Indeed, analysts say that the ratings of developed countries’ have disconnected with reality, while countries like Russia are being penalised. “On the basis of our model, the [best possible] ‘AAA’ rating for the US and the United Kingdom cannot be explained, as these two countries are rated two to three rating notches better than countries with comparable fundamental data,” Ingo Jungwirth, an analyst with Raiffeisen International, wrote in a study in March.

His study found that based solely on the country’s finances, both the US and UK should be downgraded three notches to a ‘AA’. However, if the ratings agency actually went through with a downgrade, the cost of borrowing to both countries would spike and spark a financial global crisis, which would probably wreck the global economy for decades. Jungwirth suggests that these two countries earn a “bonus” for being too big to fail.

On the flip side, Russia is underrated given the strength of its financial position. Consider that on the day Iceland defaulted on its debt at the start of this crisis, it enjoyed higher ratings than Russia. Today Russia’s ‘Baa1′ rating from Moody’s Investors Service is still the same as bailout-dependent Iceland’s. Fitch Ratings and Standard & Poor’s currently class Russian debt as ‘BBB’ – even lower than Moody’s. …

There are already some signs that investors are cottoning on to the strength of the Russian bond offering. After US investment bank Lehman Brothers collapsed, the spreads on UK credit defaults swaps (CDS) … have soared by 281 basis points (bps). At the same time, Russia’s CDS have actually contracted by 17 bps over the same period, making it one of the few countries in the world deemed by investors to be a safer place to invest than it was before the start of the crisis. …

The US, Japan, and most of Europe have reached their limits to growth. Now faced with unsustainable budget deficits, ballooning debts, and intense (BRIC-centered) competition for remaining high net energy resources, the long era of Western hegemony is now coming to an end. It is thus with some skepticism and bemusement that I view the smug commentary in the Western media on the Russian Foreign Ministry leak published at R ussian Newsweek********, which they claim show Moscow’s “planning to reorient its foreign policy in a more pragmatic and pro-Western direction”, in apparent acknowledgement of its failed policies of dirigisme within and confrontation without.

In reality, the Kremlin’s détente-for-modernization leak is more likely to be an Aesopian telegram that conveys Russia’s satisfaction with what it has already achieved and of the new world order that is emerging. In the past decade, the Russian state has consolidated and reestablished a sphere of “privileged interests” across Eurasia, decisively purging Ukraine and Central Asia of Western influence. Meanwhile, with the United States facing severe fiscal stress and geopolitical challenges on other fronts in the Middle East and the Far East, the West now has neither strength nor will to push back against Russia beyond Visegrad, and is beginning to lose its unity and cohesion. Russia’s security dilemma is retreating, as a new geopolitical equilibrium crystallizes along the marches between the West and Eurasia.

Since good fences make good neighbors, this paves the way for better relations between Russia and some Western countries, in particular Germany, Italy, and France (in the Russian leak, Britain is conspicuous in its absence). Take the former. What interest does Germany really have in sending soldiers and paying taxes to perform a doomed “civilizing mission” in Afghanistan for the US, or in subsidizing Mediterranean profligacy while imposing stringent discipline on itself in return for their (aging and shrinking) markets? On the other hand, there is great potential for synergy between the German and Russian economies. The Teutonic industrialists have technologies and capital that Russia now needs to modernize its manufacturing and hi-tech industries, while the Russians have the energy and mineral resources that could keep German factories humming well into the age of scarcity industrialism. Back in October 2009, I suggested that this economic relation could be the basis for a new German-Russian alliance; now the New York Times has caught on.

The American age of dominance is waning and will soon come to an end and a new constellation of Powers will take its place. Far from being a shunned BRIC in a world run by the West, Russia will be one of the main poles in the new world of the Rest.

* See Nouriel Roubini, Anders Aslund or Julia Ioffe for the standard spiel.

** See “The R of the BRICs Remains Solid” part of this post.

*** Of course there are arguments that the magnitude of these problems are overstated.

**** The irony is that the more Russia’s (abnormally low) life expectancy and (now fairly average by European standards) fertility rates improve, the worse its dependency ratio will get in the decades ahead! Yet another demonstration of the stupidity of simple-minded extrapolation of population trends to future economic prospects.

***** In any case, in an age of peak oil, the wisdom of expanding road networks further is open to question. Russia would be better served by modernizing its railway system, on which it plans to spend 390bn $ by 2030.

****** On the basis that it fulfills democratic norms on paper although not in spirit, and in the sense that most Russians believe Russia is free and democratic (as was not the case during the Yeltsin period). Both the Polity IV political database and Economist Democracy Index perceive Russia as a kind of hybrid regime that is neither liberal democratic nor fully authoritarian.

******* This illustrates another important point – the BRICs are greater than the sum of their parts; they are more of an idea and a concept, than some kind of ranking in which countries can be kicked out of for (perceived) lack of performance. Strong Chinese and Indian growth, for example, help pull along nations like Russia or Brazil that are more heavily based in resource extraction.

******** See the full “О Программе эффективного использования на системной основе внешнеполитических факторов в целях долгосрочного развития Российской Федерации” here.

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

Three months ago I wrote an extensive analysis of Russia’s economy during the crisis in which I said that although it is going to be damaged by the shutdown of its traditional financing mechanism – cheap credit from the West – sovereign solvency will not be threatened and there will be a strong recovery in the second half. I was too optimistic, mostly because I misunderestimated the sheer severity of the global crash. That said, let us see how well its predictions stack up against reality more than three months on. I will also update my thoughts on the US and world economy, including for the more distant future.

Following the ruble correction, the trade balance was shifting back into positive territory. As of January, although resource exports fell by about a half the decline was less pronounced, with machines / equipment and chemicals falling 30% and consumer goods / agricultural products by 20% – this despite the internal credit crunch, shrinking foreign demand and increasing protectionism. Imports fell severely, especially for the biggest category – cars and equipment. This is not surprising – import tariffs were raised on cars and sales have plummeted, while there’s little need for new physical capital (machine tools, etc) when demand falls for the goods it is used to make.

In my essay, setting oil at 50$ per barrel and making some assumptions resulted in 2009 exports of 245bn $ and imports of 223bn $ – annualizing the January figures gives 204bn $ and 104bn $, respectively. Pretty much what I expected for exports, but imports will probably rise as inventories clear out and the ruble (perhaps) strengthens against the US dollar and the euro, which is quite possible since I expect oil to finish the year between 60$ and 80$ (PS. In the article I guessed that oil will average 50$ for 2009 – looks like its going to be significantly higher, as it is already hovering around 52$). Nonetheless, the current account will remain very much in the black. Keeping our capital account assumptions constant for next year, I stick with the “78bn $ in the medium scenario (50$ oil)” (that assumed a 100bn $ capital outflow in 2009 and higher imports – now, some economists are predicting capital outflow will be less than 83bn $), so really the capital account may turn out to be slightly pink instead of deep red).

Despite the ruble correction inflation has not become a major issue. In fact Bank of America Securities-Merrill Lynch expects inflation in Russia to slow dramatically, to just 9% this year.

I was dead wrong about government spending, taking Kudrin at his word that the budget deficit will be at around -1%. In fact, it’s more like -7.4% as spending is increased in the face of a much worse than expected contraction. Still, this is not threatening. Besides, I suspect it will eventually turn out lower since this budget is predicated on average oil prices of 41$ for 2009, which is already looking outdated.

Industrial production started deteriorating in October and accelerated in January, falling 16% year on year.It recovered slightly in February, marking a fall of 13.2% on the same time last year. This is because many manufacturers simply extended the long January holidays to encompass all off the month so as to allow inventories to come down – for instance, after car production plummeted to below 20% of its equivalent 2008 level, it more than doubled to 40% in February.

Industrial production index relative to same month of last year.

Industrial production index relative to same month of last year.

There are a number of convincing arguments that Russia will emerge out of the crisis sooner than many other G7 countries. As Eric Kraus argued in The Wheels of Heaven Stop and earlier, wages and output correct much quicker in Russia than in the developed world. Once the ruble correction restored balance, the salary arrears and barter that were appearing in October-November retreated, as did the specter of outright financial failure and ruble collapse – as acknowledged in the WSJ.

Although the situation remains grim, there are a number of positive indicators. Firstly, the Russian manufacturing PMI surged to 40.6 in February from a truly dismal 34.4 in January. While it is rather lame to rejoice at improvements in second order differentials, the point stands that a few more such jumps and Russian manufacturing output will have plateaued.

Any value below 50 indicates manufacturing decline; above 50 means growth.

Any value below 50 indicates manufacturing decline; above 50 means growth.

It should be noted that Russia’s performance was no worse than the world average. The industrial crisis started in October, the rate of decline troughed at around 34 in Dec-Jan and rose sharply in February. Edward Hugh helpfully collected these graphs into one post at his blog. In the major European countries the crisis took off in August at the latest, hit troughs between 28 and 35, and is still fully in the doldrums. Japan’s PMI is edging up slowly from a catastrophic performance. The decline was not as steep in Poland, but was more prolonged. The US fall started in August, troughed in December and remained at around 35-36 in January and February. It appears to be somewhat better than the global PMI.

The least affected country there is India, which only began falling in November and never went below 44. China’s decline started in September, troughed in November and has since recovered to 45 by February. This is not surprising – their indigenous financial systems were relatively unaffected by the global / Western financial crisis (hmmm, remember all the brouhaha over how China’s financial system was supposed to collapse because of bad loans? And it turned out to be by far the more stable one), while Russian companies relied on Western intermediation to access credit. China tanked more sharply than India because it is more reliant on exports to the developed world, but will now presumably work to stoke domestic demand by countercyclical fiscal policies and more social guarantees.

So I suspect what we have is decoupling from the unwinding. There was a popular thesis around 2007 that the BRICs will manage to escape unscathed from any US slowdown – since then, most pundits consigned this theory to the dustbin. But I won’t be so quick. The shock was sudden and unprecedented – nonetheless, most emerging markets that weathered the tsunami (with the exception of those that got sunk by it, like Ukraine and Latvia) declined less – and are beginning to fall less rapidly – than their First World counterparts. Japan and Germany are getting mauled for their export dependence but they too will eventually plateau and start recovering once their now excess capacity is trimmed down.

The real worry, I believe, is primarily for the likes of the US and the UK. Their fiscal policies and imbalances are unsustainable and what they are now doing, with the charades over “quantitative easing” (translation: printing money), transferring toxic “assets” onto the public account (ed: swallow enough toxicity, and even a beast as large as the federal government could get poisoned) and fiscal stimuli (ed: only countries disciplined enough to run surpluses during the fat years should have this benefit), is postponing the Day of Judgment. I suspect that the fiscal stimuli will be relatively ineffective as they are not market-allocated; develeraging will have to continue regardless (e.g. house prices are still significantly above their longterm position relative to incomes); and the planned US budget deficit of 12% of GDP for 2009 will not be significantly reduced in 2010 or 2011. By that time the world will be abandoning US dollar assets in despair over ever getting repaid; the “solution” would be either a huge (read: politically unacceptable) cut in public spending or ever more money creation (which just feeds the spiral). Interest rates on the debt will rocket. It does not help that oil prices will almost certainly soar over the next five years, probably surpassing their 2008 peak because of peaking oil extraction and full recovery and resumption of growth in Asia.

Back to Russia in 2009. According to Finance Minister Kudrin, normal lending levels have now been restored internally. From looking at the news, it is clear that foreign investment in Russia continues – unlike its pariah-like status after the Soviet Union or 1998, they realize that it remains a promising market since it is just an average-affected country by a world crisis. (E.g. – Peugeot Citroen and Mitsubishi, GE and Magna, LG, etc are all starting to build factories there). Nor are things all bad amongst domestic manufacturers even now. Naval-military construction is even looking to hire people while there is a surplus of unemployed labor. Anecdotally, consumer sentiment remains significantly better than in the US or the UK. Nassim Taleb (of black swan fame) is optimistic. Some respected Russian economists think government predictions for the economy are too gloomy and actually expect significant positive growth this year (some like Sergei Guriev are gloomier). I predicted a range of 0-3% – now I expect it be about 1% to -2%, and certainly not less than -4% (on the latter point, a made a symbolic bet on this in late March with commentator “Michel” at SWP).

Thirdly, the stock market is rising. Along with China, the RTS has been one of the world’s best performing stockmarkets in 2009, rising from around 500 to 700 (of course, after an precipitous fall). Nor was the improvement restricted to the oil and gas sector. This might mean that investors finally predicted how tremendously oversold everything was and are beginning to snap up stuff at bargain prices, thus vindicating my predictions.

Finally, I highly recommend reading the two latest articles by Eric Kraus – the aforementioned The Wheels of Heaven Stop and (Yet Another) Year of Living Dangerously. In particular, the second one puts to rest some popular but false conceptions about Russian economic weaknesses. I’ll quote it in extenso, if you don’t mind Eric!

Unlike many of its emerging market peers, Russia is relatively immune to miscellaneous scourges facing the developing economies, and which threaten a number of Latin American (Mexico, Argentina), EMEA (Ukraine, Georgia, the Baltics, Hungary) and Asian (Indonesia, Thailand, Philippines, Korea) countries with economic collapse:

• Plunging global demand for manufactured goods

Russian exports are primarily in the commodities sector – and the main driver here is likely to be Chinese industrial activity. Manufactured exports are limited to military (a growth sector in troubled times), nuclear power generation, and relatively cost-effective heavy industrial machinery (turbines, power generation, etc.) suitable for the needs of the developing countries – where at least some infrastructure spending is likely to be maintained.

• Inability to fund the current account deficit due to collapse in remittances/bond markets/exports

Russia has no indispensible import requirements, being self-sufficient in all major commodities and basic foodstuffs. In a worst-case scenario, Russia could survive without Mercedes motorcars and French cheese for an unlimited period. Remittances are a negative item on the balance sheet, and the Federal government has virtually no foreign debt to refinance.

• Political instability

With due respects, reports of Russian political unrest are laughable. Whilst a number of EMEA governments are breaking under the stress, Russia remains remarkably quiet. We would note that the Western press, always desperate for bad news as regards Russia, has been recycling a single demonstration by Vladivostok used car dealer for nearly three months now…

Those of us who lived through the 1998 crisis were stuck by the total absence of popular protest – as the crisis worsened, people returned to their dachas to plant potatoes. Perhaps the experience of seventy years of collectivist rule durably chilled the popular enthusiasm for revolution.

As regards the international context, the crisis has diminished any Western ardour for confrontational politics, the opening of new military fronts, or expensive missile systems; a substantial improvement in US-Russian relations is thus to be expected. Similarly, some of Russia’s neighbours, previously fixated upon comprehensible but perhaps outmoded historical grievances, will now have far more important matters to attend to – in the current climate, even modest Russian investment capital flows will likely receive a warm welcome.

• Economic fragility

Despite claims by the western kommentariat that the Russian politico-economic system lacks flexibility, in fact, it is far more flexible than that of most developed economies. Downward adjustment of wages and staffing levels can occur virtually overnight, with production simply halted until inventories are reduced to the desired level – as indeed happened during the January 2009 period (resulting in industrial production numbers which were dramatic but quite misleading).

In summary, while our readers are undoubtedly familiar with the inefficiencies of the Russian economy, this does have a silver lining: no manufacturer in his right mind would attempt to set up a just-in-time supply chain in Russia. After 20 very eventful years, like an old Lada automobile, much of the local industrial fabric is relatively inefficient, but at least, admirably fault-tolerant.

Although we would expect to see further discouraging numbers through the first half of 2009, the period of maximal stress was apparently reached in October-November 2008; after a sharp rouble devaluation, successful support for the banking sector, and the recycling of official Forex reserves into the corporate sector, the increase in non-payments which mushroomed out in Q4 2008 has been almost entirely reabsorbed.

Although our view is temporarily unfashionable, we continue to expect a gradual differentiation between the potentially high-growth BRICs countries and the old economies of the West. Those wishing to predict the timing of a Russian rebound would do well to keep a close eye on Chinese growth trends. Whilst the financial disruption in Russia has been severe, the financial system has survived the stress test, and policy of both the Central Bank and the finance ministry are broadly appropriate. Over the next couple of years the opportunities in financial markets will likely match those enjoyed by investors in the 1998 post-crisis period.

As for the foreign currency reserves, unsurprisingly the media has largely fallen silent on it – mainly because nothing’s happened here in the past few months. They stood at 385.3bn $ as of March 20, unchanged from 386.5bn $ in January 23. I stand by my conclusions in the article.

Prediction: “A wave of consolidation will occur in the Russian banking industry”.

This is the context in which headlines such as Hundreds of small Russian banks close to failure need to be viewed in. The opportunity to prune Russia’s 1400 banks (far too many, plus a lot aren’t proper banks at all) that was missed in 1998 arises anew.

Prediction: “The oligarchs, Moscow and the middle classes bear the brunt of the crisis, while the provinces, agriculture and domestic manufacturing benefit, thereby reinforcing already latent tendencies in national development.”

The number of Russian billionaires has been more than halved and they’ve been warned subtly and not so subtly that there would be no more bailouts and that their future survival depends on how they behave themselves during the crisis. The rest needs more time to make itself evident, I believe – but with the ruble devalued, industrial diversification in the form of import substitution should if anything speed up.

Prediction: “All vital demographic statistics, with the exception of the total fertility rate, improve during this period ­ the expanding social safety net checks mortality increases, but the confidence crisis temporarily dents the former.”

According to January figures, births declined by 2.7% and deaths by 7.5% in comparison with the corresponding month a year ago. Infant mortality fell, marriage rates increased and divorce rates decreased. However, I will not draw anything from this yet since the monthly fluctuations tend to be pretty big.

Prediction: “Since Russia is still a rock of stability amidst dangerously overextended east ­central European countries, it is likely that its position and influence in the region will rise following the crisis…Relations with Ukraine greatly improve after the
generous aid Russia bestowed upon its cold, starving multitudes following the utter economic apocalypse that precipitated the peaceful protests that overthrew its Orange regime and replaced it with a friendly administration seeking integration into Eurasian economic and security structures.”

Yep, it is now obvious that Ukraine is already for all purposes insolvent – lots of reports about people unable to withdraw money from banks. More than a third have difficulties getting food (i.e. same as Russia in 1998). Not surprisingly, then:

We are in a pre-default situation, and it looks like Ukraine has already lost its chances to reform its economy and industry,” says Vadim Karasyov, director of the independent Global Strategies Institute in Kiev. “The worst thing is, people are starting to feel disillusionment in the idea of democracy itself. The demand for a strong hand, to fix this mess, is growing.

With the nation on the brink of bankruptcy, the market pricing in the likelihood of sovereign default at nearly 90% and its politicians more interested in controlling the lucrative gas transit “business” than providing leadership, I will not be surprised to see revolution in Ukraine over the next few months.

(Republished from Sublime Oblivion by permission of author or representative)
 
No Items Found
Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.