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Editorial note: This article was first published at Arctic Progress in February 2011. In the next few weeks I will be reposting the best material from there.

The Arctic to become a pole of global economic growth? Image credit – Scenic Reflections.

Behold! Far north along the shores of the Arctic a quiver of upspringing settlements fringes the coast. Boats swarm around canning factories, smoke flutters above smelters, herds of reindeer dot the prairies… And here or there, on every street-corner, glimmer out the lights of theaters where moving-pictures entertain white people through the sunless weeks of the midwinter dancing-time, the singing-time, the laughing-time of Eskimo Land.

- Northward ho!: An account of the far North and its people.

In 2003, Goldman Sachs economist Jim O’Neill wrote the now famous paper Dreaming with BRIC’s, predicting that Brazil, Russia, India and China would overtake the developed G8 nations within a few decades and make astounding returns for faithful investors. The BRIC’s concept entered the conventional wisdom, spawning a host of related acronyms (BASIC, BRICSA, etc) – and if anything, realizing its promise well ahead of schedule. Last year, China’s real GDP possibly overtook America’s, and Russia’s approached Germany’s.

Yet for all their successes, the BRIC’s may not fulfill their expected roles as the stars of the global economy in the 21st century. The level of education is horrid in Brazil and atrocious in India; without the requisite human capital, these two countries will find it difficult to rapidly “converge” to developed world standards. China is much better off in this respect, but its high growth trajectory may in turn be disturbed by energy shortages and environmental degradation. China produces half the world’s coal, which is patently unsustainable given its limited reserves. But since coal accounts for 75% of China’s primary energy consumption and fuels the factories that keep its workforce employed, there is little it can do to mitigate this dependence. Meanwhile, China’s overpopulation, pollution and climate change predicament is so well known as to not require elaboration. Many other countries flirting around the edges of BRIC status – Indonesia, South Africa, Vietnam, etc. – face serious challenges in the form of low human capital, uncertain energy and food supplies and a rising incidence of AGW-induced droughts, floods and heatwaves.

There is one global region that may hold the key to resolving these intertwined problems – and even to become a major pole of global growth in its own right. For the most part, it is now an empty wilderness, but climate change is opening it up as potential living space. Its exploitation has the potential to halve the length of global freight transport routes while increasing their security, uncover sizable to gigantic new sources of hydrocarbons and minerals, and stabilize global food prices through the expansion of arable land. Its experience of management and conflict resolution may inspire a global model of cooperation – or it may degenerate into an economic, legal, or even military battlefield over shipping routes and sub-sea resources.

This global region is the Arctic Rim, and its adjoining ARCS: Alaska, Russia, Canada, and Scandinavia. The ARCS of Progress in the 21st century.

Arctic sea ice extent on September 1, 2010 – both the Northern Sea Route and the Northwest Passage are clearly open. Image credit – The University of Illinois Cryosphere Today.

From North Pole to Growth Pole

The core reasons behind the Arctic Rim’s bright prospects are global macro-trends: climate change; peak oil and resource nationalism; overpopulation in the South. These “push” and “pull” factors will induce a decades-long Arctic boom, starting with shipping, energy and mining, and culminating in a fundamental northwards shift of the center of the world economy. Let’s examine each of these in turn.

Breaking Ice For Shipping

Ah, for just one time I would take the Northwest Passage
To find the hand of Franklin reaching for the Beaufort Sea
Tracing one warm line through a land so wild and savage
And make a northwest passage to the sea.

- Northwest Passage song, Stan Rogers, 1981.

Typically, the cryosphere – the frozen part of the world – remains stable, because its snow and ice reflect much of the Sun’s heat, thus cooling itself. This process is called the ice-albedo feedback.

However, when the high-albedo ice melts, it leaves behind darker-hued earth, flora or sea that absorb far more heat. Local air temperatures soar and inhibit the reformation of the ice during cold seasons. From working to keep the system stable, beyond a critical threshold the ice-albedo feedback begins to reinforce a runaway dynamic of melting and warming.

The ice-albedo feedback largely explains why the Arctic is warming about twice faster than in the world as a whole.

In summer 2007, Arctic sea ice extent fell 38% below average since records began – an area the size of six Californias. The next year saw both the Northwest Passage and the Northern Sea Route clear of ice for a short period in late summer. As of December 2010, sea ice extent was the lowest for the month on satellite record, even surpassing the 2007 melt.

While the relentless fall in sea ice extent over the past three decades is remarkable enough, what’s stunning is the 55% decline in summer sea ice volume. Once the thick, multi-year ice is gone, then it’s really gone – the low albedo of the ocean water will raise local temperatures, preventing all but a thin film of sea ice from reforming during the cold winters. It is thus a near certainty that Arctic sea ice is already deep in its death spiral.

Inland, earlier snowmelts enable the ground to absorb more heat, while dark-hued shrubs and boreal forests encroach on the tundra.

Many of the effects will be negative. The polar bears will probably go extinct, either drowning for lack of sea ice, or starving, or migrating south and merging with their grizzly cousins. Invasive species from the south will drive out Arctic flora and fauna off the top of the world. Global ocean and air currents will be interrupted as the temperature differential between the Arctic and the tropics shrinks.

But the new Arctic merchants will be making a killing.

Shipping routes during ice-free Arctic summer . Image credit – Laurence C. Smith.

In 2010, the Baltica became the first high-tonnage tanker to sail with petroleum products by the Northern Sea Route, steaming from Murmansk to China. This was followed by the voyage of the MV Nordic Barents, the the first vessel to sail from one non-Russian port to another through the Arctic, cutting 5,000km off the traditional Suez route. It carried 41,000 tons of iron ore from Kirkenes, Norway to feed the steel mills of China. One upping them all, the year ended with the first round-trip voyage without icebreaker assistance via the Northern Sea Route. The Norilsk Nickel-owned ship Monchegorsk carried the metal from the north Siberian port of Dudinka to Shanghai, taking just 41 days of steaming (the Suez route would have lasted as long as four months).

The opening of the Northern Sea Route and rising demand for metals and petroleum products from China and other emerging markets is set to continue spurring the development of Arctic shipping. In January 2011, a Sovcomflot executive said the Russian shipping company has already received 15 requests for icebreaker assistance in the Arctic for this year, compared to just four in 2010*. The governor of Murmansk, Dmitry Dmitriyenko, predicts that cargo transport through the Northern Sea Route will increase tenfold by 2020. This expansion will be sustained with private investment funding: both Sovcomflot and the Port of Murmansk are to be partially privatized in the coming years.

Similar trends are in play with the opening of the Northwest Passage across Canada. It has been conquered by cruise ship in 2006 and the commercial ship MV Camilla Desgagnés in 2008. Exploitation of the Northwest Passage will likely go slower than of its north Eurasian counterpart, because of lower demand and the (relative) underdevelopment of Canada’s icebreaker fleet. But there is still a wealth of opportunities there.

Black Gold or Fool’s Gold at the Top of the World?

Use it or lose it is the first principle of Arctic sovereignty.

- Speech by Canadian Prime Minister Stephen Harper, 2007.

Our first and main task is to turn the Arctic into a resource base for Russia in the 21st century.

- Speech by Russian President Medvedev in September 2008.

Global oil production has now either peaked or is close to peaking, and will now either continue on its present “undulating plateau” – or begin to decline at an accelerating pace. The specifics are intensely argued over and the debate is far too extensive to detail here. But suffice to say, the “cornucopian” position that technological ingenuity and market forces will always conjure more and more resources out of a finite planet is untenable.

Any number of factors – global production exceeding new discoveries since the mid-1980′s; the world’s inability to significantly ramp up oil production despite soaring prices for the commodity; the rising costs of oil production due to the falling EROEI of the remaining oil sources; massively inflated reserves numbers from OPEC members; growing resource nationalism – militate against a business-as-usual future of increasing production in the oil industry.

These mounting challenges are the reason the big oil majors are pushing into the deepwater drilling that produced the Horizon blowout in the Gulf of Mexico, and partnering with Russian state oil companies to develop offshore gas deposits in the Kara Sea, and sinking millions of US dollars on prospecting off Greenland despite no returns to date. They need to maintain their reserves numbers to prevent their stocks from tanking – but to do so, the oil majors are forced into taking escalating financial, environmental and political risks.

The Arctic’s natural resources. Image credit – Global Research.

In 2008, the US Geological Survey estimated that the Arctic may hold as much as 13% of the world’s undiscovered oil (90 billion barrels) and 30% of its undiscovered natural gas. Unsurprisingly, the Arctic is rapidly becoming central to oil exploration. That said, capitalizing on these resources – even assuming they are as big as estimated above – will be exceptionally difficult. For a start, some 84% of these sources are likely to be offshore. Second, according to more recent USGS calculations, developing them will be prohibitively expensive: “Assuming production costs of up to $100 per barrel, only 2.5 billion barrels of oil could be lifted… and only with a 50% probability.” For perspective, an average oil price of $92 per barrel broke the world economy in 2008.

Talk of the Arctic becoming the next Saudi Arabia is unrealistic. Its oil reserves are smaller, more dispersed, more remote, of worse quality, and far more challenging to exploit. But this isn’t to say that its black gold is fool’s gold. Technological progress on Arctic drilling, as well as a lack of better options elsewhere, will draw Western oil majors and National Oil Companies north.

The Arctic isn’t only of interest to shippers and oilmen. Confronted with inexorable rises in demand from China, the global mining industry is rushing to add metals and minerals production capacity wherever they can. Just to take a few Arctic examples, there are plans to start or expand iron ore production on Canada’s Baffin Island, Norway’s Kirkenes and the Kola Peninsula. Coal production is resuming at Svalbard. Just in case the whole oil thing doesn’t work out, Greenland is looking to exploit its potentially vast mineral resources. The Coeur d`Alene Mines Corporation recently opened a gold mine near Juneau, Alaska ahead of schedule. Though volumes remain small, this will change as depletion becomes as evident for minerals as it is now for oil.

Towards an Arctic Civilization?

… Before this century is over billions of us will die and the few breeding pairs of people that survive will be in the Arctic where the climate remains tolerable.

- James Lovelock, inventor of the Gaia hypothesis.

Beginning with the shipping and energy industries, the influence of the Arctic will eventually come to encompass the entire world. Assuming that efforts to quickly cut greenhouse gas emissions are unsuccessful, and that geoengineering is either not attempted or doesn’t work, then many of the middle regions will become too hot and dry for sustained agriculture (and maybe human survival), and masses of climate refugees will try to migrate north. The center of global economic growth, politics, and perhaps – in the far future – population, will come to rest within the Arctic Circle.

The North Pole may become the spatial center of the world. Image source – Trausti Valsson.

This process will likely be accompanied by mass upheavals, societal collapses, famines, border conflicts, maybe even bigger wars. But as usual misery contains the seeds of opportunity. It is not impossible that the farsighted individuals who are now buying up Hudson Bay territories or Siberian riverside lands are positioning themselves or their heirs for lordships and kingdoms in 2200.

But let’s focus on just the next three decades. The opening of the Arctic by various “push” factors (overpopulation, global warming) and “pull” factors (shipping routes, resources) will create demand for infrastructure, housing, associated services, etc. Buying up strategic lands, routes and infrastructure in the Arctic region offers one of the best, and most overlooked, rates of return in the world today. Take inspiration from OmniTRAX, a Colorado-based company that bought the derelict Port of Churchill and its railway from the Manitoba government for a bargain basement price of $10 in 1998. Now that Hudson Bay has become clear of sea ice during the summer, these assets are receiving tens of millions of dollars of investment from the Canadian government.

How can you benefit from the coming Arctic boom? In the coming years, Russia is going to partially privatize lucrative state assets, such as shipping company Sovcomflot and the Port of Murmansk (which handles 60% of shipping across the Northern Sea Route). New ports, roads, railways, pipelines, mines, dams, oil and gas fields, aluminium smelters, LNG plants, etc. are springing up over the entire region.

Enter the ARCS of Progress: Why Alaska, Russia, Canada, and Scandinavia are Positioned to Dominate the Polar-Centric World

Идут на Север срока огромные,
Кого ни спросишь – у всех указ…
Взгляни, взгляни
В глаза мои суровые,
Взгляни, быть может, в последний раз.

- Soviet GULAG song, 1947.

O Canada!

Our home and native land!
True patriot love in all thy sons command.
With glowing hearts we see thee rise,
The True North strong and free!

- National Anthem of Canada.

Watching the economic news these days is a sure path route to depression. Anywhere you seem to look in the developed world there are awning budget deficits, soaring debts, depressed output, and stagnation. We’ve established that putting your money into the PIGS (Portugal, Italy, Greece, Spain) isn’t such a good idea. But the US is the “safe haven,” right? Unfortunately, its fiscal sustainability indicators are actually worse than the PIGS average. In 2009, the US got $0.6 in tax revenue for every $1 of outlays, or a receipt-to-outlay ratio of 0.6; the equivalent ratio for the PIGS was 0.78. Maybe Japan? With a 0.52 receipt-to-outlay ratio, it makes the US look like a paragon of fiscal discipline.

But within all that mess there’s a few, sparkling gems. Not only are they at the heart of the opening Arctic, but they are all excellent investment destinations on their own merits. They are the ARCS countries: Alaska, Russia, Canada, and Scandinavia.

Alaska

In contrast to the rest of the US, Alaska was barely dented by the economic crisis, its GDP declining by just 0.3% in 2009 and recovering 0.6% in 2010. Employment is lower than the US average. While states like California and Illinois flirt with state bankruptcy, Alaska has accumulated $40 billion in its Permanent Fund. Finally, it is – along with Greenland – the most demographically vigorous of the Arctic states, with a total fertility rate of 2.32 children per woman in 2006. It won’t be afflicted by the First World’s looming aging crises any time soon. Alaska is well set to fulfill its motto: “North to the Future!”

Russia

Though the poorest of the ARCS, Russia is also its fastest growing one, with 5% annual GDP growth during 2001-2010. Its high level of human capital (around 70% of Russians continue to higher education, a First World rate), vast resource wealth and decent macroeconomic management set it on a promising path to convergence with developed countries.

Additionally, Russia has a predominant population, economic and military presence in the Arctic. The Murmansk region by itself has more people than all of Alaska, while the Russian Northern Fleet is by far the strongest Arctic force. State policy is to transform the Arctic into Russia’s “strategic resource base” within the next decade.

Criticisms of Russia’s prospects typically center on allusions to its “Zaire with permafrost”-like corruption levels, plummeting population, crumbling infrastructure, “legal nihilism” and Putinist authoritarianism. While each of these has a grain of truth, taking them as gospel fundamentally misrepresents the country. For a start, if Russia really was more corrupt than Nigeria or Zimbabwe – as implied by Transparency International’s Corruption Perceptions Index – then it would still be deep in debt as in the late 1990′s, and its $480 billion foreign currency reserves would be in Cayman Islands accounts instead of the Central Bank’s vaults.

What about Russia’s demographic “death spiral”? A quick glance at Rosstat will show that its population grew in 2009, and that its total fertility rate, at 1.6 children per woman, is now higher than the European average.

One can spend pages upon pages unraveling the double standards, misrepresentations and outright lies which the Western media and political class use to attack Russia. But if you’re unconvinced, and refuse to buy into Russia’s undervalued market on principle, it’s your loss.

As t he professional Russia investor Eric Kraus wrote in Business Week in July 2010, “Russian markets are fashion victims, and are currently both unfashionable and cheap. You can own them now, or wait and buy the next time they surge back into vogue. And I will be selling out just about then.” I’d trust him – that’s exactly what he did in 2008!

Canada

Canada combines the American spirit of free enterprise, with a greater safety net and social mobility. It is also on far better fiscal footing. In 2010, its cyclically adjusted primary budget deficit was -2.7% of GDP (US: -7.0%), and its net debt was 32.7% of GDP (US: 65.2%; Japan: 104.6%). Possessing huge energy, mineral and freshwater reserves, as well as a well-educated and growing population, it is surely one of the better investment bets in the developed world.

Scandinavia (and Nordic)

The Nordic region is one of the richest, most educated and socially cohesive on Earth, frequently coming at or near the top in any global index of freedom, social mobility, environmental sustainability, and technological modernity.

In 2010, Sweden’s GDP grew the fastest in Europe at a blistering 5.2%, while maintaining a balanced budget throughout the crisis. Norway’s fortunes are far more directly tied to its oil industry, but peak oil, excellent state management of reserves and a low population make for bright prospects. Norway is the second richest European country after the banking center of Luxembourg.

Even apparent basketcases like Iceland may be a good investment to buy up on the cheap. While its international banking career might be over, it still has massive freshwater and geothermal energy reserves, that make it an attractive center for energy-intensive industries such as aluminium smelters.

Finally, contrary to right-wing depictions of social democracies as retirement homes full of effete, aging liberals, all the Nordic states have fertility rates that preclude major aging crises (they range from 1.8 children per woman in Finland to 2.2 in Greenland).

The Arctic when all the ice melts.

From an Ultimate Dim Thule…

By a route obscure and lonely,
Haunted by ill angels only,
Where an Eidolon, named Night,
On a black throne reigns upright,
I have reached these lands but newly
From an ultimate dim Thule —
From a wild weird clime, that lieth, sublime,
Out of Space — out of Time.

- Dreamland by Edgar Allen Poe.

Even in our day, science suspects beyond the Polar seas, at the very circle of the Arctic Pole, the existence of a sea which never freezes and a continent which is ever green.

- The mystic H. P. Blavatsky.

Before the rise of the world economy, spatial perspectives were local, at most extending to the boundaries of their cultural sphere or world-empire: The Ecumene for the Ancient Greeks and Romans; Dar al-Islam for the Muslims; Christendom for the Franks; the Great Wall for the Chinese. Medieval European geographers referred to any lands beyond the borders of the known world as Ultima Thule.

Globalization from the 19th century bound the entire world together, for the first time in history, but its flows and links of labor, capital and commodities passed the Arctic by. Unattractive to sustained private investment, the region’s development was always fitful and unbalanced, from the Yukon Gold Rush that petered out almost as suddenly as it flared up; to the penal camps, subsidized settlements and military bases of the Soviet Arctic, now decaying away except where hydrocarbons extraction has thrown them a lifeline.

But now the world is changing. No longer will opening the Arctic have to be a hubristic project, as with the chiliastic visions of Soviet planners; or a costly and unprofitable strategic necessity, as with the Cold War submarine patrols beneath the Arctic sea ice or the bomber flights over it. Today, it is global macro-trends such as global warming, resource depletion and overpopulation that will ensure the rapid but organic development of the Arctic.

With the growing human presence, the Arctic will inevitably begin to lose its luster of mysticism, foreboding and darkness. As the years turn into decades, and 2050 approaches, the polar-centric view of the world will become increasingly central to human spatial consciousness. The world’s trade, energy and capital flows will have been largely rerouted north.

The ARCS of Progress, their numbers swelled by climate refugees, and their economies bolstered by a flood of capital investment, will be amongst the leading Powers in the world. This assumes they retain their present political configurations. For instance, could an independent Greenland, with just 56,000 people today, retain its own national identity? Facing resource shortages and droughts in the south, would China encroach on the Russian Far East? Would the US try to assimilate Canada?

Whatever the answers to these questions, one thing is near certain. The vision of a northern Ultima Thule is dissipating, and will soon dissolve altogether (thought teh concept may be resurrected to describe a desolate, uninhabitable South many hundreds of years into an extreme AGW future). In its place there will emerge a polar world-economy of open seas, farms and growing cities by 2050.

There will arise an Arctic ecumene.

* According to more recent data, there were 34 transits of the Northern Sea Route in 2011, up from just 4 in 2010; with 820,000 tons of goods transported relative to 111,000 tons in 2010. Volumes are predicted to double again this year. This goes in tandem with record breaking sea ice melt in 2012.

Edit Jan 28, 2013: There were a record-breaking 46 vessels making the transit through the NSR this year.

(Republished from AKarlin.com by permission of author or representative)
 
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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)
 
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This is the first post in a series of three, in which I will analyze the major trends that will define the next ten years and their likely impacts on global regions. To put these forecasts into context, I must first describe the narrative through which I view the history of the post-WW2 era (the Oil Age, the Age of Hubris, or as John M. Greer aptly described it, the “age of abundance industrialism” – now on the verge of meeting its Nemesis, the waning of Pax Americana and the demise of global Western hegemony), which is dominated by the concept of “limits to growth” – the 1972 Club of Rome thesis that finite resources and pollution sinks will ensure that business-as-usual economic growth can never continue indefinitely on planet Earth.

A Short History of Abundance Industrialism

Driven by an electro-mechanical revolution powered by a windfall of cheap oil, the world registered its highest GDP growth rates in the 1950-1973 period. The era was defined by self-confidence and a secular “myth of progress”, which reached its apogee with the 1969 moon landings. But the next decade saw the arrival of major discontinuities. American oil production peaked in 1970, and went into decline. Saudi Arabia settled into its role as the world swing producer, enabling it to inflict a severe “oil shock” on Western economies in 1973 to punish them for their support for Israel, to be followed by another in 1979 coinciding with the Islamic Revolution in Iran. The decade also saw milestones such as the publication of Limits to Growth, the ending of hyperbolic growth of the world system, and a new emphasis on conservation and sustainability (which led to significant improvements in fuel efficiency and pollution control – back then, the fruits were all low-hanging, so impressive results were not hard to achieve). Yet the first tentative steps towards sustainability were not to be followed through, as the newly-elected Reagan took office proclaiming “Morning in America!”, with its implicit promise of a return to a past with no future. It was a false dawn.

Thus began the “age of diminished expectations”. In the US, physical production by volume and real working class wages stalled in the 1970′s, and have since been on a plateau (slightly tilted up according to official statistics, slightly tilted down according to unofficial ones). The age of Mammon saw rising inequality, both within and between nations (the sole major exception being China whose ascent to world power began in the late 1970′s). As the American industrial base entered its long atrophy, its economy shifted towards construction, services, and finance, – symbolized by metastasizing suburbia – and made possible by new drilling by the oil majors in remoter areas like Alaska, the Mexican Gulf, and the North Sea, a political-security rapprochement with Saudi Arabia, the IT revolution, and the rise of multinational corporations exploiting globalizing markets and cybernetic technology in a flattening world. Sustainability went out the window; quite literally, as Carter’s solar panels were removed from the White House roof in 1986. Finally, the US harnessed its new role as the focal point of the emerging global neoliberal system to open up their economies to the world, unleashing China’s “surplus armies of labor” and the former USSR’s energy resources in the service of Pax Americana.

overshoot

[Source: Tracking the ecological overshoot of the human economy, PNAS.]

This new era of international neoliberalism and developed country post-industrialism coincided with the genesis of humanity’s ecological overshoot of the carrying capacity of the Earth. Though the first global pollution alarm in the form of the “ozone hole” led to an impressive response involving a global agreement on the withdrawal of CFC production, the reaction to the growing specter of runaway climate change caused by man-made CO2 emissions – which is ultimately a far more serious issue – has been muted right up until 2009′s Copenhagen fiasco and today. Instead, the party continued in full blast throughout the 1990′s, for the US was too busy basking in the glow of the ostensible end-of-history triumph of “Western liberal democracy as the final form of human government”.

These hubristic visions of imminent utopia, of global drive-in democracy, collided with hard reality in the first decade of what was supposed to be a “new American century”. The United States is in a state of severe economic disequilibrium and has been in rapid decline relative to its competitors – a condition reminiscent of the USSR in the 1980′s. The probable decline and fall of the global order of which it is the locus will constitute the defining trend of the next decade.

Shifting Winds: The End of Pax Americana

What is Pax Americana? It is the liberal, internationalist, post-Cold War order, which has extended its reach throughout the whole world barring a few socialist holdovers like Cuba and North Korea. Globalization, rule of law, human rights, liberal democracy, free markets, economic growth – these are its self-defined values, which it considers to be the apex of humanity’s socio-political evolution. Its critics, from Western leftists to Third World nationalists, decry it as an exploitative, ruinous, imperialist, hypocritical, end-of-history theology, with voluminous references to the inconsistent ways in which these values are practiced by their own sponsors, or wielded as weapons against its ideological and geopolitical competitors.

But these arguments will soon become academic. As demonstrated by Robert Ayres, there is a glaring hole at the center of modern macroeconomic theory – accounts of growth neglect the vital role of “useful work” (a function of exergy and technical efficiency), whose contribution far outweighs that of labor and capital combined. Both factors have been flattening in the US in recent years, making further growth unsustainable. Furthermore, studies in systems dynamics indicate that brittle systems, with poor “shock absorbers”, can be subject to so-called “cascade collapse“, in which failures at one node produce a self-amplifying resonance that causes many other nodes to fail. If this is an accurate description of the global System, then a setback in any one sphere – be it economic, financial, geopolitical, etc – could usher in a vicious spiral into anarchic apolarity on the international stage.

Pax Americana and its neoliberal ideological superstructure rests on three pillars: cheap oil, American dollars, and the US Navy. Like the legs of a tripod, they all survive – or fall – together. And today, they are crumbling. Let us examine the forces that will be undermining these pillars in the next decade:

Peak Oil

Contrary to the “doomer” worldview, it is almost certainly possible to sustain an industrial civilization without a drop of oil (though ceteris paribus it will be a materially poorer one, because of oil’s uniquely high EROEI). The problem is that today’s industrial system, especially in the US, is built in such a way – gas-guzzling SUV’s on asphalt roads slithering across endless vistas of soulless suburbia – that cheap oil is indispensable to making the commutes and credit flows, the jet flights and JIT production systems, function. An even bigger problem is that Hubbert’s predictions of a global oil peak are (roughly) on schedule: though delayed by the 1970′s oil shocks, it is likely that either 2008 or 2010 was the all-time peak, and oil production will now decline at an accelerating rate – even without accounting for possible discontinuities like a global credit implosion, a sudden collapse of Ghawar, the spread of revolution to Saudi Arabia, or Iranian mining of the Straits of Hormuz.

oil-production

[Source: World Oil Production Forecast - Update November 2009, Oil Drum. Click to enlarge.]

The US spent prodigious sums to fight a war to open up Iraq’s oil reserves, but today its oil production is no higher than in 2000 (and hopes of massively increasing it are probably unrealistic). Russia has reconsolidated state control over its hydrocarbon deposits, discounting Western recriminations over its “resource nationalism”, and has successfully pushed back against Washington-backed “color revolutions”. Central Asia never proved to be the black gold lode of American geostrategic fantasy, and in any case it has since been closed off again by Russia. Due to their immense capital costs, environmental impact, and low energy-return-on-energy-invested (EROEI), there can be no salvation in tar sands or shale. Nor have there been any efforts at mitigation of the kind recommended in the Hirsch report. Any energy transition will be a very drawn-out process, considering the sheer scale of the infrastructure that will have to be replaced – and using continuously lower-EROEI energy sources!

As such, it can be said with a high degree of certainty that the world will soon experience a severe shortfall in liquid fuels. Because of its high degree of dependence on cheap oil, this will affect the US disproportionately, which will have to make good with demand destruction. The consequences will include major knock-on effects on consumers, who constitute the mainstay of American economic power.

State Insolvency

The geological realities of peak oil (2005-2010), in combination with soaring demand from industrializing Asia, have led to the worst crisis since the Great Depression, with the free-fall only being checked by a dizzying panoply of monetary flooding, fiscal stimulus, and government bailouts. As if this weren’t enough, the US faces rising entitlements costs as the baby boomers start retiring, a bloated military-industrial complex, and increasing commitments to Afghanistan with no timetable in sight (where there are now more US troops than there were at the peak of the Soviet intervention).

us-budget-woes

[The US budget deficit is predicted to permanently remain in the red even under the rosiest assumptions. As of now, it is the more pessimistic scenarios that are being born out - Republican refusals to raise tax rates or cooperate on Medicare; Soviet-like rhetoric about "defense cuts" while real military spending continues rising; etc.]

Now the major reason why the US has been able to afford both guns (the US military) and butter (its double deficits) in the face of deindustrialization was by giving its many foreign investors an atrocious rate of return, which they accepted in return for America’s “alpha” – its reputation as the largest economy, sole superpower, and global financial center, in other words, the “safe haven” par excellence. It also draws immense strength from the US dollar’s role as the global reserve currency, for instance by allowing it to comfortably buy oil at $-denominated prices even when the currency is weak. But with its “imperial overstretch” (see Afghanistan), moribund financial system, and a budget deficit north of 10% of GDP and projected to remain in the red for the foreseeable future – by some measures, US debt and fiscal metrics are worse than those of the PIGS on aggregate – will this American “alpha” survive? Probably not for much longer.

The creeping monetization of US debt will destroy investor confidence that they will ever make a positive return on their US bond investment. The withdrawal of a single major investor, especially if it coincides with a geopolitical shock, could set off a “cascading collapse” as other investors scurry away from US Treasury bonds. This will leave the US incapable of generating the primary surpluses to service its negative net foreign investment position, leading either to a compound debt trap or a classic emerging market-style currency crisis. Ice or fire? Given America’s democratic system and the bipartisan consensus on fiscal profligacy, I would bet on the latter.

Economic Decline

The collapse of what in some respects resembles an informal tributary system, channeling global (i.e. Asian) savings to the American consumer, will sound the death knell for Pax Americana. As Paul Kennedy argued in The Rise and Fall of the Great Powers, military power is ultimately subordinate to the economic base which supports it. The industrial base that won the Second World War and forged the American superpower has been in decline since the 1970′s – though on paper it boasted a high productivity growth rate, it masked a huge decline in the size and complexity of its “industrial ecosystem”. Mundane manufacturing, the automotive industry, and machine building have all experienced rapid decline; the heavily-subsidized aerospace and defense industries constitute the only major exceptions to this trend.

Now as long as globalization, free trade, and stability reigned, this did not portend international decline. Industrial hallowing out simply freed up workers into sectors that were more in demand, like restaurants, construction, services of all kinds, etc; and women gained many more economic opportunities. The US could get its manufactures from abroad, like Spain during its (literal) Golden Age. Furthermore, the transition from manufacturing to consumption and finance is historically not without precedents, being observed in the halcyon days of empires like Holland and Great Britain. After these former empires had established their initial industrial supremacy through mercantile means, they transitioned to free-trade regimes designed to reinforce their economic hegemony – and in so doing “kicked away the ladder” from countries trying to catch up. (The United States itself was one of the world’s most protectionist nations until the Second World War, at the end of which it accounted for half of global industrial output and drastically reduced tariff rates).

However, as pointed out above, the crumbling of two pillars of Pax Americana, cheap oil and the US dollar, makes the survival of today’s comfortable globalization highly unlikely. When the inflows of cheap credit from abroad cease; when oil flows decline due to geological, political, and geopolitical factors – the US will no longer be able to maintain its privileged position as the world’s “market dominant minority“, its overstretched armed forces will no longer have access to the lavish funding of the days of yore, and the neoliberal world order they upheld will come to an end.

Geopolitical Shocks

Facing the twinned specter of peak oil and fiscal insolvency and supported by an atrophied industrial base, Pax Americana could in fairness be described as a “brittle system” under a growing threat of collapse. Though it may yet fade away gradually into the night, to be slowly displaced by the state-centered, neo-Westphalian, mercantile reality of “world without the West“, it is altogether possible that geopolitical shocks will make the transition far more abrupt and chaotic than expected.

Though nothing’s certain, it is possible, likely even, that the biggest shock will emanate from a confrontation between Iran and the US in the Persian Gulf. Since 2005, the hardline IRGC paramilitary / intelligence clan, whose figurehead is Ahmadinejad), has been in the ascendant in Iran. Their power was further reinforced in 2009 when the Supreme Leader Khamenei sided with the IRGC in the aftermath of the abortive “Green Revolution” spearheaded by the waning “moderate” clerical clan (headed by Rafsanjani), in response to Mousavi’s electoral loss. These internal Iranian developments occurred in tandem with the rising tensions with Israel, Saudi Arabia, and the US over Iran’s pursuit of an nuclear bomb, amidst the window of opportunity left open to the Islamic Republic by the US quagmire in Iraq. Iran sees the Bomb as the best guarantor of regime security by allowing it to establish a regional hegemony in the Persian Gulf region.

This is unacceptable to everyone in the region. Israel views an Iranian bomb as an existential threat; Ahmadinejad expresses the opinion of 62% of Iranians when he says the Israel state should be wiped off the map. The Jewish state is now ruled by Benjamin Netanyahu, a man who in 2007 opined: “It’s 1938, and Iran is Germany, and Iran is racing to arm itself with atomic bombs”. Not much room for compromise there. The rulers of Saudi Arabia, beset by Iranian-stoked ferment amongst their Shi’ite population and undermined by the Iran-backed al-Houthi insurrection on their Yemeni border, view the prospect of an Iranian bomb with similar trepidation. Though they will protest in public, they will be quite happy to see an Israeli-American strike on Iran; rumor has it that Saudi officials have given Israel permission to fly over their territory via backdoor diplomatic channels.

The US is hesitant. Striking Iran carries great risks. First, no matter how good and accurate your bombs are – the US has accelerated the development of a bunker-buster capable of penetrating 60m of reinforced concrete – they are only worth their weight if you know precisely where to strike. Iranian nuclear facilities are highly dispersed and concealed, making the extent of US intelligence on them uncertain. Second, Iran can mine the Strait of Hormuz and harass oil tankers with coastal shore batteries, diesel submarines, and merchant raiders. This will put at risk 20% of the global oil supply; even if the blockade proves ineffective, as predicted by most analysts, soaring insurance rates may result in oil prices spiraling into new highs due to unprecedentedly tight supplies. Third, the Islamic Republic has a panoply of retaliatory options at its disposal: a renewed Hezbollah missile barrage against Israel, increased support for Shi’ite insurgencies in the Arabian peninsula, and above all a resurgence of political violence and state instability in Iraq. As mentioned above, hopes have been pinned on Iraq to delay global peak oil by another decade. Yet it has always been a land of unfulfilled potential, its imminent oil production takeoff regularly stymied once per decade – in 1979 with the outbreak of the Iran-Iraq War, in 1991 with the Gulf War, in 2003 with the US invasion. It would not be out of character for its oil production to plummet again in 2012, in the face of renewed internecine warfare, Iranian incursions, and mining of the Strait of Hormuz.

Given all these risks and uncertainties, it is not surprising that the US is pursuing a cautious approach, restraining Israel and pushing for “crippling” sanctions on Iran, targeting its gasoline imports. However, the latter will not achieve much, especially since Russia – which has not received the firm recognition of its sphere of influence over the post-Soviet space that it really wants from Washington – will be able to torpedo any sanctions by allowing Iran to import gasoline through its Central Asian surrogates. Israel may grow impatient and eventually jump the gun without US permission. But Iran will likely consider Israeli and US actions to have been coordinated, and will embark on its “Project Mayhem.” The US may be forced to rush in and respond unprepared to contain the fallout as best it could. Now it is true that alarmist predictions that the US Navy will be crippled by Iranian low-tech swarm attacks are largely unsubstantiated, and there is no question that the US will have no trouble in gaining full air superiority over the obsolete Iranian integrated air defense system. However, defeating Iran’s dispersed retaliatory assets in detail may be a difficult and prolonged undertaking, perhaps even requiring the military occupation of strategic Iranian regions such as Khuzestan and Kish Island.

The US finds itself caught in a Catch-22 situation. Let Iran be, and it develops a nuclear deterrent allowing it to make a bid for regional hegemony – if it is not preempted by an Israeli strike. Attack Iran, and needless to say, anything worse than the most optimistic scenarios (in which the Strait of Hormuz only remains blocked for a few days) will constitute a tremendous physical and psychological shock for Pax Americana, a shock in which all its three pillars come under strain in the form of oil supply disruptions, financial turbulence, and prolonged aeronaval operations.

Endgame

In conclusion, given the inherent fragility of the neoliberal world order and the mounting stresses on it in the years ahead, stresses that could be explosively released in a major geopolitical crisis – possible in Iran, though major clashes in other hotspots like the Caucasus or the East China Sea cannot be dismissed – it is unlikely that Pax Americana will survive the decade.

Yet its collapse will not herald a global collapse and a sudden descent into the Olduvai Gorge, for Pax Americana is ultimately just a subsystem of a larger system – that of global industrialism, the System that encompasses virtually the entire world, with the sole exception of hunter-gatherer remnants in the Amazonian fastnesses and a few mystical recluses. The American empire, much like the Soviet one, will retreat from globalist pretensions, while maintaining a continental hegemony. In the meantime, powered by domestic coal and a new kind of resource tributary system – one based on bilateral deals instead of open markets – China will be well on its world-historical “great reconvergence” with the West, making it the preeminent superpower of the age of scarcity industrialism.

The geopolitics of scarcity industrialism are the topic of the next monograph in this series.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Though it’s not quite true that Russia has “no roads, only directions”, the old saying isn’t far off the mark. The World Bank’s recent report on Russia’s economy notes that the Eurasian giant’s road network is primitive and crumbling, coming in 111th in a global ranking (the railway system does much better at 33rd); more than half its highways do not meet minimum riding quality requirements. None of this should come as a big surprise to anyone who has had the pleasure* of driving beyond Moscow’s MKAD.

One of the main gripes of Russia’s limousine liberal opposition is the low priority the Kremlin places on the country’s road development – according to Boris Nemtsov, the rate of road construction during the Putin era fell by two or three times relative to the Yeltsin years (these figures don’t tally well with the official statistics but whatever). My intention here isn’t to wrestle over numbers and details in an attempt to either vindicate or condemn Putinism, instead I am going to consider a far more fundamental question: is it really worth Russia’s while to invest limited resources in a high-entropy system with no future that will furthermore accentuate socio-economic divisions in the short-term?

First, there is the imminent reality of peak oil. World oil resources are finite and there is evidence suggesting that production peaked globally in 2005 or 2008 (depending how you measure it), and that Russia will peak sometime between now and 2015. While Russia will continue extracting plenty of surplus to satisfy its own needs, is there really a need to use its energy proceeds to expand a transport system that will soak up ever more domestic oil production? Surely there are better uses for this revenue, such as improving its abysmal energy efficiency, refurbishing the creaking R&D system or even just getting more foreign currency? Eventually, of course, Russia’s oil production surplus too will dwindle and vanish: thereafter, its high-entropy road system, with its long asphalt serpents and wheeled metallic gas boxes, will decay into mud tracks and rust carcasses, and then into mere directions in the deepnesses of Eurasia. (Another thing that bears mentioning is that rising Russian domestic oil consumption will make the collapse of oil availability in the deficit countries that much more rapid due to the dynamics of the Export Land Model).

Aren’t I ignoring alternate automobile energy sources, such as hydrogen and electric? I don’t buy much into the optimistic prognoses. Due to its fundamental problems with energy wastage, storage and infrastructure deficit – suffice to say, you need about one liquid hydrogen truck per twenty vehicles compared to one gas truck per two hundred – hydrogen is unlikely to ever displace hydrocarbons on the mass scale needed to preserve automative culture in its heyday form. Electrics have relatively better prospects, but they remain several times more expensive than conventional cars: though battery technology is improving rapidly, the availability of the Rare Earth Metals used to make them is moving in the opposite direction. In short, both hydrogen and electrics are far more structurally energy-inefficient and hence expensive than today’s hydrocarbons; as soon as shortages drive oil prices into the stratosphere, widespread vehicle use by the middle classes will retreat into history. Why should Russia even embark on this road to nowhere?

Second, it should be stressed that even as of 2008, there were only about 210 automobiles for every 1000 Russians, compared to 500-700 in the developed countries. If the Russian state were to fund a world-class highways system, like the American interstates or the German Autobahnen, their benefits would only be immediately enjoyed by perhaps a third of the population (its more affluent part). While this would no doubt be welcomed by the likes of Boris Nemtsov, a pro-bourgeois shill who bemoans Russia’s maternity benefits because they increase fertility amongst the poor, and by Yulia Latynina, who decries democracy for allowing poor people to vote, I fail to see how this would improve the lot of Russia’s marginalized and pensioners. Viewed from this prism, the Russian government’s decision during the economic crisis to increase social benefits – including a 30% rise in pensions this year – is far more socially just than taking the World Bank’s suggestion to increase road infrastructure investment.

Instead of subsidizing the already prosperous bourgeoisie off the state’s lard, Russia would be far better served leaving the road infrastructure to market forces. First, they are subject to less graft and waste. State contracting for road-building is riddled with corruption, even by Russian standards: around half to two thirds of allocated funds can be expected to get “lost”. Second, where heavy demand exists, private companies build toll roads (e.g. the Moscow to St.-Petersburg route). These are already sprouting where traffic flows are heavy and are of much better quality than the state projects. Only people who use these private roads will have to pay for their upkeep, instead of the all-Russian taxpayer. Likewise, where there is little demand for roads, such as the symbolic but unprofitable trans-Siberian route, capitalists will not waste capital.

Third, Russia’s geography itself hardly befits an auto-faring civilization. The cold climate, seasonal melting and vast distances make upkeep difficult and costly, even if it weren’t weighed down by corruption. The vastnesses of northern Eurasia are far better suited to railways, whose operation is inherently cheaper and cleaner. Unlike automobiles, railway fares are affordable to ordinary pensioners and the indigent. Encouragingly, investment into Russian railways is very substantial and there are plans for a high-speed rail link between Moscow and St.-Petersburg and other high-traffic routes.

In the US, the automative age got kickstarted in the 1950′s, when oil prices were low, affluence was rising fast and the US government financed the Interstate for military purposes. In turn, this project gave an impetus to the growth of a suburbia that now forms the core of its service economy. However, as Howard Kunstler and others have pointed out, it is an economy with no future: critically dependent on concentrated energy sources to support a high-entropy, unsustainable and soulless lifestyle, and one that only continues to be subsidized under the political pressure born of the “psychology of previous investments”. This is not a road Russia should aspire to travel, regardless of the superficial attraction of the American suburban idyll. It is a spiritual cemetery, and soon to become an economic one too**.

* Not being ironic here, BTW. Driving in Russia is far more fun than in any European country (with the possible exception of Germany’s limitless speed Autobahnen). I’m a thrill-seeker that way.

** I’m also highly skeptical of the usefulness of India’s expansion of its Golden Quadrilateral, for a nation where mass car ownership is non-existent and unlikely to ever materialize and which doesn’t even have metro systems in most of its biggest cities. Likewise for China, though at least its railway plans are appropriately gargantuan and ambitious.

(Republished from Sublime Oblivion by permission of author or representative)
 
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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)
 
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I enjoyed the egg-throwing scenes from Ukraine’s Rada on the ratification of the gas-for-fleet deal with Russia as much as anyone. It also reflected the polarized commentary on the interwebs. The Ukrainian patriot-bloggers get their knickers in a sweaty twist. The academic beigeocrat Alexander Motyl (he of “Why Russia is Really Weak” fame some four years back) now warns of the “End of Ukraine”. Ukraine’s (self-styled) intelligentsia writes open letters condemning the Kharkov deal and Yanukovych’s sellout of the national interest. 2000 protesters stage a demonstration against his pursuit of closer ties with Russia in Kiev, a city of three millions. Alexander Golts, liberal Russian military analyst, argues that the asymmetric nature of the exchange – “with the lower gas prices to take effect immediately, Ukraine can now save roughly $4 billion annually, whereas the lease extension will only take effect only after the current agreement expires in 2017″ – means that Russia was duped. In my view, these screeds are ideologized, or approach the issue from a set of false or incomplete assumptions.

Let’s start from the “banderovtsy” who despise the “sovok” Yanukovych for selling out Ukrainka to the Moskali Horde. (Yes, I’ve grossly caricatured three complex groupings in that sentence). Their problem is that they believe the “Ukrainian people” share their own rigid conception of Ukraine as a rigid nation-state, rejecting opposing views that stress its civilizational commonalities with the Orthodox, Slavic, or Eurasian spheres. This manifests itself in a particularly antagonistic attitude to Russia and Russianness, which are perceived, not inaccurately, as the greatest enemies of Ukrainian nationhood yesterday, today and tomorrow. Their biggest problem and frustration – indeed, their predicament – is that by and large, the Ukrainian people simply do not buy into their efforts to imagine into being a narrow, militantly Ukrainian vision of Ukraine*.

I’m not saying this as a Russian chauvinist**, but as someone who actually bothers to find out what Ukrainians themselves believe, as mediated through opinion polls. And the Ukrainian nationalists would not like the lyrics Ukrainka is singing. As of April 2010, some 63% of Ukrainians supported Ukraine joining the Union of Russia and Belarus, while only 27% spoke out against. This is not the whole picture, of course: 53% would also like to join the EU, although 63% speak out against NATO membership. But it does destroy the Orange myth-making that seeks to portray Yanukovych’s policies of deepening relations with Russia as some kind of treasonous, nefarious plot against the Ukrainian people.

How can they be, when 56% of Ukrainians themselves support keeping the Russian Black Sea Fleet in Sevastopol? In direct opposition to the opposition’s narrative, only 28% of Ukrainians support their accusations that Yanukovuch betrayed the interests of Ukrainians, while a much larger majority of 63% disagree. Still denying what Ukrainians are saying for all to hear? Then explain why if elections were held today, the Party of Regions and its allies would take 42% of the vote, while the combined opposition forces would net just 32%. Or try to rationalize Yanukovych’s 12% point jump in approval ratings during the first four months of his (pro-Russian) Presidency.

[Source: Approval ratings of Ukrainian politicians - Yanukovych; Timoshenko; Tihipko; Yatsenyuk; Simonenko from 2007 to 2010. Note Yanukovych's sharp jump from December 2009 to April 2010].

Second, what about the analysts like Golts who claim that Russia has been duped? On the surface, it does have a great deal of credence. Neither Russia nor Ukraine has a history of keeping their promises to each other. As Craig Pirrong pointed out:

So, my view is that this is just an interlude in the ongoing battle of bilateral opportunism between two fundamentally corrupt and unprincipled states. Remember the old Soviet joke: “We pretend to work and they pretend to pay us”? Well, I’d characterize this deal as “We pretend to give them a price break, and they pretend to extend our lease.” All this deal does is create more promises to be broken. And broken they will be.

And too bad for Russia its 4bn $ in effective annual gas subsidies kick in immediately, whereas Ukraine’s obligations to not kick out the Russian fleet in 2017 can be annulled by the next administration, should an Orange coalition come back to power.

However, this all rather misses a vital point. The process of Eurasian reintegration is, in my view, a self-sustaining process. Once it passes a critical point, it cannot go into reverse, even should politicians like Tymoshenko or Tihipko “win back” the country.

Take the example of the Baltics. Despite their substantial Russian minorities, the indigenous populations were strongly pro-Western and this was reflected in their foreign policies. They joined Western institutions like the EU and NATO, their economies were integrated with Europe, and their financial systems taken over by Swedish and German banks. As a result, they successfully “anchored” themselves into the Euro-Atlantic world and Russia can do nothing about it, short of a military intervention whose consequences cannot be foreseen. Much the same can be said of Ukraine, but in reverse. It’s cultural, economic, and political ties to Russia didn’t snap even during the Russia’s period of collapse and relative weakness. Now Russia is resurgent, while the Atlantic world order faces fiscal ruin and imperial overstretch. The conditions are in place for a rollback of Western influence across the post-Soviet space. It is already proceding at an accelerating pace. Ukraine lies at the center of this rollback – and the majority of Ukrainians are either supportive or apathetic about it.

Say what you will of them, but Putin and Medvedev are not idiots. They would not agree to a deal so ostensibly unfavorable to Russia, unless their thought processes were governed by calculations outside the mainstream purview. My instinct is that they do not view negotiations with Ukraine in terms of a set of rational exchanges between two sovereign nation-states. Instead, they view it as a soon-to-be assimilated territory. Not direct political control in the style of a “neo-Soviet Union”, mind (though the possibility cannot be 100% excluded). But what we are looking at is Ukraine becoming a certain type of client state, similar to Belarus, that will enlarge the scope of the Eurasian economic-industrial system back to Soviet levels and provide a lengthy buffer against Western encroachment by anchoring Russia’s effective borders in the Carpathian Mountains. These considerations may explain why the Russian state, now sure of its permanent influence over Ukraine, may not feel particularly nervous about the severely asynchronous nature of the Kharkov agreement.

Besides, by piecing together the other Russo-Ukrainian deals in this period, the gas-for-fleet agreement no longer looks anywhere near as one-sided as it appears on paper. Yanukovych needs the cheap gas to ease Ukraine’s fiscal situation, which is in dire straits. Russia on the other hand is proceeding with a series of initiatives to “lock in” Ukraine into its sphere of influence, such as its proposals to merge their nuclear, aviation, and gas industries.

Not all of them have been met with enthusiasm even by the heavyweights in the Party of Regions. They must recognize that should it be allowed to proceed, the marriage of Russian and Ukrainian economic interests will be near irreversible, and cannot fail to produce political consequences that will lead to a dimunition of Ukraine’s sovereignty, as observed in Belarus or Armenia. But it should be stressed that this is not a new development under Yanukovych. Russian corporations were busy buying up Ukrainian industrial assets, such as the Industrial Union of Donbass steel giant, even under the Orange administration. Whatever the personal reservations of Ukraine’s leaders, this process can only accelerate under a Ukrainian government that is overtly friendly with Russia.

And this brings us to the third class of analysts who I don’t believe have it quite right – those who recognize Russia’s growing influence over Ukraine, like Alexander Motyl, but couch it in the negative and ideologized language of “Russian imperialism” and “democratic rollback”, with all their dark connotations. Their approach conflates democracy with liberalism, economic pragmatism with anti-market neanderthalism, and Eurasian reintegration with Ukrainian subjugation.

If anything, Ukrainians are even less liberal in their views than Russians. This is not surprising considering that it is an economic disaster zone, essentially a post-Soviet fragment that never left the Yeltsin-era state of “anarchic stasis”. Twenty years on, Ukrainians are tiring of it all. They now just want a leader who can get things done. (Interestingly, and very tellingly, even the Ukrainian nationalists tend to respect Putin and wish they had someone like him at the helm). What about the lower gas prices perpetuating Ukrainian industrial backwardness – is it not a short-term fix that will only benefit Yanukovych’s oligarch allies in the Donbass? But Ukraine’s industry won’t flourish at “market” gas prices; the post-Soviet experience suggests much of it will simply collapse, and Ukrainians do not want that. Or in another words, as so often happens to the dismay of Western chauvinists, the people’s choice, as channeled through democracy, clashes with both liberal and market ideals.

Finally, the process of “Eurasian integration” cannot simply be reduced to slogans like “Russian revanchism” or “neo-imperialism” (though this is not to say that they are wholly false). Ukrainian attitudes towards this are actually rather contradictory. The opinion polls indicate that while most are supportive of entering into an economic union with Russia and Belarus, a similar majority insists on maintaining Ukraine’s political sovereignty. But herein lies the contradiction. Economics and politics are inextricable linked, especially in that part of the world. Economic reintegration cannot help but result in a certain level of political integration, and considering Russia’s position of economic dominance in Eurasia, it cannot help but result in “a regathering of the Russian lands” (or what Motyl calls a “creeping re-imperialization”). This circle cannot be squared.

Some Russia-watchers like Nicolai Petro believe that Ukraine Can Have Them and Us.

Few, however, seem to see that there is a third option — embrace Ukraine and turn it to the West’s advantage. Replace the misguided “divide and conquer” strategy that the West has been pursuing in the region with a new one that aims at the simultaneous integration of the Slavic cultural component of Europe into pan-European institutions. Make Ukraine Europe’s indispensable partner for bringing Russia into the European Union. Rather than placing the two countries on different tracks, reward them both for moving along the same path.

Although I respect Petro as an analyst, I think this assessment is pollyannish, a dream that can only be realized if history truly ends. But history never ended. “Divide and conquer” is the way of states and this remains the case to this day, even though it is now far better concealed and fought with money, not motor rifle divisions. This will become clearer in the next few years. Burdened by an increasingly untenable debt load and global commitments, the US and its allies and proxies cannot help focusing inwards during the next decade; even in the unlikely event that it should it tilt sharply back Westwards, the “Ukraine fatigue” that Pfifer warns about is all but inevitable in Western capitals.

In the meantime, Russia is resurging and seemingly set to become a developed nation by the 2020′s. Despite the popularity of EU membership amongst Ukrainians, it is unreachable. Not only are European countries against Ukraine’s accession, but the EU itself now shows more signs of disintegration than further expansion. On the other hand, Ukraine would always be welcome in Eurasia, and as pointed out above even more Ukrainians want to join the Union of Russia and Belarus than the EU. The attractions of joining (ailing) Europe will diminish, while the pressures propelling Ukraine back into (dynamic) Eurasia will intensify.

[Source: A (feasible) geopolitical forecast from the Italian magazine Limes. Though the details will probably be wrong, the general trends correlate with reality].

In his Presidential campaign, Yanukovych told America that Ukraine would be a bridge between East and West. In the coming age of post-peak oil “scarcity industrialism”, one of the surest predictions I can make is that the world will see the retreat of liberal globalization, more protectionism, and the rising preeminence of regional economic blocs. If Ukraine were to follow Yanukovych’s or Petro’s vision, its bridge would not survive; it would get sucked into a geopolitical black hole. And empires rarely tolerate vacuums on their borders.

Hence the contradictory views of many Ukrainians on how to reconcile Ukraine with a Russified Eurasia, and the profound challenges its rulers face in balancing national interests against the imminent return of history.

* To be achieved by glorifying freedom-fighting pogromists, making an anti-Ukrainian genocide out of a Stalinist democide, changing the Great Patriotic War to World War Two in history textbooks, etc.

** Personally, I am a moderate “Eurasianist” and support (non-coercive) economic, political, and military integration between Russia, Belarus, Ukraine, and Kazakhstan. As I’ve argued on this blog, it would provide manifold benefits to the majority of Eurasian people. Does that make me a “Russian chauvinist”? In my own (unavoidably biased) view, probably not, though that really depends on who you ask.

(Republished from Sublime Oblivion by permission of author or representative)
 
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I’ve been accused of being a “Russophile cockroach”, an “amoral Putin lackey”, and overall bad guy. Guilty as charged! Yes, I do like Russia and don’t have much good to say about the Western media’s coverage of it. Yes, I don’t give much of damn for the moralistic posturing that any vapid idiot Kremlinologist can easily excel in. And yes, I do have a positive opinion of Vladimir Putin (as do 75%+ of Russians). Now granted, part of this probably has something to do with the huge amounts of money his FSB minions kindly slip under my door for glorifying their Tsarist godfather on the Internet in my spare time. But this doesn’t necessarily mean that I set my alarm clock to VVP’s speeches, drink prodigal amounts of Putinka for breakfast, and bow before his icon at the Altar of Neo-Stalinism in my basement before logging onto my workstation to fulfill my job description as ein strammer Putin-soldat. In reality, my positive view of Putin is moderate and hedged.

Don’t believe my word as “the dishonest, progangadizing (very, very) little maggot” that I really am? Below I present five major shortcomings of the Putin Presidency.

What Putin did wrong

1. Waiting until 2006, or too little too late.

Since 2006, Russia embarked on a range of policies designed to check its demographic decline, reduce poverty, and recover its status as a Great Power. The main examples would be the National Priority Projects; a revamped industrial policy; health promotion; pro-natality, AIDS containment and anti-alcohol measures; military modernization; and incubation of hi-tech industries such as nanotechnology. Many of these are already bearing fruit – quite literally on the demographic front, where the total fertility rate rose to 1.56 children per woman by 2009, from 1.1-1.3 before 2006. In conjunction with falling mortality rates, this resulted in Russia experiencing its first year of population growth in 2009 since 1994. But why did Putin take so long to start addressing all these issues?

Though there are several possible explanations, I think the most accurate is that at the time Putin was simply too preoccupied with stabilizing the Russian shell of the collapsed Soviet empire. Each functioning state rests on its monopolization of legitimate violence, of tax collection, and of the issuing of money. All three monopolies were under grave threat by the late 1990′s. Homicide rates were sky-high, organized crime infiltrated state structures, and Chechen bandits raided Russia proper. The state was too weak to collect taxes from the oligarchs, producing chronic budget deficits that culminated in the 1998 default. Inflation raged unchecked, most transactions were in dollars or in kind, and many analysts were starting to describe Russia as a failed state. Therefore it cannot be surprising that Putin in his first term devoted most of his attention towards containing and mitigating these mortal threats to the Russian state. The invasion of Chechnya, the political subjugation of the oligarchs, the strengthening of the “power vertical” – all these were intended to restore some modicum of state control over the Russian Federation.

Yet as the political struggle went on at the top, the “real Russia” remained largely stagnant. With the inflow of ethnic Russians from the Near Abroad largely exhausted, demographic decline accelerated in the 2000-2005 period. In contrast to the broad-based growth after 2005/2006, in the early Putin years manufacturing remained depressed, while more than a third of economic growth accrued to the recovery in oil extraction. Little new infrastructure was built. The rate of military procurement dropped even below the miserly levels of the Yeltsin era. Thanks to the Putin government’s myopic negligence or administrative inability, Russia’s manifold, deepgrained socio-economic problems only began to be seriously addressed within the past few years.

Strike 1 – Contrary to most fans and critics alike, Putin didn’t do too much. He did too little, and too late. Under the first few years of his watch, Russia lost historical time just as it did under Yeltsin. On many socio-economic indicators, the RF in 2010 has only caught up to what the RSFSR achieved back in 1990.

2. Red tape and corruption, or the bureaucracy is expanding to meet the needs of an expanding bureaucracy.

Corruption remains “public enemy number one”, according to President Medvedev. This can be confirmed by any number of horrific anecdotes: the absurdly inflated Moscow housing market, bureaucrats owning property worth hundreds of their yearly salaries, entrepreneurs losing their businesses to well-connected thugs. Apart from a few cosmetic house-cleaning campaigns under the Putin President, the state’s efforts to control this scourge have been decidedly lack-luster, and Russia continues to be perceived as one of the most corrupt nations on Earth.

[Sources: Transparency International's "Corruption Perceptions Index"; Transparency International's "Global Corruption Barometer", answers to the question, "In the past 12 months, have you or anyone in your household paid a bribe in any form?" (% saying "yes"); World Bank's "Worldwide Governance Indicators" (Control of Corruption), country percentile].

This corruption is directly related to the arbitrary power of Russia’s bureaucracy, and the labyrinth of regulations that “justify” its existence. Love them or hate them – and yes, most Russians hate them – bureaucrats are indispensable for running a modern state. However, in Russia bureacrats are neither accountable unlike in most developed nations nor held under close scrutiny unlike in the USSR or today’s China. Furthermore, their numbers are well in excess of necessity. In contrast to a few post-Soviet nations like Estonia and Georgia which fired many of their bureaucrats, the Russian bureaucracy grew rapidly under Putin.

[Source: Rosstat].

The extractions of rent-seeking bureaucrats stunt the development of small and medium businesses. Furthermore, corruption indirectly kills people (e.g. grocery pharmaceuticals are expensive and unreliable) and fosters a destructive social mentality in which anything and everything is considered exchangeable for money and the privileged and connected can act with impunity.

As the man at the top of the pyramid, Putin was responsible for perpetuating this system during his Presidency. Sensational rumors of foreign villas and multi-billion dollar offshore accounts to the contrary, there is no evidence that Putin is personally corrupt*. However, controlling corruption within one’s circle and further down is extremely hard; no Russian ruler, except the most steely and despotic, has ever managed to rein in his bureaucrats. Now you could go down the neo-Stalinist route, but executing corrupt bureaucrats is now politically incorrect in most places outside China. Perhaps Putin should have simply axed this Gordian knot, like Saakashvili in Georgia**? That might have worked, – no regulation, no bureaucrat, no problem. But something stayed his hand. Maybe he feared chaos, since the bureaucracy is one the forces gluing a nation together. Maybe they were considered necessary to reconsolidate the state and rebuild the power vertical. I don’t know.

Maybe Putin shouldn’t have suppressed Russia’s civil society and media outlets if he was serious about checking corruption? But this is a false narrative. It is not the federal government or Putin, but unreformed institutions such as the Ministry of Internal Affairs (MVD), the FSB, the Prosecutor-General, etc, that pose the greatest hazards to Russia’s nascent civil society. It is not VVP who runs around killing and harassing journalists, but the “stationary bandits” in government and/or business taking advantage of Russia’s culture of impunity. The ultimate proof of the pudding is Ukraine – despite its pluralistic politics and journalistic freedoms after the Orange Revolution, corruption there remains at least as bad as in semi-authoritarian Russia***. No matter the personal integrity or ability of Russia’s (or Ukraine’s leaders), the entire post-Soviet state system remains unacceptably opaque and unaccountable.

Strike 2 – Putin could have mitigated Russia’s corruption and culture of impunity by: 1) stripping away the reams of red tape that create opportunities for rent-seeking, 2) decimating the ranks of the bloated bureaucracy, traffic police, etc, or 3) increasing the penalties for, or the “costs” of, corruption. In reality, there was some improvement in 1) and 3), and massive backtracking on 2). It is only under Medvedev that government and citizenry are beginning to show signs of taking corruption more seriously.

3. Inequality, or oiligarchs & their little adults.

Russians are not Americans. Though most accept the capitalist system, a majority of Russians believe the state has a duty to narrow down inequality between rich and poor and assure everyone a decent standard of living. Opinion polls indicate that around 63% of Russians are essentially “statists”, while only 25% are economic “liberals” and an insignificant 4% are small-government libertarians. Thouh there has been impressive progress on lifting all boats in the past decade – poverty rates were slashed, consumer goods became much more affordable – the Putin regime also presided over an era of slowly rising inequality****. This does not sit well with many Russians, especially the elderly who put great stock in egalitarian values.

[Source: Rosstat].

It is no great exaggeration to say that Russia’s government is by the rich and for the rich. Though perhaps at first necessary as the most reliable way for a broken state to combat tax evasion, the 13% flat tax on incomes now perpetuates inequalities. A much bigger burden falls on productive companies in the form of (highly regressive) social security contributions, which are set to rise from 26% to 34% of the first 400,000 rubles of income this year to help correct the budget deficit. However, Putin had no problems with reducing taxes for oil companies, so that they could either extract and sell off Russia’s oil the faster, or pocket the extra change.

Worst of all are the effects on social cohesion. All Russian oligarchs earned their wealth through their connections with the state – there is not a single Sergei Brin or Bill Gates amongst them. The inheritance tax was abolished in 2006, and now more than a hundred Russian children, or “little adults“, are set to acquire billions without earning a single ruble. Sure, these “new Russians” get to experience the shallow thrills of conspicuous consumption, and take power in their sleazy connections with state structures to run over ordinary Russians with impunity (sometimes literally). The price Russia pays for tolerating these historyless elites is a perpetual bankruptcy of social capital, the cooperative spirit that welds a nation together. Amongst other things, this dearth of social capital manifests itself in society’s tolerance for petty corruption. After all, why should a simple traffic policeman, doctor, or other low-paid state worker refrain from taking bribes, when oligarchs make off with billions in cahoots with the state?

There has been no effort to check or reverse the growth of inequality under either Putin or Medvedev. Even as the Fair Russia opposition party calls for progressive taxation and a luxury tax, Roman Abramovich is indulging himself to his biggest yacht so far, armed with a missile defense system and laser shield.

Strike 3 – Putin presided over an increase in inequality, made all the more unholy by money’s marriage with socio-political privilege. Though neither the trend towards nor the magnitude of inequality is exceptional by global standards, it clashes with Russian popular sentiments and undermines social capital.

4. Economic mismanagement, or stationary bandits who don’t know or care about limits to growth.

First, the “Muscovite” rent-granting political economy over which Putin presided is both economically inefficient and socially unjust. Take the Russian oil industry, in which politically subservient oiligarchs are given free rein to manage their own companies. This combines the worst of both private and state ownership. Lacking security over their assets, the oiligarchs are loath to plow too much of their own money into maximizing long-term oil extraction and revenue. Far better to maximize short-term extraction by overexploiting their oil fields, pleasing the Tsar with generous rent payments, and to make off once these fields go into premature decline. In the meantime, astronomical profits are diverted into a few oiligarch hands instead of going to the Russian state. Now granted, Putin’s “purgatory”, run by clans of “stationary bandits”, might be an improvement over Yeltsin’s “hell” of asset-stripping “roving bandits”… but they are all still bandits nonetheless.

Yet when all is said and done, it is not entirely clear that Putin could have realistically done better on any of these issues. He inherited the “Muscovite system” from Yeltsin and can be credited with actually making it workable, in the sense that the oligarchs were forced into paying their taxes and Russia’s chronic budget deficits were finally eradicated. Reversing privatization and trying to create a Russian version of Statoil, the efficient state-owned Norwegian energy company, was entirely unrealistic given the institutional rot of the Russian state. The other extreme, a full-scale liberalization of the oil sector, would have probably been counter-productive because of that same weakness of the Russian state. For proof, look no further than how Khodorkovsky used YUKOS’ resource wealth to mount a direct political challenge to the Kremlin… would the Russian people really have been well served if their state had been hijacked by the Menatep bandits?

Second, even accounting for its being a cold, landlocked country with a lot of heavy industry, Russia remains very energy inefficient. There are serious uncertainties over its ability to meet future domestic and European gas demand, and its oil production will soon peak and go into decline. However, by world standards, Russia is supremely well-endowed with energy resources. Thus, it makes manifest sense to use the earnings from foreign hydrocarbons sales to aggressively implement energy efficiency measures and build a green energy infrastructure. The World Bank estimates that investing 320bn $ into energy efficiency could save Russian consumers 80bn $ and generate more than 100bn $ in extra export revenues annually. Putin prefers to go the much more expensive route of greatly expanding generating capacity, e.g. by building many nuclear power plants, while less glamorous but cheaper options like insulating housing, upgrading utilities, or reducing natural gas flaring are neglected. So yes, Russia’s policies on energy are short-termist and “cornucopian”, – but the very same could be said for almost any country one cares to name. Only a bare handful of nations, like Sweden or Germany, have made serious commitments to sustainable development (and none acknowledge the concept of Limits to Growth).

Third, the main reason Russia experienced such a deep recession during the 2009 global financial crisis was because its banks and corporations had become dependent on infusions of Western credit. Once this system throttled up in late 2008, emerging markets were the first to be cut off. Unfortunately, Russia under Putin’s watch had failed to develop the deep indigenous credit systems that enabled countries like Brazil or China to weather the storm in good shape, and it saw a massive GDP decline of 7.9% in 2009. But it’s not exactly clear how Russia could have prepared better. The main reason Russia’s financial system was starved of capital was because instead of reinvesting the proceeds from hydrocarbon sales into the economy, the government bought up foreign currency reserves in order to prevent an excessive ruble strengthening from short-circuiting the revival of Russia’s manufacturing base. Ironically, by trying to reduce its resource dependency, Russia actually increased its exposure to the Western financial system, whose weaknesses only became obvious with the benefit of hindsight. Nonetheless, despite the severity of the GDP drop in 2009, the Russian economy is now showing signs of mounting a vigorous recovery.

Finally, Putin should be given big props for protecting Kudrin – the main architect of Russia’s macroeconomic stability – from the attacks of the spendthrifts and siloviki in his circle. This did nothing to benefit him politically, but as a result Russia today is “one of the world’s most fiscally secure nations”, according to Liam Halligan, chief economist with Prosperity Capital Management.

Strike 4 – under Putin, Russia remained economically unproductive, socially unjust, energy inefficient, and acquired a dependence on Western credit. These problems are deep and are unlikely to go away without intelligent intervention by the state.

5. White elephants, or Siberian bridges to nowhere.

The Russian state has always liked “white elephant” solutions to complicated problems. Putin continued in this proud tradition. Perhaps the best example of this were Russia’s wild-eyed plans to construct six aircraft carriers during the giddy heights of its pre-crisis boom. Let’s look at the problems with this scheme:

  1. The global hegemony of the United States rests on the power projection capabilities of its 11 aircraft carrier battle groups. Russia is a regional land power whose strategic interests do not extend far beyond its Near Abroad.
  2. Russia’s economic base is seven times smaller than America’s.
  3. Even the “structurally militarized” USSR never had much success with aircraft carriers. Russia’s military-industrial complex is now almost an order of magnitude smaller and no longer has access to the big drydocks in Ukraine.
  4. Russia can’t even build a decent helicopter carrier, and eventually took the rational decision to order Mistrals from France.
  5. The days of the aircraft carrier may well be numbered due to the development of cheap carrier-killing weapons systems.

This particular white elephant never was to be. But far too many are real enough, such as the bridge to nowhere near Vladivostok that will connect the Russian mainland to a small island populated by a few thousand residents, projected to cost more than 1bn $ and intended as a showpiece for the 2012 APEC summit. Meanwhile, the roads from the Urals to Vladivostok remain little more than dirt tracks.

Now admittedly, white elephants are minor nuisances relative to the first four problems. Their attractions are hardly unique to Russia, and it could even be argued that some, like the Sochi Olympics, are a net positive thanks to their impact on national morale. Nonetheless, I still think improving Russia’s energy efficiency or networking its clunky armed forces is somewhat more important than erecting suspension bridges in Siberia or dreaming about multiple carrier battle groups patrolling the Russian Arctic.

Strike 5 – Putin is sometimes too influenced by the traditions of Soviet gigantism to consider humbler, more cost-effective ways of solving problems.

What Putin did right

But what about that KGB spy’s ruthless suppression of freedom and democracy? False narrative. The majority of Russians approve of Putin and his system – as of 2008, some 75% of Russians felt that they either had “enough” or even “too much” freedom. Today’s Russians feel much happier and freer than in either the late Soviet Union or Yeltsin’s Russia.

But hasn’t Putin suppressed the free media and brainwashed Russians into worshipping him? Yet if that were the case, one would presumably expect most Putinistas to be old, sour-mouthed Stalinists, whereas in fact support for Putin (and disillusionment with the West) is highest amongst young, university-educated Muscovite men – the very segment of the Russian population that is most exposed to the West through the Internet and foreign travel! (Of course, to the Western chauvinist, this must mean that the Russian people are ignorant, nationalist sheeple… since nothing can be allowed to challenge their faith, there is little point in talking to them).

What about Putin’s hatred of the West? Again, false narrative. Putin the KGB operative is inseparable from the Putin who served under Sobchak, the liberal mayor of St.-Petersburg in the 1990′s, or the Putin who favored the “civiliki” clan (Surkov, Medvedev, “patriotic liberals”) over the FSB-connected “siloviki” in his choice of successor. But why then does Putin antagonize America by maintaining relations with freedom-haters like Ahmadinejad and Chavez? Newsflash! This is Realpolitik, practiced by all sane and sovereign nations. Bending over backwards to advance Washington’s national security interests is not part of Putin’s job description. Not can it reasonably be expected, due to US support for states hostile to Russia (e.g. Georgia) in its Near Abroad.

One of Putin’s greatest strengths is that he recognizes the immense harm Russia suffered from single-minded past pursuits of abstract ideals, and rejects mindless idolization of the West as surely as he rejects the old Marxist-Leninist dogmas. He is a national figure of post-ideological reconciliation, a leader who sees no paradox in defending the Soviet Union against politicized attempts to equate it with Nazi Germany while honoring Russians like the dissident Aleksandr Solzhenitsyn or the White general Anton Denikin.

Zhou Enlai may have been exaggerating when he said the impact of the French Revolution was “too early to tell”, but nonetheless, I think it is fair to say that we must wait at least a few decades before we have any hope of objectively determining Putin’s legacy. Based on the criticisms I’ve made in this post, some analysts would rush to dismiss Putin as an incompetent idiot or malicious enemy of the Russian people. After all, it doesn’t take much to pronounce judgment from the comforts of one’s armchair… Yet none of us have been in Putin’s boots. We didn’t experience his early struggles with the oligarchs, the contraints and frustrations he faced trying to rule Russia through an unwieldy and corrupt bureaucracy, the pyramid of cards he has to build and maintain to balance the warring Kremlin clans. I can do no better than quote a great speech by Theodore Roosevelt to illustrate this point:

It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.

Putin’s critics, knowing neither victory nor defeat, are nothing more than the dust at the feet of that great man who continues struggling, striving, and spending himself as Russia’s humble servant.

* To the best of my knowledge, all these allegations of Putin’s 40bn $ of personal wealth originate from Stanislav Belkovsky, a professional purveyor of kompromat and creature of Sechin’s silovik clan.

** Georgia’s success at controlling corruption shouldn’t be exaggerated. In recent years, the Saakashvili regime acquired the habit of pressuring independent businesses to provide “voluntary contributions” in return for not bankrupting them under corruption prosecutions.

*** Russia’s corruption should be viewed in perspective. Is it a serious problem that reinforces privelege and blights the lives of many people? Certainly. Apocalyptic? Not at all. First, Russia is not excessively corrupt by the standards of most middle-income countries, and there is evidence that “everyday” corruption (as opposed to business corruption) fell under Putin’s watch. See here, here, and here. Second, corruption does not seriously affect Russia’s growth potential. Italy was systematically corrupt in the 1970′s-80′s (and still is), as exposed in the short-lived mani pulite investigatations of the early 1990′s. But that did not stop Italy from overtaking Britain’s GDP back in 1987 in the so-called “Il Sorpasso”. Likewise, Russia’s myriad strengths – the strong education system, energy wealth, and macroeconomic stability – means that its systematic corruption is unlikely to constitute an insurmountable barrier against its convergence to Western levels of development.

**** Russia’s levels of inequality shouldn’t be exaggerated, however. The Gini index of income inequality has been stable at around 40 since the early 1990′s, and is only high by European standards. (The US and China are at 45, most Latin American countries exceed 50).

(Republished from Sublime Oblivion by permission of author or representative)
 
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After two hundred years of global ascendancy, the West is in rapid relative decline to (re)emerging Asia, which is mounting a steady “Great Reconvergence”. Likewise, the legitimacy of today’s “neoliberal internationalist” order promoted by the West is being questioned by the more statist, neo-Westphalian visions of the leaders of the Rest, the so-called BRIC’s. This has already led to the emergence of a “world without the West” – a parallel international system based on the principles of state sovereignty, hard power, and bilateral trade relations.

The most powerful and influential member of this new world is China, which has become the “workshop of the world” since its graduated opening up from the late 1970′s. Accounting for half of global steel and cement production, China has built up an enormous infrastructure of roads, railways, and ports to support its mercantile expansion. In 2009 it became the world’s largest automobile market. Furthermore, China is now advancing higher up the ladder of added-value industries by expanding into hi-tech areas such as commercial aircraft, renewable energy, and supercomputers.

One of the most important factor making China’s rise all the more significant is that it is concurrent with the accelerating decline of Pax Americana that is spurred on by the end of cheap oil, US economic weakness, and regional threats to American hegemony from the “challenger Powers” (e.g. Russia, Iran, and China itself). Should the current international order suffer a “cascading collapse” – which is not unlikely, given the brittleness of the world financial and energy system – then it is possible that China will emerge as an equal, or even superior, pole to the US superpower as soon as 2020.

The Inevitability of China’s Return to Hegemony

Critics aver that ordinary Chinese remain much poorer than Americans, but they miss the obvious fact that with its 1.3bn+ population, China needs only a Romanian level of per capita economic output to equal the US; should they reach Portugal’s level, China’s economy would be double America’s size. (Economic power underpins military power). Nor is there any reason for supposing that China’s growth will soon falter due to social and regional inequality, environmental degradation, bad loans, population aging, or social unrest (though it may well experience a Malthusian collapse along with the rest of the world by 2050). For a refutation of the major concerns, see my old post A Long Wait at the Gate of Delusions, or in summary:

  1. Regional disparities. The sharp divide between the affluent coastal and poorer internal regions is not new in Chinese history. In the absence of firm central control, this has in the past led to fragmentation – coastal administrations orientating themselves to foreign commercial interests, the interior sinking beneath a morass of poverty and corruption. However, modern China is not the ailing China of the 19th century in the throes of Malthusian stagnation. It is now a proud and rising Great Power, its regional separatist movements are quelled, and it is under the firm control of the CCP. As such, the chances of a jaded Japan or declining USA successfully exploiting this divide are very slim.
  2. Income inequality. There is also a great deal of inequality between China’s urban and rural, between its new oligarchs and itinerant indigents, and between the privileged and non-privileged. However, this is entirely typical of capitalist societies at the height of the industrialization drive, and levels of inequality tend to fall once a more affluent state decides on expanding social welfare schemes to contain labor unrest. As will be covered in a later, related post on China’s internal debates, the ideological underpinnings for such a shift are already coming into place with the concept of the “Harmonious Society“.
  3. Environmental degradation. A major problem. An innovative attempt to start measuring economic performance with “Green GDP” (accounting for pollution costs) was quietly squashed when it indicated that China had almost no real growth. That said, localized pollution per se, like city smog or collapsed ecosystems, won’t bring about China’s fall just as they haven’t led to the fall of any other post-agrarian society. The same certainly cannot be said for anthropogenic climate change, whose effects will become devastating to China by the 2030′s (floods, droughts, desertification, dust storms, etc). The most ominous prospect is the melting of the Himalayan glaciers, though some point out that this may be a centuries-long process. Nonetheless, these potential disasters won’t come in time to prevent China’s assumption of its superpower mantle, which I predict for 2020.
  4. Bad loans. A valid point, but they only tend to result in – or more accurately, contribute to – long-term stagnation by the time high growth rates falters, such as when a developing society nears convergency with the rich world (e.g. Japan in the early 1990′s). South Korea got a severe economic shock in 1997 stemming from its structural weaknesses, but respectable rates of growth continued up until the 2008 economic crisis. Speaking of which, Western critics should be doubly cautious now when criticizing China for its bad loans. As recent history might have proven, investing in industrial overcapacity may be rather less useless than building suburbs with no future, printing money under euphemisms like quantitative easing, or whatever the latest bondoogles are.
  5. Will China get old before it gets rich? The concerns over aging are ridiculous because 1) China’s TFR is at a respectable 1.8 (OK, more like 1.6-1.7 if one accounts for their skewed sex ratios, but still…), 2) its labor force will continue growing until 2030, and 3) it still has massive labor armies locked up in the countryside which can be drawn into higher-added value economic sectors. The real problem cases in the aging department are Central Europe, the Mediterranean, and Japan. See Will China Grow Old Before Getting Rich? (Goldman Sachs) for a more comprehensive analysis which reaches the same basic conclusion.
  6. Excessive export dependency. Frankly, I’ve always thought the image of the heroic American consumer saving the world by kindly consuming much of what the the world produces to be somewhat ridiculous – and this image is already being revealed for the hallucination it really is, thanks largely to US fiscal profligacy, imperial overstretch and peak oil. But I digress. First, China’s export dependency is nowhere near as high as suggested by the official figures because much of its exports are merely assembled in China from parts made in and imported from Korea, Japan, etc. Whereas gross exports are near 40% of GDP, net exports are at just 7% of GDP. In 2008, China clocked up a respectable 8% GDP growth rate (albeit, one only enabled by prodigious credit infusions), even though its exports fell by 20%. Second, the main reason for Chimerica – Chinese saving / production – American dissaving / consumption – in the first place was it allowed China to acquire the foreign currency to pay for resource imports, build up its industrial base, and acquire advanced technologies, while the US got back cheaper goods to cushion its rising inequality and industrial stagnation. But China interest in this deal is flagging. It already has by far the world’s largest industrial base by volume and it has bought up, or stolen, most of the key technologies needed for advanced industrialism. From now on, growth will be slower as it is curbed by stagnant world demand, accumulating bad loans, diminishing returns, etc, – it will likely be around 5-7% a year in the 2010′s, rather than the 10% typical of the 1980′s to 2000′s. Nonetheless, growth should continue at a fast enough rate to soak up the new landless labor, ease social tensions and enable China to launch a geopolitical breakout. The inevitable transition from a centrally-weak, disbalanced and commercialized nation-state, to a more centralized, balanced, hegemonic empire will not be smooth, but China’s forward momentum is simply too large to derail its rise to superpower status.
  7. Social unrest. Unlikely to happen in a big way as long as fast economic growth continues, which it likely will for the next decade. China still has plenty of room for economic convergence, and its investments in human capital are going to be paying off handsomely in this period – “during the past decade, China has produced college and university graduates at a significantly faster pace than Korea and Japan did during their fastest-growing periods” (Goldman Sachs). Nor are resource or ecological limits to growth likely to intrude in the next ten years. Of course, this situation won’t last forever and by 2030 at the latest, China will be forced to radically reform its model to hold together, e.g. to nationalist expansionism or ecotechnic dictatorship.
  8. China’s monolithic and non-democratic nature. Though the CCP projects an image of internal unity on the world, under its placid exterior there is a flux of dynamic debates about how China should reconcile growth with environmentalism, capitalism with socialism, democracy with stability, and cultural influence with military strength. The necessity of liberal democracy for success is a figment of the Western end-of-history mentality, and will be recognized as such by the time the West realizes history doesn’t end.

In conclusion, China has the tools at its disposal to become the world’s last industrial superpower (the US and Japan are in relative decline, Russia has too few people, India is coming to the party too late). The creeping dissipation of the global financial system will remove the US from its position as the system’s intermediator, and with it will go a key pillar of neoliberal internationalism. This will clear the foundations for the emergence of a new symbiosis between the oil-exporting nations of the Middle East and a China which can provide them with cheap consumer goods and security guarantees in place of a deindustrialized, unpopular, and increasingly insular America. These trends will become the conventional wisdom by 2020.

China and the World: Coal, CO2, and Geopolitics

By that date, the age of scarcity industrialism will be in full bloom. Three issues will come to the forefront of all discussions about China’s global significance.

First, the impact of 1.3bn people enjoying rising levels of personal affluence on the global environment. Its electricity generation fueled almost entirely by coal, China has recently overtaken the US to become the world’s biggest CO2 emitter. Today, given the absence of any egalitarian, spiritual, or ultra-nationalist ideology keeping the country together, China requires rapid growth to prevent spiraling unemployment and social unrest. The CCP wants to remain in power, and for that it needs stability, and that needs growth, and that needs more and more coal plants every year. Hence the reason for China’s unwillingness to agree to any but the weakest CO2 emissions targets – i.e., a non-binding resolution to a 45% reduction in Co2 intensity per unit of GDP by 2020 from the levels of 2005. However, since China’s GDP is expected to treble or even quadruple from 2005 to 2020, its emissions will grow by 50-100% even if it achieves this non-binding target. Needless to say, this will be catastrophic for our efforts to contain climate change to a global temperature rise of below 2C, at which point runaway dynamics are expected to become predominant. As the last superpower, I expect China to take the lead in any global or national “final gambit” at geoengineering our way out of runaway climate change.

Second, China’s ability to generate industrial growth from its own resources is shrinking. It is already a major oil importer and its grain production is on a slowly dipping plateau, thanks to increasing urbanization and environmental damage (desertification, salination, depletion of fossil aquifers, etc). It is already restricting exports of the strategic Rare Earth Metals that constitute key components of hi-tech devices such as hard drives, wind turbines, and electric cars. This is a major problem for the world outside China, since China accounts for a stunning 95% of global REM production. It will take a decade to reopen the old mines, and in the interval the West could experience a severe “tech crunch”.

Since the bulk of Chinese electricity consumption comes from coal and its geo-economy is not structurally dependent on cheap oil on the same massive scale as the US, China will not be as hard hit by peak oil as the Anglo-Saxon world; besides, its manufacturing prowess and foreign currency reserves will allow it to outbid most competitors for the black gold. However, the downside to using coal is that it too will peak – in China’s case, perhaps within 10 to 15 years, after which it will go into a rapid decline. As such, China can be expected to “lock in” foreign energy supplies with long-term contracts, increase exploitation of unconventional fossil fuel sources such as coal seam gas, and accelerate its current attempts to force through a renewable transition. In 2009, China became the world’s largest producer of both wind turbines and PV panels; however, they have made nary a dent in its CO2 emissions, and are unlikely to do so any time soon. Coal is much cheaper and more importantly, provides the vital base load power that intermittent wind and solar flows cannot.

Third, China’s military power and neo-colonial influence is set to increase in the coming decades. After suppressing military spending from the late 1970′s to the early 2000′s in order to free up its energies for rapid economic growth, the People’s Liberation Army is now being paid back handsomely for its patience. A prescient quotation from the Economist in 1986, from the days when the magazine was still worth reading:

For China’s military men with the patience to see the economic reforms through, there is a payoff. If Mr. Deng’s plans for the economy as a whole are allowed to run their course, and the value of China’s output quadruples, as planned, between 1980 and 2000 (admittedly big ifs), then 10 to 15 years down the line the civilian economy should have picked up enough steam to haul the military sector along more rapidly. That is when China’s army, its neighbors and the big powers will really have something to think about.

That time is now. Defense spending is now rising faster than GDP, as China intensifies military modernization and acquires new capabilities in electronic, information, and anti-satellite warfare. The overall strategic balance has also changed. The dissolution of the Soviet Union meant that the old Chinese fear of a tank invasion from the north has dissipated; coupled with the growing importance of maritime trade and foreign energy supplies, this has produced a reorientation to coastal defense and broader power projection to the south and east. China’s most ambitious military project is its decision to embark on the construction of a real blue-water navy, a vital tool in the renewed “gunboat diplomacy” we are likely to see in the years ahead.

In the short term, this has extended to China acquiring Russian weapons such as four Sovremenny-class guided missile destroyers, twelve Kilo-class diesel-electric submarines, and advanced anti-ship missiles and supercavitating torpedoes such as the Sunburn, Sizzler, and Shkval. Domestic production of naval vessels is expanding rapidly: whereas US shipbuilding is withering away, China now accounts for a third of global shipbuilding and “is in the midst of a shipbuilding and acquisition craze that will result in the People’s Liberation Army Navy having more ships than the U.S. Navy sometime in the next decade”, including four aircraft carriers by 2020. China’s military modernization has already tipped the regional balance of power. A recent RAND study indicates that China is already be able to establish air superiority over Taiwan in the event of a hot war over the straits, and on current trends it will probably be able to conquer it outright within the decade.

In tandem with its military modernization, which is mostly geared to fighting and winning possible local wars in south-east Asia (Taiwan, Spratly Islands, Vietnam), China is pursuing a far-sighted “string of pearls” strategy of naval base construction on its outlying coastal islands and friendly nations such as Myanmar, Sri Lanka, Bangladesh, and Pakistan. They will host radar stations and anti-ship batteries, and will form logistics hubs for naval operations. The underlying strategy is to reinforce China’s coast against foreign encroachment and to protect its sea lines of communication (SLOC) – especially the vital energy routes supplying it with Middle East oil.

Finally, the broadest form of China’s projection of influence is its rush to buy out mines, arable land, oil field concessions, and foreign national elites, from Australia to Brazil to Ukraine to Angola; indeed, Africa is a focal point of interest, with up to half a million Chinese already working on building up the continent’s industrial infrastructure and tapping its energy and mineral wealth. Closer to home in South-East Asia, most nations are both appreciative and fearful of China’s rise, bandwagoning with the US on security while engaging with China economically. The fact of America’s accelerating decline means that this state of affairs is not permanent. Any future “downsized” US empire will have minimal interests in East Asia, and will concentrate its energies on the Americas, Africa, and perhaps the Middle East (though it will be largely displaced by Turkey and China there).

The second greatest East Asian Power, Japan, will have neither the will to mount a serious challenge to China’s emerging hegemony, nor the strategic foundations. Japan is almost entirely reliant on foreign supplies of energy, and as soon as the PLA Navy surpasses the Japan Maritime Self-Defense Force, it will be utterly eclipsed by China. Why struggle, when Japan can instead exist as in a comfortable symbiosis with a China whose post-1978 growth it actively nourished – spats over their wartime history to the contrary? Japan is capital-rich, China is labor-rich; both share Asian values based on paternalism, state capitalism, and national sovereignty… Japan has two choices. It can try to construct an encircling alliance encompassing Russia, Korea, India, and the US to contain China, but this is a truly ambitious undertaking because 1) Russia has – and by that point the US will have – no overriding reason to confront China, 2) the “pan-Asian” appeal of China, 3) Japan has territorial disputes with Russia, whereas Russia in turn has close if suspicious relations with China through the SCO, and 4) as argued by the late Samuel Huntington, Asian societies have a tendency to bandwagon with the leading regional power – now it’s the US, in the future it will be China. The other alternative, and I would argue the likelier and more natural one, is for Japan to acknowledge Chinese regional hegemony. Once Japan takes this plunge, every other nation in in the region will follow.

Conclusion

It is no exaggeration to say that whither goes China goes the world. It is already the world’s greatest industrial power, at least as measured by physical throughput, energy consumption, and pollution emissions. Though still technologically backward, it is much less so than 10 years ago. China’s purchases of foreign technology, copying, and industrial espionage are rapidly closing the gap, and China’s rapidly expanding R&D workforce will be able to successfully hit the ground running once there arises the need for indigenous innovation.

The extent to which China will be able to solve its energy, minerals, food, and water problems will have major impacts domestic and international, and its success or lack of at reducing – or mitigating – its greenhouse gas emissions, is probably going to determine whether the world as a whole will be able to wriggle out of its Limits to Growth predicament. Finally, China’s cultural, economic, and neo-colonial influence is going to metastasize – in the process transforming it into an East Asian regional hegemon and primary pole in world geopolitics.

China’s greatest challenges lie in geopolitics (how to manage its own rise?), coal (how to power growth?), and CO2 (how to grow, or just stay still, sustainably?). The answers to these questions will determine its future political, social, and economic trajectory. It is therefore vital to to find out how its elites are planning to stand up to this panoply of perils and opportunities, which will be the subject of my next post on China.

(Republished from Sublime Oblivion by permission of author or representative)
 
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As a follow-up to my article on the historical necessity of Green Communism, I would like to 1) refute some common myths and misconceptions about limits to growth-induced collapse, 2) clarify the concept of Green Communism, and 3) elucidate why the only realistic way to prevent collapse now is to force through a “sustainable retreat” by an “ecotechnic dictatorship”.

Let’s take as a starting point our current situation. From the late 1970′s or early 1980′s, calculations indicate that humanity exceeded the long-term carrying capacity of the Earth. Fossil fuel resources are being used up at an unsustainable rate, producing an increase in what William Catton called the “phantom carrying capacity“, which now supports many of the Earth’s surplus billions. However, should the energy base becomes too weak to sustain this phantom carrying capacity, there will be a catastrophic fall of the human population as the Earth system snaps back into equilibrium, producing a massive Malthusian dieoff. The recent peaking of world oil production and accelerated Arctic methane release are but the early portents of hard limits to growth on our finite planet.

We are in a predicament, dependent on an industrial Machine whose insatiable appetite for ever higher levels of material throughput will eventually doom us all. A Machine and its brother, Mammon, with whom we have made a Faustian bargain. We have to somehow wriggle out of this physical and spiritual dependency on our industrial Mephistopheles to avert a collapse of industrial civilization by 2050, but continued dithering and denial makes the changes required ever more drastic year by year. Had the world begun the transition to sustainability in the 1970′s, a great deal of personal freedom and private affluence could have been preserved; as of today, it looks ever likelier than only a Leviathan invested with total power over society can haul us back from the brink of the Olduvai Gorge.

The Necessity of Green Communism, or How I Learned to Stop Worrying and Love the State

The world’s industrial infrastructure and services run on cheap fossil fuels and electricity (much of which is derived from hydrocarbons). Past global energy transitions, such as the one from biomass to coal, took 50 years to accomplish. It is not unreasonable to expect a similar timescale for the hydrocarbons to renewables transition, especially since unlike in the past we will be shifting towards energy sources with lower EROEI’s and lower energy and power densities. At the same time, we will have to deal with the problem of anthropogenic climate change, which seems to exhibit more signs of veering out of control with every passing year.

In the face of these challenges to industrial civilization, the world system may continue on one of the following three paths: 1) business as usual, 2) limits to growth, and 3) sustainable retreat. The rough shape of humanity’s ecological footprint trajectories are summarized for each scenario in the graph below, where 100 is a rough estimate for the carrying capacity of the Earth in 1960.

My vision of three possible future overshoot scenarios.


Business as Usual, or “Fantasy”

The miraculous discovery of a new energy source, embodied in the element unobtainium, enabled an uninterrupted continuation of economic progress. Energy researchers all over the world slapped their balding heads in frustration in 2012 for not discovering this energy source earlier, an energy source that was non-polluting, present throughout the world’s oceans, and very easy to extract and exploit. Just a few years later world governments embarked on a geoengineering scheme to create a cloud of self-assembling nanobots, designed to cleanse up the surplus atmospheric CO2 back to its pre-industrial levels, and hopefully not turn the world’s biosphere into “grey goo” in the process.

By the time they got ready to get going with this in 2025, to their happiness they discovered it wasn’t even necessary. Just a few days before the nanobots were due to be unleashed, the theory of anthropogenic global warming was finally exposed as a massive hoax invented by Al Gore to further his megalomaniac plans for global totalitarian socialism. In an interview, the UN climate panel’s chairman admitted, “I am deeply ashamed for having perpetuated such a massive fraud on the governments of the world”. Al Gore himself couldn’t be found for comment, the conman having been raptured into the technological singularity hours before the scandal broke.

Limits to Growth, or “Reality”

Though business-as-usual cornucopia sounds like a good plot for a literary homage to Michael Crichton, few informed people can seriously believe that technology and markets by themselves will enable us to extend our Faustian bargain with the Machine long enough to cheat Gaia when she comes to collect. The likeliest outcome of business-as-usual hubris is a flattening plateau, following by a global, cliff-like collapse in human numbers, technology, and socio-political complexity. There are four major sources of evidence for holding this theoretical viewpoint.

1) Limits to Growth. According to the findings of the widely-publicized 1972 study by the Club of Rome, exponential growth is unsustainable on a finite planet, even when markets and technological growth are accounted for. The results of the “standard run” of their World3 model contained in the 2004 updated version of the study are reproduced below. Crushed between the Scylla of resource depletion and the Charybdis of pollution overload, collapse occurs within the first half of the 21st century.

The Limits to Growth standard run leads to collapse early in the 21st century.

A recent report by Graham Turner of CSIRO Sustainable Ecosystems, A comparison of The Limits to Growth with 30 years of reality, showed that world system dynamics in the post-1972 era closely tracked the forecasts of the Limits to Growth standard run. Not good.

2) Resource Depletion. In support of the theory that the world will experience severe problems with energy are depletion studies of the three major fossil fuels – oil, natural gas, and coal. Let’s summarize each one.

Peak oil was most likely reached in 2008, and from 2011 depletion will decisively overtake new fields coming offline – most of which will be located in remote locations like deep offshore or the Arctic, and will require huge investments for exploitation to begin. Natural gas will peak by 2030, but its decline profile will be much steeper than for oil; however, there are hopes of prolonging the gas age by exploiting shale gas and coal seam gas. Finally, although on paper coal reserves should last centuries, the bulk of the deposits are very low EROEI and may even require more energy to extract than they will ever produce through combustion. It should be noted that even though US coal extraction by volume has seen continued increasing uninterrupted in recent years, when measured by total energy it peaked in 1998, and has since been on a slow downslope. Finally, tar sands, oil shale, and other unconventional sources of oil require a phenomenal amount of fresh water and natural gas to extract, they are extremely polluting, and have a very low EROEI; it is completely unfeasible that they will make good the gap.

Paul Cherfurka’s projections of future global energy usage by source.

Could renewables save us? Solar PV is improving rapidly, but it starts from an extremely low base. Wind power is already well established, but there are serious questions over its real EROEI level – can industrial civilization be run on wind, or is its real inefficiency masked over by the prior cheap oil subsidies used in the making of wind turbines? Yet the crucial problem facing wind and solar are their low energy and power densities, which makes them unsuitable for providing the base load that a stable electricity supply demands. The only real hope is to massively expand next-generation nuclear reactor construction, in conjunction with other renewables. However, this will take a intense effort spread over decades, and it is not clear that this effort will be sustained as the system comes under assault from ever fiercer energy and climate shocks – and that’s assuming uranium extraction remains profitable in net energy terms.

In conclusion, the evidence indicates that from 2030, the net energy available to industrial civilization will begin to decline; furthermore, due to diminishing marginal returns, by that time there will be little scope for more efficiency improvements. This lends support to the Limits to Growth standard run model that industrialism will decline by the first half of the 21st century due to resource shortages.

3) Tainter on diminishing returns to complexity. In his celebrated work on The Collapse of Complex Societies, Joseph Tainter posits that societies increase their complexity in order to solve certain problems. For instance, one of the major reasons behind the formation of the Chinese state was its provision of a bureaucratic-administrative mechanism for implementing irrigation and flood control works, which increased the carrying capacity of the land. Unfortunately, the flip side is that societies need to expend ever more organizational and physical energy to maintain a certain level of complexity, a complexity which is subject to diminishing marginal returns. Eventually, this expenditure undermines the society’s economic base and opens up a large potential gap where said society could reap the same benefits but at a lower level of complexity (and cost). At that point, there arises the risk of collapse.

Tainter’s collapse model: at C3-B1, there appears a risk of collapse back down to C1-B1, at which point “hypertrophied states” tend to use coercive tools to try to prevent this from happening.

Civilization reaches its absolute peak of power, health, well-being, etc, at C2-B2. When it begins to run up against problems, the typical reaction is to continue increasing complexity, even though marginal costs now exceed marginal benefits. At C3-B1, there appears an appreciable risk of catastrophic collapse back down to C1-B1, because at that point people would retain the same benefits but at a much lower cost. Furthermore, by this point a civilization’s natural legitimization mechanism, economic growth, will have long since failed; more artificial forms of legitimization have to be found (e.g. the idea that the Empire is sanctioned by God), as well as ever higher levels of physical coercion (e.g. the security forces, authoritarianism) – for instance, the Western Roman Empire adopted Christianity and experienced its highest levels of militarization just a century or so before its final collapse in 476 AD.

In addition to society’s tendencies to try solving its predicaments with the failing tools of the past (ever more complexity), in systems characterized by competitive peer polities, such as our own anarchic international system, there is a further reason for maintaining complexity – anyone who doesn’t can’t support an army, and those who don’t have armies get conquered for their resources. In these systems, organizational complexity is maintained absolutely regardless of costs, and the extractions necessary to sustain it are legitimized by the fact that every other state within this system is doing the same thing. Only when every unit of the system reaches economic exhaustion does the resulting power vacuum finally allow for a rapid, global collapse. A collapse more reminiscent of the relatively rapid fall of Mayan civilization, than of the Roman Empire’s slow decline over the centuries.

The Limits to Growth model has to be updated to reflect these political and geopolitical feedback loops. The likely result is that the increasingly authoritarian, “hypertrophied states” of future decades, locked in deadly competition over each for resources, will stretch out the smooth peaks shown in the Limits to Growth standard run into decades long plateaus, as shown in my graph of “World Overshoot Scenarios”. However, when collapse does finally come, it will be far, far steeper than it would have in a world without politics. The artificial prolongation of industrial civilization will result in an explosive closing of the awning “potential gap” on the complexity graph, plunging the world into famine, anarchy, and dieoff.

4) Cliodynamics. Another valuable analytical tool is the recently-developed science of “cliodynamics“, which attempts to mathematize “big history” by modeling the systems dynamics of the rise and fall of civilizations. In particular, its insights can teach us a great deal about the nature of Malthusian stress and political-demographic collapse.

Here is the basic story. Over millennial timescales, technological growth produced a secular rise in the carrying capacity of the land, which allowed the human population to grow to its current seven billions. However, over shorter timescales the Malthusian tendency for populations to grow faster than technology or the increase in carrying capacity typically resulted in diminishing per capita surpluses and a plateauing of the population. The system became fragile, as surplus stocks accumulated during the “Golden Ages” of plenty were drawn down, and climatic, political, and geopolitical perturbations during the stagnation resulted in sharp dips into dearth. During these times of dearth, peasants began to turn to banditry, producing rising internal violence in the countryside, which forced other peasants into the cities and further decreases food production. Faced with their own shortages, elite predation also grew, further squeezing the peasantry.

Eventually, a “tipping point” was reached, in which elite predation, internal violence, and depreciation of carrying-capacity improvements (e.g. roads, canals, grain silos, redistribution mechanisms, irrigation works, etc) became self-sustaining and spiraled out of control. In the ensuing “cascading collapse”, the central state withered away into a patchwork quilt of warring fiefdoms, and the drastic reduction in the carrying capacity of the land resulted biblical-scale Malthusian dieoffs. However, as soon as the violence died down, the population was found to be far below the carrying capacity of the land, and there was a new “Golden Age” of growth until it once again bumped up against the plateau of carrying capacity. This explains the basic mechanism of pre-industrial Malthusian political-demographic cycles.

Flow chart representation of the collapse dynamics in a typical Chinese political-demographic cycle.

Flow chart representation of the collapse dynamics in a typical Chinese political-demographic cycle.

Now Korotayev et al (the cliodynamicians) believe that ever since the industrial revolution, technological growth has reached such great velocities that the increases in carrying capacity accruing from it now far surpass any Malthusian pressures. According to them, the era of cyclical collapses is now at an end. However, a closer examination shows that 1) their models of technological growth are flawed – they do not account for the diminishing returns seen for technological progress in recent decades, nor 2) do they note that in most cases post-industrial technology has not been in the form of low-maintenance knowledge, but embodied in the (fossil fuel-dependent) machines of industrial civilization. But their greatest omission is that much of the post-1900 increase in carrying capacity has come not from technological growth, but from the technologically-enabled exploitation of the high-EROEI hydrocarbon “resource windfall” – oil, coal, and natural gas. Once these resources become scarce again, the technology used to exploit them will become as chimerical as the fossil fuel-powered machines and phantom carrying capacity they once supported.

The end result will be similar to the same Malthusian-era collapses analyzed by the cliodynamicians. An era in which surplus per capita draws to the level necessary for mere subsistence, characterized by dearth and famine in the bad years, and limited recoveries in the good years; a plateau that increasingly slopes down, until a series of severe perturbations (climatic disasters, resource wars, etc) so disturbs the world system that negative feedback loops take over and the entire system collapses into a prolonged Dark Age.

In conclusion, drawing on the theoretical works of systems modelers (Limits to Growth), energy modelers, collapse theorists (Tainter), and modern cliodynamicians (Korotayev, Turchin, Nefedov, Khaltourina, etc), we can paint a general outline of the next 50 years. Ever more human effort will be mobilized or requisitioned by ever more coercive “hypertrophied states” to compensate for the effects of declining emergy availability (peak oil, exploitation of lower-EROEI energy sources, diminishing returns to energy efficiency, and the effects of credit collapse, resource nationalism, and geopolitics), falling agricultural productivity (fertilizer shortages, heatwaves, rivers and fossil aquifers running dry, rising sea levels inundating coastal farmlands, etc), and other costs accruing from exponentially rising climate chaos.

Those regions which collapse first, nowadays called “failed states”, will be taken over by neo-colonial industrial powers to contain the chaos and acquire resources to buy just a little more time for their industrial civilization. Physical output will plateau and stagnate, while real living standards begin to degrade at an accelerating rate. Eventually, a series of shocks – climate catastrophes like the conflagration of the Amazon or a “hydroxyl collapse”, poor harvests resulting in global famine and pestilence, perhaps even a final, total war of late global industrialism – will finally make the Machine give up the ghost. The collapse of fossil fuel availability will render usless most modern technology, everything from microchips to electric cars and photovoltaic panels. This will result in a political-demographic collapse of unparalleled severity that reduces the human population to below one billion souls within a few decades, ushering in a post-industrial “Rust Age” on a polluted, desertifying, and drowning planet.

The "Rust Age", or "age of salvage" (M. J. Greer).

The “Rust Age”, or “age of salvage” (M. J. Greer).


Sustainable Retreat, or “Green Communism”

As shown above, business-as-usual will be anything but usual, and will almost certainly lead to impoverishment, oppression, totalitarianism, wars, and eventual global dieoff. There is still however a path out, should we choose to take it – a global “sustainable retreat” to below the limits, which if accomplished within the next generation could still stave off collapse and allow us to continue with the development of a truly sustainable civilization, one based not on growth of physical output and consumerism, but on intellectual, cultural, and spiritual self-actualization. This ideal or utopia I shall call Green Communism, a scientific fantasy in which man reaches reconciliation with Gaia, socio-economic classes disappear, and the coercive state itself withers away into oblivion.

However, Green Communism cannot be attained while human psychology remains myopic, short-sighted, competitive, and individualistic; nor is any such transition possible while the world is in overshoot and increasingly hemmed in by limits to growth. As such, a transitory period is required – an “ecotechnic dictatorship” that would concentrate onto itself the political legitimacy and coercive tools to force the world back onto a sustainable path. But first, to forestall the inevitable criticisms and condemnations, I must point out why alternative roads to the sustainable transition are no longer viable, even if they ever were in the first place.

1) The Anarchist Delusion. Disillusioned with the “System” – states, corporations, etc – many “peakists”, “doomers”, survivalists, etc, advocate community-based retreat on a spectrum ranging from weed-smoking “hippies” teaching themselves organic permaculture to “frugal patriots” holing up in their Idaho “doomsteads” with prodigious quantities of canned food and firearms. However, very few of them have truly broken off the ties that bind to industrial civilization; learning to survive on sustenance agriculture in true pre-industrial fashion is very, very hard work, and almost no-one has the will and perseverance to follow through.

Furthermore, they will receive a rude awakening in the coming era of limits to growth-induced authoritarianism and collapse. Governments don’t like anarchists, especially nasty ones. Period. One of my critics tried to prove an anarchic lifestyle works by posting a Wikipedia link to a “list of anarchist communities“. But on closer examination, practically all their modern manifestations collapsed within just a few years, either from internal causes or due to state suppression.

Perhaps the anarchists will “band together” to protect themselves, he went on to suggest? Will there be enough of them to keep the warlords away? That would certainly be a good idea as the government’s writ collapses and rural violence soars. However, one very important thing is that “bandits” are so-called violence-specialists; it is what they do, their profession. For a settled anarchist community, it will be difficult in the extreme to muster the economic, administrative, and military capabilities to successfully accomplish all three of the following necessary tasks for surviving in an anarchic environment: 1) producing enough food and goods for community subsistence, 2) managing internal conflicts, and 3) defending themselves from the bandits, psychos, and warlords. Drawing resources from one task will undermine the likelihood of fulfilling another. In practice, what will almost certainly happen is that either the anarchist communities begin paying tribute / protection money to the warlords (thus creating a dependency through which they can later be brought to heel), or they find it more profitable to become warlords themselves. After all, the first kings and nobles were all essentially just the most successful racketeers!

Yet the most essential feature of the anarchist delusion isn’t even their belief that they can make it on their own, but that the state is dispensable, unnecessary, and even harmful to the human enterprise. From the same poster: “What problems has the state solved that weren’t caused by the existence of states?”

The fundamental predicament (not problem) of most biological life-forms is their tendency to overshoot the carrying capacity of their environment. One of the most powerful theories for the rise of the state was its capacity to raise the carrying capacity of the land, which postponed overshoot and collapse, and in general made state-centered societies far more powerful than the hunter-gatherer tribes that they displaced.

Now let’s turn to today’s reality. If all states were to magically vanish right now, so would the administrative and coercive tools to sustain global industrialism. Soon afterwards, the underlying carrying capacity-enhancing infrastructure such as the global oil industry, fertilizer production, cybernetics, etc, would depreciate into irrelevance from lack of maintenance. Anarchy will reign and the global population will plummet back down to the few millions of people that primitive technology and band-like social organization could support. You may dismiss or despise the hand of the state that feeds you, but you will likely sing a different tune when it withers away into your anarchic paradise.

2) Why Individual and Community Retreats are no Real Solution. Another strand of the anarchist delusion is that since collapse is unavoidable, it is best to retreat from the System while you can, pay off your debts, cut the ties that bind, etc. But quite apart from the implicit resignation to the inevitability of the untimely deaths of billions of people, it cannot be stressed enough that any collapse today will be global (see Tainter above), and the chaotic fluxes it produces will be so violent than any community, no matter how prepared or resilient, could be casually swept away by the tidal waves it would generate.

I do not deny that it pays to get personally and psychologically prepared for collapse, but this must be part and parcel of a multi-pronged political effort to avert collapse if possible, and dampen its severity should avoidance prove impossible. The idea that you can hole up in a doomstead and survive against the imminent zombie hordes is particularly inane (read the War Nerd‘s entertaining essay Apocalypse Never to find out why). Finally, defeatist notions of the inevitability of collapse – such as those advanced by Dmitry Orlov, who is strongly opposed to all forms of political activism – are in many ways as counter-productive as the mindless business-as-usual mentality of modern society.

The traditional American focus on individualism and self-reliance only worked in the age of abundance which characterized their entire history (the US GDP has been higher at the end of every decade than at the beginning since its founding). This era is at end and will never return. This will be a major shock for Americans, more so than for most people whose memories of cyclical and Malthusian dynamics are more recent, but they will all have to get used to it.

3) The Gramscian Road to Green Communism will take too long. Say what you will about them, but at least the Green Party has a political plan for a sustainable future. This plan involves changing society’s core values to embrace concepts such as “ecological wisdom” and “community-based economics”, through means of grassroots political action and infiltration of key political and economic institutions. Hopefully this will displace the pro-growth bipartisan consensus and enable the democratic enactment of policies that will steer the world back towards sustainability.

As I argued in Roads to Green Communism, however, this “soft” approach to the sustainability transition is doomed to failure. Guilt-ridden liberals may be moved to make $10 donations to Greenpeace or boycott electricity consumption for a grand total of one hour per year (on the so-called “Earth Hour”), but this will not be enough to persuade them to make real sacrifices. It gives me no joy to say this, but the hard truth is that left to themselves, free from coercion either by their peers or by the Leviathan of the state, even enlightened individuals will not take anything more than symbolic steps to reduce their ecological footprint.

Why? All humans are prone to a psychological blindsight called “creeping normalcy”, or what Jared Diamond in his book Collapse calls “landscape amnesia”. This describes a process in which slow, detrimental changes to the environment go unnoticed by the general population because of their slowness and gradualism, but whose eventual accumulated impact becomes devastating. One tragic example would be the Easter Islanders who chopped down all their trees, accelerating the tempo in the last decades of their pre-collapse civilization in order to construct ever bigger moai (statues) to honor the gods that legitimized the tribal chieftains who ruled over them. Human psychology reacts well to immediate threats, but when they are far-off and abstract – such as the declining EROEI of energy sources of climate change – mobilization is much more difficult. As the biggest McMansions and tallest skyscrapers have been erected in the present era of peak oil, there is nothing to suggest that modern civilization is any wiser than the Easter Islanders.

As of now, changing this psychology quickly will be extremely difficult, if not impossible. In the Soviet Union, it took around two generations to transform the bulk of society from having a traditionalist-peasant worldview, to an urban-secular one – and this despite uninterrupted state propaganda and coercion. Today, even most educated people see the green movement as a bit weird and extremist, if not as evil socialists planning to enslave the world. And we certainly don’t have even a single generation to wait, let alone two. Gradualism is not a solution, it is suicide.

4) Our current System is blinded by Institutional Myopia. Could the current System bail us all out, like it did the politically connected Wall Street oligarchs? Almost certainly not.

Modern society is run by experts and technocrats, if indirectly (their recommendations have to be balanced against corporate interests and the popular will, which is what politicians are there for). However, those same experts are either part of, or suborned by, the System – the sum total of the texts and power relations that make up a society’s set of beliefs. The former category, which includes government policy-makers and corporate strategists, suffers from an “institutional myopia” which gives answers in advance and precludes all questions questioning the legitimacy of their own institutions.

For instance, what can a rational, capitalist state – interested in self-preservation, predicated on unlimited economic growth, and confronted with irrefutable evidence of the dire consequences of business-as-usual greenhouse emissions on the world’s climate – do to resolve these contradictions? The answers are meaningless buzzwords and Orwellian oxymorons like “green growth”, “skeptical environmentalism”, and “clean coal”; the forbidden question relates to the efficacy of industrial capitalism as a system to confront the imminent challenges of man-made climate change.

The latter category, encompassing private think tanks and academia, have a greater degree of freedom in asking inconvenient questions. However, it is ultimately the state that pays academics their salaries. Biting the hand that feeds is always dangerous, especially if their fangs contain the poison of the forbidden question. Anathema unto them. Therefore, academia’s answers also tend to conform to the reigning paradigm.

Incidentally, this very omnipresence of this System will doom the Gramscian and anarchist approaches. For when systems come under strain, they tend to rigidify, to revert to authoritarian conservatism, and free thinkers – the only people who have any chance of averting socio-political collapse by “scanning” an innovative solution to the problem – are scapegoated as a divisive enemy by the angry, confused masses, and repressed by the coercive “hypertrophied state”, which for all its authoritarianism is a fragile, populist creature that appeases society on the easiest matters (such as repressing the powerless). From Tainter’s The Collapse of Complex Societies:

At this point, decomposition rapidly becomes inevitable as “scanning” ceases, for the system no longer has the surpluses to do it. In most cases rigid behavioral controls are imposed, innovation and positive change is stymied and corruption, authoritarianism and feudalism begin to dominate … for society is enslaved to its own myths of superiority and delusions of grandeur.

… Censuses and historical detail thin, as literacy and science declined during this period to be replaced by an “increase in mysticism, and knowledge by revelation”, as well as by “increased propaganda about patriotism, ancient Roman values, and superiority over the barbarians”.

Yet this is only a stopgap measure, for by now eventual demise is inevitable:

Increasingly radical attempts to save the system, even cardinally change it, cannot permanently reserve the trend towards further complexity and disequilibrium; eventually, everyone loses faith in the system and there is a severe collapse. …

… According to RM Adams, “By the fifth century, men were ready to abandon civilization itself in order to escape the fearful load of taxes”. In 476, after being denied payment or settlement in Italy, the Roman barbarian army mutinied, sacked Rome and deposed Romulus Augustus, the last Western Emperor.

Even the intensified legitimization of the “hypertrophied state” vanishes, as do the coercive tools that kept it together well past the point when it should have naturally collapsed. Science and rationalism retreat, and its former agents – intellectuals, priests, tax collectors, etc – are liquidated, as the Sun dawns over a new Dark Age.

5) Technological Singularity as a Road to Green Communism? As Good wrote in 1965:

Let an ultraintelligent machine be defined as a machine that can far surpass all the intellectual activities of any man however clever. Since the design of machines is one of these intellectual activities, an ultraintelligent machine could design even better machines; there would then unquestionably be an ‘intelligence explosion,’ and the intelligence of man would be left far behind. Thus the first ultraintelligent machine is the last invention that man need ever make.

Hence, as soon as humanity and its technologies become obsolete, the biosphere’s limits to growth will become equally irrelevant to the future of intelligent life on Earth. If we manage to hold on long enough to unleash this technological singularity – and avoid its various perils and pitfalls – then the super-abundance produced by self-assembling nanotechnology will eliminate scarcity, the “dematerialization of production” will make classes obsolete, and the borders between reality and virtual reality will fade into oblivion as the Earth metamorphoses into Tlön. Fully freed from material constraints, humanity will be able to build the purest forms of Green Communism… should it wish to.

There is one problem, however – industrial civilization may not survive long enough to catapult itself out of overshoot. For the projections suggest that a singularity-driven transition to sustainability may elude us, for both “singularitarians” and the Limits to Growth proponents tend to place their respective events – Singularity and civilizational collapse – in the 2030-50 timeframe.

So which trend will win out? Will we “transcend” just as industrial civilization begins to finally collapse? Or will the world’s last research lab be burned down by starving rioters just as the world’s first, and last, strong AI pops into super-consciousness inside?

This may be the last answer industrial civilization will find out.

The Necessity of Ecotechnic Dictatorship to Force a Retreat from Collapse

In his excellent book “Our Ecotechnic Future“, Michael John Greer outlined his thoughts on the future of our civilization, which he saw as going through the following four stages: 1) “abundance industrialism” (1950-2010), 2) “scarcity industrialism” (2010-2050?), or the plateau on my “World Overshoot Scenarios” graph characterized by rising coercion, impoverishment, and resource wars, 3) the “age of salvage” (2050?-2250?), in which civilization scavenges the detritus of late industrialism to sustain a very low-level, primitive industrial system, and 4) the “ecotechnic future”, in which post-industrial technologies in spheres like renewable energy or biotechnology, scarcely-conceivable today, may reset the world on a path of truly sustainable development in harmony with Gaia. Such an ecotechnic age will be close to the Green Communist ideal.

Perhaps the humans of the ecotechnic age would even resemble the Na'vi people from the film Avatar, in which an ostensibly primitive society has managed to "network" itself into Mother Nature on an incredibly intimate level, allowing its members to lead what appear to be very fun and fulfilling lives.

Perhaps the humans of the ecotechnic age would even resemble the Na’vi people from the film Avatar, in which an ostensibly primitive society has managed to “network” itself into Mother Nature on an incredibly intimate level, allowing its members to lead what appear to be very fun and fulfilling lives.

However, is it really necessary to endure a catastrophic human dieoff and a centuries-long wait for the sustainable transition to Green Communism that may not even come about? Or perhaps there is still a chance, however slight, of effecting such a transition through a sustainable retreat starting from today, as shown under “Green Communism” in my graph of “World Overshoot Scenarios”?

I think that given the will, there’s a way – an ecotechnic dictatorship leading the people towards Green Communism.

This system will be based on three pillars – reinforcing resilience, educating the people, and preparing for collapse. These pillars will be supported by the full power of the modern state and technology.

A) Reinforcing Resilience. Technocratic central planning using the latest tools of operations research and networking to minimize waste while maximizing real living standards. The legitimacy of the state is not based on creating prosperity or opportunity, so it will be ideologically resilient in the face of the economic decline that is necessary to reduce physical throughput to levels consistent with a retreat to global sustainability. Resources will be funneled into 1) intensive, targeted research in computer science, cybernetics, sustainable energy generation and food production, geoengineering, systems dynamics, and cliodynamics, 2) the provision of social goods such as education, preventative healthcare services, high culture, and social support to the indigent, and 3) internal security and military forces necessary to defend the fledgling ecotechnic republic from hostile forces within and without.

The ecotechnic dictatorship is a democratic society. The state will make strategic decisions by balancing their decisions between opinion polls and expert panels – much like modern China’s experiment with “deliberative dictatorship“. Since corruption and economic sabotage will be immensely harmful in a world suffering from resource shortages, it will have to be stamped out without mercy. One workable method is to institute a system of universal 2-way sousveillance to detect corruption and free-riders; since this mechanism is “horizontal”, in contrast to the “vertical” nature of traditional surveillance, it will reinforce ecotechnic democracy. The people will be able to observe trials and electronically vote on criminals’ punishments.

How to maintain enthusiasm and prevent the ideological ossification of the regime’s elites? Through a dedication to meritocracy and the power of modern electronic technology to enforce transparency. Promotions will be based on technical competence and devotion to the cause as judged by one’s peers; greater power will gain one greater material perks and privileges.

One might object, how is this different from the current System that needs to be overthrown? Realistically, some level of hierarchy is necessary and inevitable. Once society acquires a certain level of size and technological development (like our own), it needs a corresponding level of socio-political complexity to sustain itself, and that in turn requires a hierarchy. You need people at the top to set certain the limits and restrictions by which the world is to be dragged back from overshoot. Unless we return to primitivism (impossible with the size of today’s populations) or manage to achieve a technological singularity (then we’ll talk about it), all hierarchy cannot be abolished without a large fall in carrying capacity. That said, under the ecotechnic dictatorship, there will be nothing on the scale of the awning inequality chasms of today. Furthermore, thanks to the power of modern networking technologies, power can be distributed horizontally to an unprecedented degree. The ecotechnic elites will be subject to greater scrutiny than those below them.

Though this all sounds restrictive of individual freedom, even dystopian, it is nonetheless a valid and probably morally superior alternative to anarchy, collapse, and dieoff. (Nonetheless, it should be borne in mind that a reversion to authoritarianism – furthermore, a socially unjust authoritarianism – is in any case virtually guaranteed in the last throes of the business-as-usual scenario). For we can only achieve a rapid enough sustainable retreat back to within the limits if the transition is backed by a powerful, global, and universal coercive force, or in other words, Leviathan.

B) Informing the People. The second pillar of the ecotechnic dictatorship is its focus on reforming human psychology from its accumulative-materialist basis to progressive, transcendental values of ecotechnic sustainability. This is the fundamental and necessary legitimization behind the ecotechnic dictatorship and its march towards Green Communism. The end goal is to coax a real “gift economy” into being (as opposed to a centrally planned one), perhaps with the help of social engineering and widespread psychosomatic therapy.

As soon as these ecotechnic values percolate throughout society, the necessity for the powerful state will vanish, and the ecotechnic dictatorship can be allowed to wither away as a new spirit of universal kindness and spiritual oneness, a state of complete sobornost, bathes humanity in the ether of Green Communism.

C) Preparing for Collapse. Though it would be great if the ecotechnic dictatorship managed “sustainable retreat” successfully, as a regime orientated towards the future it must always keep in mind the possibility of its own failure and demise, a demise that would inevitably lead to global collapse.

Hence, it will devote a black budget into making secret preparations to “buffer” human civilization against the possibility of collapse by creating Arctic “lifeboats” or repositories containing seed stocks, banks of knowledge, etc, whose locations will be entrusted to a society of dedicated Guardians. The goal of these Gaian priests and priestesses would be to function as the “bookleggers” and “memorizers” of Miller’s post-apocalyptic A Canticle for Leibowitz, preserving knowledge and culture into the post-collapse Dark Ages.

What is to be Done?

1) Is collapse under the business-as-usual scenario truly inevitable? Or am I underestimating the capability of markets and technology to overcome the restrictions posed by finite resources and the laws of thermodynamics?

2) What are the chances of effecting a “sustainable retreat” before it is too late and energy shortages and climate chaos destroy industrial civilization? Can such a transition really be carried out from the grassroots level and gradual culture change, or is the capitalist-industrial System too entrenched for that to work?

3) If an “ecotechnic dictatorship” as described above or something similar is necessary to prevent collapse, how should we go about implementing it? Through Gramscian infiltration and subversion of the current System, or a decisive revolutionary break that, in Zizek’s words, “does not occur within the coordinates of some underlying global matrix, since what it achieves is precisely the “reshuffling” of this very global matrix”?

4) How should the “ecotechnic dictatorship” legitimize itself, and how should it defend itself from its numerous enemies within and without – preferably without degenerating into all-out tyranny? Indeed, how much liberalism can we afford?

5) And how can we “globalize” the Revolution so as to prevent our ecotechnic enclave from being smothered in its cradle by outside capitalist-industrial Powers?

(Republished from Sublime Oblivion by permission of author or representative)
 
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I have long noted Russia’s resurgence back into the ranks of the leading Great Powers; I predicted that the global economic crisis will not have a long-term retarding impact on the Russian economy; and within the past year I have bought into Stratfor‘s idea that the defining narrative now in play in Eurasia is Russia’s intention to reconstruct its empire / sphere of influence / call-it-what-you-will in the post-Soviet space. This “resurgence” is advancing along several major fronts: geopolitical, economic, demographic, military, and ideological. In this post I will cover recent major news on the first four.

Ukraine Returns to the Empire?

The most consequential big event is the electoral victory of Viktor Yanukovych (35%) in the first round of the Ukrainian presidential elections, followed by Yulia Tymoshenko (25%), Serhiy Tihipko (13%), Arseniy Yatsenyuk (7%), and Viktor Yushchenko (5%) – a result that I called 100% accurately. Disillusioned with the incompetence, economic decline, and “anarchic stasis” of five years of Orange rule, polls indicate three times as many Ukrainians now favor a “strong leader” over a “democratic government”, so no wonder that the liberal ideologue Yushenko, though the only major Ukrainian politician who is consistent and sincere in his views, suffered a crushing defeat as the last true representative of the Westernizing “Orange” movement. This marks a threshold in the accelerating “regathering of the Russian lands”*.

Below is an electoral map of the first-round Ukrainian presidential elections. As is always the case, the urban, Russophone / Surzhyk-speaking, Russian Orthodox Church-affiliated south and east voted for the pro-Russian Yanukovych, head of the Party of Regions, while the more bucolic, Ukrainian-speaking, Kyiv Patriarchate-affiliated / Uniate center and west favored Tymoshenko.

[Click on map to enlarge].

This reflects the civilizational fault-line riveting Ukraine in half – commonly assumed to be along the Dnieper River, but more accurately, dividing the country into a pro-Russian south and south-east, the independence-minded Ukrainian center, and the pro-Western south-west.

Back in 2004, there was a clearly defined pro-Russian (Yanukovych) and pro-Western (Yushscenko) force. Yushscenko prevailed thanks to incompetent vote rigging on the part of the Party of Regions and a Western-supported popular uprising known as the Orange Revolution. The oranges are now regarded as rotten and nothing of the same sort can happen in 2010, since both Presidential contenders are now, for most purposes, beholden to Russia.

Yanukovych supports closer political and economic ties with Russia, would renounce NATO and EU accession plans, and enjoys the support of the Donbass oligarchs (including Ukraine’s richest man and king-maker, Rinat Akhmetov) and the senior managers of the Ukrainian military-industrial complex. There has been talk of a possible political union between United Russia (Russia’s “party of power”) and the Party of Regions, which will lay the institutional foundations for closer union with Russia, Belarus, and Kazakhstan, involving joint membership in Eurasec, a customs union, and even the CSTO. Finally, there have been rumors that Yanukovych will retain Yushenko in some minor political position, as a placebo for the west Ukrainians in order to nip secession movements in the bud and to undercut Tymoshenko’s support in a crucial region.

Tymoshenko is the unprincipled, chameleon-like politico par excellence, repeatedly reinventing herself from hard-hitting gas oligarch / robber baroness, to Lesya Ukrainka-inspired Orange liberal nationalist, to Putin-friendly aspiring Czarina. She has negotiated a well-publicized gas deal with Russia, took part in the sale of the major Ukrainian steelmaker, the Industrial Union of Donbass, to a Kremlin-friendly Russian industrial group, and publicly backed away from NATO membership. In doing this, she has tried to ride the geopolitical and emotional wave of the Russian resurgence, and succeeded in gaining the firm support of the central regions. However, although singularly charismatic in the gray world of Ukrainian politics, she has been unable to significantly penetrate into the Party of Regions electoral base. Coupled with low voter turnout in Ukraine’s western regions, due to their disillusionment with her newly-discovered Russophilia, this means that she will almost certainly lose out to Yanukovych in the second round of elections scheduled for February 7th** (assuming no extralegal interference from the 3000 strongarm Georgian “election observers” who are in Ukraine just for the girls, supposedly).

Geopolitically, this Ukrainian reversal marks declining US influence in the region and the imminent resurgence of Russia as a Eurasian hegemon. This is producing reverberations, with independence-minded countries throughout the region – Belarus, Kazakhstan, Azerbaijan, even Georgia – now accepting their eventual reintegration into Eurasia, or attempting to reach a new accommodation with the new reality of Russian power. Here is Peter Zeihan (Stratfor) on Ukraine’s Election and the Russian Resurgence:

These are all important factors for Moscow, but ultimately they pale before the only rationale that really matters: Ukraine is the only former Russian imperial territory that is both useful and has a natural barrier protecting it…. Without Ukraine, Russia is a desperately defensive power, lacking any natural defenses aside from sheer distance… The (quite realistic) Russian fear is that without Ukraine, the Europeans will pressure Russia along its entire western periphery, the Islamic world will pressure Russia along its entire southern periphery, the Chinese will pressure Russia along its southeastern periphery, and the Americans will pressure Russia wherever opportunity presents itself…

Ukraine by contrast has the Carpathians to its west, a handy little barrier that has deflected invaders of all stripes for millennia. These mountains defend Ukraine against tanks coming from the west as effectively as they protected the Balkans against Mongols attacking from the east. Having the Carpathians as a western border reduces Russia’s massive defensive burden. Most important, if Russia can redirect the resources it would have used for defensive purposes on the Ukrainian frontier — whether those resources be economic, intelligence, industrial, diplomatic or military — then Russia retains at least a modicum of offensive capability. And that modicum of offensive ability is more than enough to overmatch any of Russia’s neighbors (with the exception of China).

Incidentally, this episode brings to mind what the late political scientist Samuel Huntington wrote about the future of the “Orthodox civilization” in his well-known work The Clash of Civilizations and the Remaking of World Order. He predicted that Western attempts to orchestrate an artificial divide between these two members of the same civilization would have only deleterious results, perhaps resulting in a “Great Split” – quoting a Russian general, “Ukraine or rather Eastern Ukraine will come back in five, ten or fifteen years. Western Ukraine can go to hell!” Yet the more stable and likeliest arrangement would be the following:

The third and most likely scenario is that Ukraine will remain united, remain cleft, remain independent, and generally cooperate closely with Russia… Just as the [Franco-German relationship] provides the core of the European Union, the [Russian-Ukrainian relationship] is the core essential to unity in the Orthodox world.

With all major Ukrainian political blocs re-orientating themselves to Russia and the two countries increasing their cooperation in spheres ranging from politics to the military-industrial complex, Huntington’s prediction could be said to have been fulfilled.

PS. The (relative) silence about the total collapse of the Orange party in Ukraine on the part of normally Russophobic outlets has been deafening. Since everyone loves the West and liberal ideologues, how on Earth could this have happened? It’s like a bad dream. ;)

The Eurasian Energy Map Redrawn

Russia, China, Iran redraw energy map by the always-insightful Indian diplomat M K Bhadrakumar.

The inauguration of the Dauletabad-Sarakhs-Khangiran pipeline on Wednesday connecting Iran’s northern Caspian region with Turkmenistan’s vast gas field may go unnoticed amid the Western media cacophony that it is “apocalypse now” for the Islamic regime in Tehran. The event sends strong messages for regional security. Within the space of three weeks, Turkmenistan has committed its entire gas exports to China, Russia and Iran. It has no urgent need of the pipelines that the United States and the European Union have been advancing. Are we hearing the faint notes of a Russia-China-Iran symphony? …

Second, Russia does not seem perturbed by China tapping into Central Asian energy. Europe’s need for Russian energy imports has dropped and Central Asian energy-producing countries are tapping China’s market. From the Russian point of view, China’s imports should not deprive it of energy (for its domestic consumption or exports). Russia has established deep enough presence in the Central Asian and Caspian energy sector to ensure it faces no energy shortage. What matters most to Russia is that its dominant role as Europe’s No 1 energy provider is not eroded. So long as the Central Asian countries have no pressing need for new US-backed trans-Caspian pipelines, Russia is satisfied.

During his recent visit to Ashgabat, Russian President Dmitry Medvedev normalized Russian-Turkmen energy ties. The restoration of ties with Turkmenistan is a major breakthrough for both countries. One, a frozen relationship is being resumed substantially, whereby Turkmenistan will maintain an annual supply of 30bcm to Russia. Two, to quote Medvedev, “For the first time in the history of Russian-Turkmen relations, gas supplies will be carried out based on a price formula that is absolutely in line with European gas market conditions.” Russian commentators say Gazprom will find it unprofitable to buy Turkmen gas and if Moscow has chosen to pay a high price, that is primarily because of its resolve not to leave gas that could be used in alternative pipelines, above all in the US-backed Nabucco project.

[Click on map to enlarge].

Third, contrary to Western propaganda, Ashgabat does not see the Chinese pipeline as a substitute for Gazprom. Russia’s pricing policy ensures that Ashgabat views Gazprom as an irreplaceable customer. The export price of the Turkmen gas to be sold to China is still under negotiation and the agreed price simply cannot match the Russian offer. Fourth, Russia and Turkmenistan reiterated their commitment to the Caspian Coastal Pipeline (which will run along the Caspian’s east coast toward Russia) with a capacity of 30bcm. Evidently, Russia hopes to cluster additional Central Asian gas from Turkmenistan (and Kazakhstan). Fifth, Moscow and Ashgabat agreed to build jointly an east-west pipeline connecting all Turkmen gas fields to a single network so that the pipelines leading toward Russia, Iran and China can draw from any of the fields.

Indeed, against the backdrop of the intensification of the US push toward Central Asia, Medvedev’s visit to Ashgabat impacted on regional security. At the joint press conference with Medvedev, Berdymukhammedov said the views of Turkmenistan and Russia on the regional processes, particularly in Central Asia and the Caspian region, were generally the same. He underlined that the two countries were of the view that the security of one cannot be achieved at the expense of the other. Medvedev agreed that there was similarity or unanimity between the two countries on issues related to security and confirmed their readiness to work together.

The United States’ pipeline diplomacy in the Caspian, which strove to bypass Russia, elbow out China and isolate Iran, has foundered. Russia is now planning to double its intake of Azerbaijani gas, which further cuts into the Western efforts to engage Baku as a supplier for Nabucco. In tandem with Russia, Iran is also emerging as a consumer of Azerbaijani gas. In December, Azerbaijan inked an agreement to deliver gas to Iran through the 1,400km Kazi-Magomed-Astara pipeline.

The “big picture” is that Russia’s South Stream and North Stream, which will supply gas to northern and southern Europe, have gained irreversible momentum. The stumbling blocks for North Stream have been cleared as Denmark (in October), Finland and Sweden (in November) and Germany (in December) approved the project from the environmental angle. The pipeline’s construction will commence in the spring.The $12-billion pipeline built jointly by Gazprom, Germany’s E.ON Ruhrgas and BASF-Wintershall, and the Dutch gas transportation firm Gasunie bypasses the Soviet-era transit routes via Ukraine, Poland and Belarus and runs from the northwestern Russian port of Vyborg to the German port of Greifswald along a 1,220km route under the Baltic Sea. The first leg of the project with a carrying capacity of 27.5bcm annually will be completed next year and the capacity will double by 2012. North Stream will profoundly affect the geopolitics of Eurasia, trans-Atlantic equations and Russia’s ties with Europe.

To be sure, 2009 proved to be a momentous year for the “energy war”. The Chinese pipeline inaugurated by President Hu Jintao on December 14; the oil terminal near the port city of Nakhodka in Russia’s far east inaugurated by Prime Minister Vladimir Putin on December 27 (which will be served by the mammoth $22-billion oil pipeline from the new fields in eastern Siberia leading to China and the Asia-Pacific markets); and the Iranian pipeline inaugurated by Ahmadinejad on January 6 – the energy map of Eurasia and the Caspian has been virtually redrawn.

And from Pipe dreams come true (bne):

Putin ordered construction to start on Nord Stream at the end of last year after the pipeline got the last environmental permits from Germany. And in January, Gazprom started building the first pumping station at the mouth of the first of two parallel pipes, which is supposed to be operational by 2011 with a capacity of 27.5bn cm/y. Thanks to Nord Stream, 2009 should be the last episode of the Russo-Ukraine “Gas for Cash” soap opera, which usually ends with Europe freezing. [AK: see also What difference would Nord Stream mean to European energy supply?].

South stream, the other pipeline project, will close the circle, but this pipeline has had a harder time getting off the drawing board and is competing with the EU-sponsored Nabucco pipeline, which is supposed to source Caspian region and Middle East gas and send it to Europe without crossing Russian soil. The problem is that there’s probably only enough demand to support one pipeline.

The R of the BRIC’s Remains Solid

Many of the economic predictions I made in Decoupling from the unwinding and Russia Economic Crisis are coming to fruition. See RUSSIA 2010: Slow build over first half to boom in 2011 (bne):

Russia was undoubtedly far more affected by the international crisis that started in September 2008 than anyone had expected – especially the Kremlin. It also stands out as the only one of the BRIC countries (Brazil, Russia, India, China) to show negative growth, leading to calls from the likes of analyst Anders Aslund to remove the “R” from BRIC.

This is rubbish, so Jim O’Neill, the man that coined the term in the first place, told bne at the 2009 International Monetary Fund (IMF) conference. “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.”

This was one of my major themes. When the Western financial system ground to a standstill in late 2008, the first countries to be cut off were the emerging markets. Having access to deep indigenous credit systems, the likes of Brazil and China were understandable far less affected than Russia, whose corporations had come to rely on Western intermediation of their credit inflows.

And in the longer term, excluding Russia from the BRIC’s makes little sense given its major growth potential (educated workforce, resource windfall, modernization policy, economic gains from global warming).

The Russian economy contracted by a bit less than 9% in 2009, but as the year came to a close it was already starting to recover – six months later than analysts were predicting at the start of the year. However, despite the pain of the crisis, the prospects for 2010 are looking much better than many had dared hope.

One should also note that this “pain” was insubstantial compared to the 1998 crisis, which is what many analysts were (unfavorably) comparing it to. While the percentage of the population barely making ends meet went up from 29% in July 1998 to 40% in December 1998, this figure remained stable at around 10% throughout the recent crisis. The main shift occurred amongst Russia’s “consumer class” (the ones who buy cars, PC’s, etc), whose percentage of the population tumbled by a quarter from 19% to 14%, and perhaps explains the reason for its large drop in GDP for 2009, i.e. the drop in large purchases. The silver lining is that this implies inequality has decreased during the crisis.

bne’s annual survey of investment bank outlooks suggests that growth will return to at least 4% and possibly go as high as 6% by the end of 2010. Inflation will remain low at about 5% while overnight rates at the Central Bank of Russia (CBR) will become real for the first time, finally giving the central bank a second tool to manage the economy and so be able to tackle Russia’s twin perennial headaches of inflation and ruble appreciation more effectively. …

The much discussed problems of the reappearance of a budget deficit will be much milder than appears now, coming in at something under 5% of GDP. This means the Kremlin will drastically reduce its international borrowing and has already cut the amount it needs to raise from $18bn to $10bn, but this could fall to $5bn or even nothing at all if oil prices rise to around $80 per barrel, which most of the banks bne surveyed believe will be the average price for 2010. Indeed the state will be able to raise all the money it needs to plug the deficit at home and pave the way for a return of private issuers to the international capital markets.

I predicted an oil price of around 90$ for 2010 (“oil prices in H1 will remain at 70-90$, and will rise to 90-110$ in H2″), so this is completely realistic considering my stellar record on oil price forecasting.

Finally, the RTS had a spectacular performance, rising over 120% in 2009 from its spring lows to end the year at about 1400. Unlike last year, the investment banks all agree that the index will end 2010 at around 1900-1950 and some say that it will reach and pass its all-time high of 2600 by 2011.

The themes for 2010 include: a turning inwards to growth driven by domestic demand, a push to introduce some real bottom-up economic reforms, a new focus on improving Russia’s productivity, increased inter-regional crediting, a shift towards closer ties with China, consolidation within many sectors and most important a gradual reassessment of Russia’s risk.

Again, much of this will not be new to S/O readers. I’ve already called the consolidation of Russia’s financial system, the shifting emphasis on domestic manufacturing, its decoupling from the insolvent Anglo-Saxon system, the imminent purge of corrupt siloviki, etc…

The collapse of the Russian economy in 2009 was dramatic, but emerging market crises are intrinsically less “sticky” than those in the West, largely because of the shallow penetration of debt in all its forms into the economy. As Liam Halligan, chief economist at Prosperity Capital Management, points out Russia’s fundamentals remain extremely strong and stand out from the rest of emerging Europe. And despite spending $200bn on rescue packages, the Kremlin still have $400bn in the bank, which was increasing again towards the end of the year, and remains the third richest country in the world after China and Japan, against the US and UK, which are 18th and 19th with a bit more than $80bn each. As the story going forward for the next several years will be all about the credit worthiness of countries, Russia finds itself, along with its newest buddy, China, in an enviable position.

Feel free to read the whole article.

Russia’s Population Grows in 2009

Russia registers its first year of population growth in 2009 since 1994.

Russia has registered the first population increase since the chaotic years which followed the fall of the Soviet Union, bucking a long-term decline that has dampened economic growth projections, officials said on Tuesday. Russia’s population increased by between 15,000 and 25,000 to more than 141.9 million in 2009, the first annual increase since 1995, Health Minister Tatyana Golikova told a meeting in the Kremlin with President Dmitry Medvedev. …

Russia’s dire population forecasts — some of which predict sharp declines over the next few decades — are a key function of economic predictions which see Russia growing much slower over the next 20 years than the other BRIC countries; China, Brazil and India.

a) None of this should be too surprising to my readers, given that back in mid-2008 I predicted:

I will make some concrete, falsifiable demographic predictions (something Russophobes going on about Russia’s impending demographic doom wisely avoid doing).

  1. Russia will see positive population growth starting from 2010 at the latest.

I was totally correct, and even better, a year early! (well, just about). Meanwhile, the Russophobe commentariat continues their happy life in la la land.

b) Russia’s approaching demographic doom is a major staple of pessimist and Russophobe assessments of its future prospects in areas like economic modernization and geopolitical power. To the contrary, far from the steep fall produced by most demographic models, a more realistic scenario is for Russia’s population to stagnate or grow very slowly in the next two decades, as a fall in the numbers of women in child-bearing age is balanced out by rising fertility rates and falling mortality rates. See 10 Myths about Russia’s Demography for my detailed exposition of Russia’s demographic prospects.

The Volatile Caucasus

Saakashvili’s megalomania probes new depths, so no wonder the opposition – who are no Russophiles, it should be said – are holding their noses and reaching out to their erstwhile enemy. Taking a cue from the Party of Regions:

The leader of Georgian opposition party the Movement for a Fair Georgia, former Prime Minister Zurab Nogaideli, said Jan. 26 that his party would like to form a partnership with United Russia, the ruling party in Russia led by Prime Minister Vladimir Putin.

See also this Russian-language report, Танки августа (“Tanks of August”) analyzing the buildup to, chronology, and course of the 2008 South Ossetian War, which is called “The Five Day War” in this publication. This is no pro-Kremlin propaganda, the Russian Army receives acerbic criticism for its performance.

However, most interesting, at least for me, was the chapter “Настоящее и будущее грузино-российского конфликта. Военный аспект” (pp. 85-109), a serious analysis of post-war dynamics in the balance of power between the two countries, is worth checking out. I’ll summarize it here.

a) Though Georgian military spending has fallen somewhat from its 2007-08 high of 8% of GDP, its military potential has continued growing at a fast rate and now exceeds its level in August 2008. Anti-partisan training has been deemphasized in favor of preparation for a hot conventional war against Russia, especially emphasizing the anti-tank and air defense aspects; battle-hardened troops have been returned from Iraq, the reserves system is being reformed, and military contracts concluded in 2007-08 are now bringing in masses of new Soviet and Israeli military equipment from abroad. The authors believe it is not unrealistic that Georgia will make another attempt at a military resolution of the Ossetian issue after 2011.

b) Counter-intuitively, the authors believe that though the revolutionary reforms now being implemented by the Russian Army will enhance its long-term potential, in the short-term there will be a certain loss of effectiveness due to the ouster of experienced officers, a shortfall which will not be immediately made up by the extensive NCO-training program which is only now getting started. The effective number of Motor Rifle and Tank battalions in the Caucasus military region has fallen from 65 in August 2008 to just 40 at end-2009, albeit their quality has been somewhat improved thanks to the rapid acquisition of modernized tanks and helicopters. Furthermore, their forward-positioning in Abkhazian and S. Ossetian bases will give them an advantage missing in 2008.

c) Finally, the authors also note the growing military superiority of Azerbaijan over Armenia. The two countries hold a long grudge over Armenia’s occupation of the ethnically-Armenian enclave of Nagorno-Karabakh. Revenues from the BTC pipeline have enabled Azerbaijan to massively increase its military potential, acquiring a panoply of modernized late-Soviet and Israeli weapons systems. Azerbaijan’s military budget now exceeds the entire Armenian state budget. However, Armenia is allied with Russia through the CSTO, hosts a big Russian base, and receives subsidized weapons systems from Russia, as well as some old Soviet stocks for free. The authors note that due to ethnic majority-Armenian unrest in the southern Georgian province of Samtskhe-Javakheti (which I noted in my post on the possibility of a new Russia-Georgia war), Russia would be wise to increase its military presence in Armenia and accelerate the modernization of the Armenian armed forces in order to be able to exploit Georgia’s soft southern underbelly in a new war***.

Power Projection & Military Modernization

Two more military things. Frustrated with the sorry state of Russian military shipbuilding, the Kremlin is considering the French Mistral, a helicopter carrier & amphibious ship. Such an acquisition will enhance two important Russian capabilities.

First, if deployed in the Barents Sea, it will reinforce its anti-submarine warfare (ASW) capabilities, which are growing in importance with its increasing strategic interests in the Arctic linked to the region’s oil-and-gas deposits and potential trade opportunities as the sea-ice melt accelerates. Second, these vessels would enable Russia to insert crack military forces behind enemy lines much quicker than had previously been possible. In the event of a potential conflict with Georgia or the Baltics, this capability will be incredibly valuable.

EDIT to add PAK-FA news: Second, Russia unveiled the PAK-FA prototype fighter, the first 5th-generation fighter to be produced outside the US. Below are some informative articles on the subject.

[youtube=http://www.youtube.com/watch?v=ovoo-n9b5Bs&w=425&h=344]

Despite delays and questions over its effectiveness, Russia being the 2nd nation in the world to test a 5th generation fighter after the US does prove that elements of the Russian MIC, especially military aviation, remain robust and capable of innovation. (Besides, one shouldn’t neglect to mention that the American MIC also has its own problems: cost overruns, questions over the JSF’s real utility, etc). As pointed out in earlier posts, Russia’s main challenge is now rooting out corruption and modernizing the MIC’s machine tools and management culture to enable high-volume production of state-of-the-art military equipment such as the PAK-FA, so as to modernize its armed forces by 2020 without returning to a Soviet-style militarized economy.

* To forestall criticism, this is not, of course, an expression of “Great Russian chauvinism”, but a historical reference to the state centralization and “gathering of the Russian lands” undertaken by Muscovy from the time of Ivan III (1462-1505). This formed the palimpsest for all future restorations of Russia’s empire, including the current one.

** Why Yanukovych will almost certainly win the Ukrainian Presidency – just a matter of beans-counting. In the first round, he got 35%, Tymoshenko got 25%. Yanukovych will net many of the Tihipko voters (13%), while Tymoshenko will get support from some of the Yatsenyuk (7%) and Yushenko (5%) voters. The rest of the electorate will split roughly in half, most likely. But even if Tymoshenko gets very lucky, it is hard to see her closing the awning 10% gap separating her from Yanukovych in the first round.

*** I would also add that though unlikely, it is not impossible that Armenia and Azerbaijan will fight a new war in the near future, as the Azeris despair of their long-term chances of ever reclaiming Nagorno-Karabakh in the face of Turkish-Armenian reconciliation and the hard reality of rising Russian power over the Caucasus. They could yet make a desperate gamble, perhaps in the context of the chaos unleashed by a US-Israeli war with Iran and its proxies. That said, the far likelier possibility is that the realistic-minded President Aliyev will reconcile himself to Russia’s growing power over the Caucasus.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Although I have several articles on the threats posed to industrial civilization by runaway global warming and ecological degradation on Sublime Oblivion (see 1, 2, 3, 4, 5), I have yet to cover the Charybdis of resource depletion in as much detail (1, 2, 3, 4). As such, I have assembled many links to relevant articles on blogs such as the Oil Drum and Energy Watch Group to provide a foundation for the layman interested in exploring these very important concepts. With time I will write short descriptions next to some of the more important links summarizing what they are about.

EDIT Dec 2010: The Best of TheOilDrum.com 2005-2010 is ultra-recommended.

Basic Summaries

Core Books on Resource Depletion

  • Limits to Growth: The 30 Year Update (Meadows et al)
  • The Last Oil Shock (David Strahan)
  • Beyond Oil (Kenneth Deffeyes)
  • The Party’s Over (Richard Heinberg)
  • Twilight in the Desert (Matthew Simmons)
  • The Long Emergency (James Kunstler)
  • Global Catastrophes and Trends (Vaclav Smil)
  • The Long Descent (Michael Greer)
  • Our Ecotechnic Future (Michael Greer)
  • When the Rivers Run Dry (Fred Pearce)
  • The Collapse of Complex Societies (Joseph Tainter)
  • Collapse (Jared Diamond)
  • World Made by Hand (James Kunstler)

Peak Oil Projections

Energy Accounting & Geopolitics

Energy & the Economy

Limits to Growth

Coal, Natural Gas & Uranium

Renewables

Metals & Mineral Depletion

Energy & Societal Collapse

Regional Analyses

Politics & Psychology of Resource Depletion

(Republished from Sublime Oblivion by permission of author or representative)
 
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Smil, Vaclav – Global Catastrophes and Trends (2008)
Category: futurism, climate change, geopolitics, catastrophes; Rating: 5/5
Summary: Google Books

Vaclav Smil, an energy theorist and language connoisseur, brings his talents to bear on this idiosyncratic, incisive and balanced book on the global future. From the outset, he outlines his skepticism in universal theories of history and attempts at quantifying current trends to make point forecasts (e.g. predictions that nuclear power would make energy too cheap to meter in the halcyon days of the industry). Instead, he emphasizes the role played by the sheer complexity of human systems and their discontinuities – for instance, who could have imagined that a generation after the death of Mao, China would be the workshop of the world helping underwrite US military dominance?

Having established “How (Not) to Look Ahead”, Smil introduces his method – analyzing key variables categorized by a) unpredictable events – “catastrophes”, b) powerful trends (the effects of globalization, global demography, the energy transition), and c) the shifting balance of power between the Great Power (the marginalization of Japan, an unstable Islam, Russia’s partial resurgence, the uncertain rise of China and an increasingly faltering United States). It is one a method I highly favor and I agree with most of the arguments he makes in his book, albeit there are a few major exceptions.

Fatal Discontinuities

First, he classifies the catastrophes or “fatal discontinuities” into: 1) known catastrophic risks (asteroid strikes, earthquakes, super-eruptions), 2) plausible catastrophic risks (nuclear war, pandemic) and 3) speculative risks (“grey goo” or takeover by machines). [There is another classification of existential risks by Nick Bostrom].

The likelihood of world-changing natural disasters occurring is vanishingly small. Though floods and earthquakes killing up to 100,000′s of people happen about once or twice per decade, their global effects are very limited. An asteroid capable of terminating industrial civilization will need to have a diameter of about 2km+ (by darkening the sky with micro-particles and destroying the ozone layer), but the chances of such asteroids striking the Earth decrease exponentially with greater size. In any case the majority of large Near-Earth Objects have already been identified and identified as safe. Predicting super-eruptions is much harder, though again based on the geological record the chances of an unprecedented catastrophe are minimal – which would have to be on the scale of the Toba, Sumatra event 72,000 years ago, which ejected 2,000km3 of ejecta and reduced the world human population to 10,000. An example of a modern threat is a super-eruption of Yellowstone, which is about due though we’d have to be extremely unlucky to have it blow up during our lifetimes. Another possibility are submarine landslides forming tsunamis, such as at La Palma, the Canary Islands, where a 500km3 slide would create a mega-tsunami with repeated walls of water up to 25m striking Florida.

The second category includes pandemics and mega-wars. During the last generation, the onslaught against disease stalled and went into partial reverse, with a growing list of contagious diseases (the most significant of which is HIV / AIDS), failures in eradication (e.g. polio) and antibiotic resistance (multi-drug resistant TB – which now finished off many AIDS sufferers). There also remains the specter of an influenza pandemi c, which will be deeply disruptive and potentially highly virulent. Though a repeat of 1957 or 1968, or the current swine flu for that matter, aren’t going to have much effect, the consequences of the return of a Spanish Flu-like pandemic (1918) will be devastating. Arising out of the natural disease reservoir of South China, the flu can spread more rapidly (air transport, globalization, greater urban populations) and a mortality profile hard on the younger cohorts (15-30 years) will have devastating effects on aging European societies. Globalization will shut down as countries close borders, with highly disruptive effects on national economies. However, we are much better prepared for handling a pandemic today than in 1918 due to better nutrition and technological advances such as mechanical respirators, antibiotics for treating secondary infections, antivirals, and math models for optimizing quarantines and vaccinations.

Just as another pandemic is almost certain to happen, so there will continue to be violent conflict, terrorism, genocides, perhaps even another large-scale democide or mega-war with tens to hundreds of millions of casualties – despite that the incidence of violent conflict fell by 40% since the early 1990′s and the agreed reductions in the US and Russian nuclear arsenals. Some may be transformational and fundamentally change the course of world history (Smil identifies the Taiping Rebellion, the American Civil War, WW1 and WW2 as transformational). The risk remains of an accidental nuclear war between the US and Russia killings hundreds of millions, or the rise of an revisionist, expansionist power unleashing WW3. The potential deaths accruing to war are several OM’s (orders of magnitude) higher than for all natural catastrophes.

Smil points out that terrorism is 1) nothing new, having gone through four “waves” – a) Russia’s narodnaya volya assassinations, b) decolonization, c) PLO, IRA, Basque ETA, and Western left-wing groups favoring bombings and aircraft hijackings, and d) modern Islamic terrorism beginning with the Iranian Revolution / Hezbollah, later extending to the Palestinian intifada and al-Qaeda, at the symbolic start of a new century (1400) by the Islamic calendar, 2) has rarely been effective with a few exceptions like 9/11 (and even there its value lay mostly in symbolism – [the spirit of terrorism], disproportionate public fear and official overreaction), for the chances of dying from terrorism are extremely low. Since producing mass casualties is extremely difficult, terrorists have to settle for “mass disruption” instead of “mass destruction”.

His final category of fatal discontinuity are “imaginable surprises”, such as annihilation of the Earth by exotic particle experiments, unforeseen climatic shifts (e.g. a drastic cooling), grey goo eating the biosphere within a few days, etc. He correctly doesn’t put much stock into these sci-fi scenarios.

Unfolding Trends

Smil makes some general observations about trend analysis. First, they tend to follow a pattern of incremental engineering process (cheaper, more efficient) and gradual diffusion, yet are sometimes marked by profound discontinuities, e.g. fertility transitions, the continuing failure to control nuclear fusion. Surprises can occur because a) long-term trends aren’t recognized in time, such as the Soviet Union’s post-1965 stagnation, b) can’t predict which trends will become embedded in society, and which ones will veer off course, c) their unknowable effects on human society (e.g. will the oil peak be moderated by a smooth transition to gas or renewables, or does it herald the end of industrial civilization?). With that said, Smil now focuses on three things: 1) the coming energy transition, 2) Great Power dynamics and 3) the future of globalization.

Smil now moves into his forte – global energy systems. The first point he makes is that the basis of today’s industrial system was formed a long time ago and that improvements since then paled in significance. “The most important concatenation of these fundamental advances took place between 1867 and 1914″, when engineers realized electricity generation, steam and water turbines, internal combustion engines, inexpensive steel, aluminium, explosives, synthetic fertilizers, electronic components, thus laying the “technical foundations of the twentieth century” [much like men like Marx, Bismarck and Garibaldi laid its ideological foundations]. A second Golden Age occurred in the 1930′s and 1940′s, which saw “the introduction of gas turbines, nuclear fission, electronic computing, semiconductors, key plastics, insecticides and herbicides”.

This technological base requires huge, uninterrupted supplies of energy for its existence. The sources of energy remain constant for long periods due to the difficulty of substitution, which involves discarding old infrastructures and building anew. As a share of world total primary energy supply (TPES), coal went from 95% in 1900 (excluding phytomass), to just 28% in 2005, while crude oil rose from 4% in 1900 to 27% in 1950 and 46% in 1975, but dropped to 36% by 2005. Natural gas expanded significantly since the mid-century, reaching 24% of global TPES by 2005. All together, fossil fuels supplied 88% of global TPES in 2005, compared to 93% in 1975. Despite all the talk about environmentalism and energy security, there has been no walk; ours is still a predominantly fossil-fuel based civilization.

In the future, Smil foresees that a) there will be no oil peak, b) coal is unlimited except by concerns over climate change and c) gas will rise in importance because of its relatively low carbon per unit of energy ratio and advances in LNG technology.

Though I am in qualified agreement with b) and c), Smil ridiculing of the oil peakists in a) is singularly unconvincing. He claims the Hubbert model is “simplistic” in that it is “based on rigidly predetermined reserves” and ignores “innovative advances or price shifts”. The first point is flat out wrong. It applies to Hubbert’s first model, but in his later work he devised a method that did away with the need for guesstimates of URR (ultimately recoverable reserves) – and which gives pretty much the same results, indicating that the effects of technology and higher prices are limited. Taking the case of the US, despite the discovery of oil off Alaska and the Gulf, despite there having been more exploration in the country than in the rest of the world combined, despite the periods of high prices during 1973-1986 and 2002-2008, despite its light regulatory environment and access to cheap credit – American oil production has declined relentlessly since the early 1970′s. Quite simply, the evidence indicates that the power of depletion will eventually defeat ever greater and smarter extraction attempts. Read one of these overviews from 2007 or 2009 for a more indepth explanation of peak oil.

However, I agree with Smil that the transition to other non-fossil fuel sources will be a drawn out process, considering that most of the “prime movers” in our society are oil-based (the steam turbines that generate 70% of global electricity output, the gasoline-fueled internal combustion engine, the diesel engine, the gas turbine, and the induction electric motor). [I would note that these difficulties are going to be aggravated by peak oil].

Addition difficulties include a) the scale of the shift, b) lower energy density of replacement fuels, c) substantially lower power density of renewable energy extraction, d) intermittence of renewable flows and e) uneven distribution of renewable resource extraction.

1) Global civilization uses fossil energy at a rate of 12 TW, a twenty-fold increase from the late 1890′s (total world TPES is around 13 TW). Only solar power has a significantly larger than current TPES is solar flux at 122 PW, which is 4 OM greater; otherwise, wind (<10 TW), ocean waves (<5 TW), and today energy / geothermal (<1 TW). Though Earth’s net primary productivity (NPP) / terrestrial photosynthesis yields solid fuels (biomass) at the range of 55-60 TW, exploiting it will further degrade vital ecosystemic services, and besides humanity already appropriates 30-40% of global NPP as food, feed, fiber and fuel (with wood and crop residue accounting for 10% of current TPES).

2) Coal and oil are far more energy-dense than wood and in general biomass cultivation will take up 4-5 OM more space than conventional oil / gas infrastructure. “In order to energize the existing residential, industrial and transportation infrastructures inherited from the fossil-fueled era, a solar-based society would have to concentrate diffuse flows to bridge power density gaps of 2-3 OM”. As an example, even using Brazilian ethanol from sugar cane to replace all current gasoline, diesel and kerosene used in transport would require the subjugation of 1/3 of the world’s cultivated lands – or all agricultural land in the tropics. Corn ethanol has half the power density of sugar cane ethanol. Large-scale adoption will have catastrophic impacts on food self-sufficiency.

[source]

3) Renewables don’t satisfy base load power requirements of an industrial society. Load factors are 75%+ for coal-powered power stations or 90%+ for nuclear power stations, whereas wind power is just 20-25%.

4) Renewable flows are also unevenly distributed, just like 60%+ of easy hydrocarbons are locked up in the Persian Gulf Zagros Basin. Jakarta has as little sun as Edmonton (shared with equatorial zone). Many areas are either too still or too windy, i.e. will be heavily damaged by hurricanes.

5) Costs won’t necessarily decline. To the contrary, protovoltaic silicon prices have more doubled; prices of steel, aluminium, plastics, etc, for wind turbines also drastically increased due to the underlying rise in oil prices.

Smil reiterates some pretty standard arguments on nuclear and hydrogen. The nuclear industry expanded quickly until the 1970′s, but stalled at that point because it previously hadn’t included costs like state-subsidized nuclear R&D, decommissioning costs and waste disposal (and later negative PR like Chernobyl). Hydrogen is not a realistic option barring the mass spread of cheap solar power. Concludes that this energy transition will be fundamentally different from previous one, which was driven by declining resource availability (deforestation), higher quality of fossil fuels (energy density, easier storage, more flexibility) and lower cost of coal and hydrocarbons. According to Smil, none of these factors apply to the fossil economy – though he expresses some concern over its contribution to climate change.

Having outlined his idea of the main trend of the next fifty years, Smil turns to a standard analysis of the shifting balance of international power between the US, China, Japan, Russia, Islam, and Europe. He cautions against subscribing to the conventional wisdom, pointing out that a) the Soviet collapse and Japan’s post-1980′s stagnation were largely unforeseen, b) the tendency of the US to surprise, going from decline / deindustrialization in the 1980′s to a vigorous “new economy” in the 1990′s before becoming fiscally and militarily overstretched in the 2000′s.

Geopolitical Trends

Smil does not believe Europe holds out much promise, unlike some delusional commentators. It is in long-term, centennial economic decline relative to the rest of the world and its economies are mired in inefficiency, unemployment and bureaucracy, and are less technologically dynamic than Japan or the US. Both Britain and Spain face separatist challenges and are economic basketcases. France is over-regulated dirigisme and has problems with integrating its 10% Muslim population (remember the burning banlieues?), but is at least demographically healthy – unlike Italy and Germany, which are rapidly aging and about to depopulate rapidly with very negative economic effects (they might be in a fertility trap, in which ever smaller generations need to pay higher tax burdens which limits their reproductive freedom). In particular, Italy is sinking back into corruption and Mafia influence, its artisanal manufacturing is being destroyed by Chinese competition and there remain huge gaps between the Nord and Mezzogiorno. He reiterates Mark Steyn’s Eurabia theory arguments (crudely summarized as lots of under-reported young, fertility, fanatical Muslims simmering in ghettoes), which has a number of holes in it. Finally, the EU structure itself is disconnected from national electorates and reality in general, and has no inspiring sense of mission; further expansion will just weaken it further. [Agreed with most things - I believe the EU by 2020 will be a much less significant institution and European nations will be tottering, preoccupied with trying to solve their own internal problems].

After a period of euphoric hubris in the 1980′s, when it seemed Japan would be number one, the country crashed into a long, ongoing period of stagnation marked by crippling deflation, the fall of the Nikkei from a peak at 39,000 in December 1989 to below 10,000, and the appearance of the NEET generation (not in employment, education or training). Though it remains rich, well-off and technologically advanced, there is a moral anomie as long-term jobs vanished and fertility plunged to around 1.2 children per woman. Smil is pessimistic on Japan due to a) its ingrained conservatism [though would the recent electoral win by the Democratic Party of Japan later be regarded in the same vein as the Meiji reforms?], b) the continued hostility of neighbors reinforces its security dependence on the US, especially to counter challenges from China and North Korea, and c) the start of depopulation in 2005, retirement wave in 2010′s as the 1950′s baby boomers retire, and the prospective massive aging of the population (medium age 50 by 2025, more 80+ than 0-14 year olds by 2050). Japanese culture does not accept immigrants and it will not be saved by robots.

The author sees Islam being in a fractured state (secular / spiritual, Sunni / Shia / others, etc) in a difficult relationship with modernity, fighting the same internal civil war that charactered early modern Christianity. His short exegesis of the Koran finds that there is support for many interpretations of just how restrictive Islam has to be, and this forms an ideological battleground between the extremists and moderates. Signs of this backwardness include the Iranian fatwa against Rushdie, the prevalence of bizarre conspiracy theories on the Arab street, and Islamic countries accounting for just 2% of the world’s scientific publications. [To this we can add the Mohammed cartoons controversy and the 2003 UN Arab development report that produced the astonishing statistic that more books are translated into Spanish per year than have been translated into Arabic in all history]. There are several inequalities within the ummah (e.g. oil-rich Saudi Arabia and Pakistan) and internal instability, in part cased by the demographic explosion [usually in water-stressed environments, I'd add] which results in youth bulges – young men with no job prospects who are susceptible to joining violent groupings. Even as the region simmers, the outside world will be forced to take an interest due to its stranglehold over the world’s oil supplies (the five Persian Gulf nations produced about 1/3 of the world’s oil in 2005, and this figure is projected to rise substantially).

It is evident he knows his stuff when talking about Russia, or at least is well-read on it. Contrary to most analysts, he believes it is resurgent in a real way, even though its longer-term prospects are uncertain. He lists its strengths as being an energy superpower (especially with respect to gas) with a big intellectual capacity and a formidable military that is being rearmed with newer-generation weapons. However, he foresees significant challenges in the form of its cyclical, hydrocarbons-based economy [as confirmed by the 2008 crisis, though the deeper problem is dependence on foreign credit], its unstable democracy, the Islamist insurgence in the Caucasus, and above all its negative demographic trends [I've written a lot about this, just search the site].

China is gradually returning to its old position of global economic predominance, its growth helped by Deng Xiaoping’s economic liberalization, FDI, the one-child policy, a cheap, disciplined and relatively skilled labor force, mass urbanization and migration to the coasts, and a certain degree of innovation (state-funded research facilities, as well as flouting of IP and large-scale industrial espionage). It is “a Communist government guaranteeing a docile work force that labors without rights and often in military camp conditions in Western-financed factories so that multi-national companies can expand their profits, increase Western trade deficits, and shrink non-Asian manufacturing”. It is economically mercantile, seeking resources around the world and if current growth trends continue, China could match US military spending by 2020. However, there are substantial problems with a) the population (severe 118:100 male-female imbalance, rapid aging and undeveloped pension system), b) the economy (huge rural-urban inequality, high taxes on peasantry and violent expropriations by business-state symbiosis), c) the environment (deforestation and soil erosion from Maoist era, little arable land per capita that is shrinking from salinization, desertification and urban expansion, needs more food but irrigation is constrained by water shortages and crops are already very intensively fertilized, falling water tables and toxic rivers, very poor air quality and now leading CO2 emitter), and d) cultural mediocrity (not as much soft power as the US).

India is nowhere near as powerful as China, and the same factors limiting the latter militate against India. It’s GDP is twice smaller; though its Gini index of income inequality is better (35 versus 45), this is a product of its underdevelopment, besides its deep social stratification / de facto caste system persists; malnutrition, immunization rates and adult illiteracy are all much worse in India; China has 3x the electricity-generating capacity and 17x the container port capacity. Though democratic, it is likewise deeply corrupt, bureaucratic and ecologically degraded. It faces a nuclear-armed Pakistan and the prospect of tens of millions of Bangladeshi refugees spilling over once their country sinks under the rising seas.

Smil is an all-round pessimist, believing the United States may go the way of the Roman Empire. According to him, its woes include increasing economic and foreign policy challenges [see Shifting Winds], uncontrolled Hispanic immigration that threatens its long-term territorial integrity and Protestant “work ethic” values, and perennial budget deficits (in particular the structural nature of the current account deficit, formed due to its reliance on oil imports to sustain the suburban arrangements and the collapse of its domestic industrial base – mundane manufacturing, the auto industry, and now even aerospace and the food industry. It has a poor education system (see results of PISA international standardized tests), retiring baby boomers about to cash in on state obligations and their savings, obesity and a general cultural decline. However, the possibility of open discussion of these failings is a persistent American strength.

He then proceeds to make the argument that “US leadership is in its twilight phase” and that the “coming transition will be unprecedented” due to the global nature of its hegemony. He plausibly affirms that no nation is strong enough to replace the US as the sole superpower, meaning that there will probably be more chaos, instability and wars. Smil predicts that in sum the world will regret its passing.

Smil concludes with an analysis of globalization, making the points that it is an ongoing historical process originating in the 16th C and blossoming from the 1950′s with the arrival of the tanker revolution, now blossoming in the intricate production chains and JIT system exemplified by Wal-Mart’s relation with China. There is a stabilizing force, interdependence, which expands the economic scope of every globalized nation far beyond the limited autarkies of history, but at the same time makes them ever more vulnerable to disruption of these links; the destabilizing force is the growing inequality between nations (e.g. failed states), though a caveat is that when calculated by population there is an improvement mainly thanks to China (but nullified when taking into account the intra-national growth of inequality – which increase since 1970 in all the major countries like the US [35 to 47], Japan [25 to 37], China [25 to 50], Russia [25 to 40]. There is now no global “middle class”, according to Smil, which makes the system unstable. [Here I disagree - East-Central Europe, Latin America and even China fit the bill here].

Environmental Change & Conclusion

This next long section is a detailed analysis of the likely course and effects of global warming. Most of the stuff is pretty basic and I’ve already summarized in my reviews of Six Degrees (Mark Lynas) and The Last Generation (Fred Pearce).

His most interesting discussions are of human influence of the nitrogen cycle (which they’ve affected to a far greater degree than the carbon cycle) and the spread of antibiotic resistance. “Losses of nitrogen from synthetic fertilizers and manures, nitrogen added through biofixation by leguminous crops and nitrogen oxides released from combustion of fossil fuels are now adding about as much reactive nitrogen (c.159 Mt N/year) to the biosphere as natural biofixation and lighting does” (in contrast human interference in carbon cycle through land use changes and fossil fuel burning amounts to 10% of annual photosynthetic fixation of the element and sulfur is equal to 1/3. This leads to mass leaching, eutrophication, growth of algae and phytoplankton, and the subsequent decomposition deoxygenates water and kills bottom-dwelling aquatic species. The worst hypoxic zones are the Gulf of Mexico, the lagoon of the Great Barrier Reef, the Baltic Sea, the Black Sea, the Mediterranean, and the North Sea. Nitrogen oxides formed during combustion contribute to photochemical smog in urban areas around the world and acid rain. It’s use will increase as Asia demands higher crop yields and Africa needs to stop its increasing nutrient mining.

The other worrying trend he discusses at length is the rise of antibiotic resistance on the part of pathogens, as peniccilin and its descendants become increasingly less effective. This is inevitable, but is much facilitated by widespread self-medication, over-prescription and poor sanitation in hospitals. If these negative trends continue, influenza deaths will sky-rocket due to the inability to treat bacterial pneumonia, and treating tuberculosis and typhoid fever will become very difficult. A nightmare scenario can arise if this is accompanied by increasing malnutrition and AIDS, which make people far more susceptible to these secondary diseases.

In the last chapter, “Dealing with Risk and Uncertainty”, Smil sums up and embellishes his ideas, asserts the necessity of properly quantifying risks, cautions on the fallacies of linear extrapolation of current trends, and notes that even during a collapse there are silver linings, using the construction of the basilica of Santa Sabina in Rome (422-483) during the waning years of the Roman Empire (ended in 476) as an example.

In conclusion, this is a very good and entertaining book. There are some East European-style grammatical mistakes and perhaps a bit too much personal boasting, but otherwise it provides a realistic appraisal of the real potential catastrophes facing humanity (i.e. big wars and pandemics, not terrorism, earthquakes or “grey goo”) and the dominant trends of the next fifty years (geopolitical flux / non-polarity, climate change & pollution, the energy transition). He approaches the subject very rigorously-scientifically so one gets a good perspective of possible futures, my only major disagreements with him being on his disbelief in the oil peak theory and paying too little attention to the social and geopolitical ramifications of climate change (he doesn’t really consider the catastrophic possibilities, sticking to the middle-of-the-road consensual IPCC forecasts).

(Republished from Sublime Oblivion by permission of author or representative)
 
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This April, Michael Bohm, editor at the Moscow Times, published the article New Kremlin Dreamers, which questioned Russia’s stated intention of becoming an advanced industrial nation by 2020. I wasn’t much impressed by its pessimistic assertions – for instance, regarding Russia’s hopes of becoming the world’s fifth largest economy by 2020, he falls into the frequent Kremlinologist fallacy of applying standard GDP growth rates to nominal GDP (as opposed to purchasing-power parity GDP, which corrects for exchange rate fluctuations). He similarly passes over that countries in the process of economic catch-up typically grow much faster than the leader nations, because they have greater returns to investment. Soon after Yevgeny Kiselyov wrote Dreaming of Modernization and Innovation on a similar theme.

I disagree with them on two fundamental points. First, I don’t share in their pessimism and I believe that on purely objective factors, Russia – and much of the rest of East-Central Europe for that matter – is well set to converge to Western living standards by 2020 (which will by then probably be stagnating in light of peak oil and intensifying competition for energy resources from other emerging-markets). This is a point I made a long time back in Towards a New Russian Century? and Education as the Elixir of Growth. Second, even if that were not the case there is still a lot to be said of the power and utility of positive, optimistic thinking – ambition is no sin in my eyes, and in the case of government a moral duty to their citizens. Hence this rebuttal. ;)

Two recent articles in the Moscow Times took issue with the “Kremlin dreamers” for their rose-tinted views of Russia’s destiny, alleging that the main goals of “Strategy 2020”, like becoming the world’s fifth largest economy or doubling GDP per capita, are nothing more than utopian pipe-dreams. Yet an objective look at key current trends – in educational attainment, economic growth, resource depletion and climate change – suggests that these “fairy tales” have the potential to become reality.

First, Russia’s educational profile resembles that of a First World country, unlike most of its emerging-market competitors. Around 70% of Russians go into higher education, compared with just 20-25% of Brazilians or Chinese. The quality of its primary education is substantially higher than in developing nations, as attested to by the results of international student assessments like PISA or TIMSS. For instance, 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. A country needs to have sizable cadres of skilled workers to move into added-value manufacturing or complex services. Brainier nations will also assimilate technology more easily and thus their economic “rate of convergence” to developed-world status will be that much faster. In this respect, Russia and east-central Europe are in a different league from East Asia, let alone Latin America or the Middle East.

Second, while there’s no denying Russia is plagued by corruption, to suggest it is endemic like in a failed state, as suggested by Transparency International’s Corruption Perceptions Index, is ludicrous – and would frankly be obvious to anyone who has visited both Russia and some of its neighbors on the list. Its problem is that it’s a survey of outsider businesspeople and their subjective perception of the situation, which differs markedly from the experiences of ordinary people. When asked, only 17% of Russians admitted to paying a bribe to obtain a service in 2007, according to TI’s Global Corruption Barometer – putting them in the same quintile as Turkey or the Czech Republics, i.e. slap bang in the middle of world corruption, not the end. The effects of corruption must also be set in context against a panoply of other, equally important growth factors. Goldman Sachs compiled an index called the Growth Environment Score, which aggregates a wide range of stats on macroeconomic, institutional, educational and technological conditions to assess a nation’s potential for economic “catch-up”. In 2007, Russia came in at 66th out of 181 countries, tied with China and ahead of Brazil and India.

Third, to fulfill one of the main goals of “Strategy 2020” – to become the world’s fifth largest economy, all Russia has to do is surpass Germany in purchasing-power parity GDP. Since according to the IMF Russia’s GDP was 2.26bn $ and Germany’s was 2.91bn $ in 2008, this can be achieved merely by maintaining an average growth rate of 2% points higher than Germany to 2020 – which seems entirely feasible considering that from 1999-2008 this difference was more than 4%. Doubling the GDP per capita over the next 11 years is trickier and requires continuing the average 1999-2008 growth rate of 6%. Though complicated by the current economic crisis, coming close is still entirely possible.

Fourth, Russia’s economy is not overly dependent on natural resource exports – they have stagnated since 2003 and the bulk of growth came from retail, construction and manufacturing. They are however crucial to replenishing government coffers, allowing the Kremlin to spend lavishly on things like military modernization, infrastructure expansion and prospective sunrise industries like nanotechnology – thus turbo-charging its plans for an “innovation economy”. (Granted, some is wasted like the 1bn $ project on the bridge to Russki Island, i.e. to nowhere). Fortunately for Russia, there’s no reason to believe oil prices will remain low. Even now, in the depth of the biggest global economic crisis since the Great Depression, prices never fell below $40 a barrel and have now rebounded to over $60. With oil production close to or already past its peak and Chinese voraciousness unquenched, a second oil price spike is only a few years away.

Finally, according to researcher Trausti Valsson, further in the future global warming will unfreeze remote energy resources in the Far North to exploitation, open up the Arctic to shipping, bolster Russian crop yields and increase the carrying capacity of Siberia and the Far North. Russia could literally end up on top of the world.

Wells may have ridiculed Lenin as a “Kremlin dreamer” in 1920, yet precisely a decade or so later the Soviet Union began to produce aircraft, tanks, trucks, machine tools and chemicals, boasting growth rates far higher than that of any other industrial nation. And though the USSR did set over-ambitious goals for the Five Year Plans, the achievements were impressive nonetheless.

By 2020, Russia will experience increasing problems due to adverse demographic trends, slowing growth due to (paradoxically) successful “catch-up”, and perhaps waning European demand for its natural gas and dissatisfaction with an increasingly atrophied and unresponsive descendant of the “Putin system”. As such, far from being a fairy tale, the “Kremlin dream” is a strategy for maintaining Russia’s geopolitical relevance well into a troubled 21st century.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Recently the World Bank’s November issue of the biannual Russian Economic Report came out. At the time I was busy with other things, amongst others planning the move from Blogger to self-hosted WordPress; as such, I did not give it the comprehensive treatment that it deserved at the time. Of course, reading about these things today is much more important than at any time since 1998 (or 1987, or even 1929)…and if I devoted an entire post to the last November issue, surely this new compendium of graphs galore and pecuniary palaver deserves some special attention?

It was compiled with a keen eye to the unfolding global economic crisis, and as such is up-to-date and covers the entire period up to October 2008. We will focus on the first section, which is a comprehensive account of Russia’s economic position. (Part II, Anatomy of the Crisis, is an in-depth discussion of the causes and progression of the credit crisis with particular attention to Russia; I will cover this in a follow-up post, so that this one doesn’t become a bigger monster than it already is). My aim is to provide a succinct summary of the data, a readable summation of its main arguments and my own contextualization, especially relative to other countries and more recent (bad) economic news.

In summary, an incipient slowdown in the Russian economy was turbocharged into nosediving growth rates by the credit crisis. Russian companies are finding it difficult to access credit, while having to pay off a slew of short-term external loans. However, most of them are due in the final two quarters of 2008, so in this respect the situation should improve next year. The liquidity crunch in September was controlled in a ‘swift, appropriate, and proportionate’ by the government, which now plans on substantial counter-cyclical fiscal injections to limit the effect of the credit crunch on the economy. The inflation risks of doing so have receded due to the global deflationary forces, while long-term fiscal viability is not seriously threatened, even under an erroneous scenario of continuing low oil prices, because Russia has healthy reserves and the non-oil part of its budget runs a small deficit. Although the capital account will go into the red to the tune of 100bn $ in 2009, the current account will remain positive at 40bn $ and the Central Bank should not lose more than 100bn $ in reserves in that year – considering that today they stand at 450bn $, this is far from catastrophic.

Recent economic news indicate that Russia, along with much of the rest of the world, is in much worse straits than was the conventional wisdom even a month ago, when this report was compiled – for instance, it is very likely that it’s already in a full-blown recession. Nonetheless, as I calculate below, even in a very pessimistic scenario in which oil prices fall to 50$ for 2009, the current account deficit for the year should not much exceed 40bn $; similarly, even a total cessation of net oil transfers to state coffers in 2008 will not imperial Russia’s long-term fiscal sustainability.

So is Russia going to go red? On the capital account, yes; on the current account, almost certainly not unless there’s a full-blown global Depression and complete collapse of oil prices; on government spending, almost certainly not unless oil prices completely collapse or the Russian economy and tax base implode, both of which I consider extreme outliers on the probability scale. (However, the state will become more “red” in the political sense, because at least in the medium-term, it will assume more control over economic life and spend more on strategic long-term investments and social welfare – in any case, there have been latent tendencies towards the above in the last couple of years, anyway).

Nonetheless, one should take the doom-laden prognostications of political instability, and perhaps bloody revolution, made by the likes of Streetwise Professor with a pinch of salt – the populist discourse on red-in-tooth-and-claw silovik “clans” fighting for “resource rents” which hold the “natural state” together might appear superficially attractive, but is in fact meretricious, intellectually vapid verbiage that betrays the author’s preference for the mysticisms of Kremlinology over hardheaded observation and analysis of real economic data.

Output

After a decade of high growth (7% for 1999-2007) and an overheated acceleration to 8% in the first half of 2008, the economy began to decelerate. During the incipient stage of the world financial crisis, Russia was widely viewed as a safe haven due to its strong macroeconomic fundamentals (low sovereign external debt, big twin surpluses and impressive foreign currency reserves). This helped Russia delay the impact of the global credit crisis – “it is now clear that if Russia had not entered the current global financial crisis with such a strong fiscal surplus and large resources accumulated in the stabilization funds and foreign reserves, the impact of the crisis would have been much quicker and more severe than is currently the case”.

A slew of shocks transmitted the global financial crisis to Russia: they are, a) a reversal of capital flows due to the global flight away from emerging markets to ‘quality’, b) liquidity problems amidst short-term external repayment obligations, c) the tumbling oil price, which eroded Russia’s fiscal and current account surpluses and reserves and d) the collapse of its stockmarket. These shocks slowed domestic demand, Russia’s main driver of growth. On the supply side, tradable sectors were the first to register slower growth, but nontradables are also slowing from very high growth rates.

Manufacturing—the engine of Russia’s industrial growth—did well through September 2008, but a slowdown is likely in the last quarter due to lack of easy credit and easing demand. (NOTE: now not likely, but certain. VTB’s Purchasing Managers’ Index fell for a fourth month to 39.8 in November, from 46.4 in October – this is lower than at the depth of the 1998 default. The only ‘consolation’ is that everybody else is doing at least as poorly.)

This is happening amidst a background of increased borrowing costs (adversely affecting liquidity and credit) and slowing aggregate demand (affecting consumption and investment). Incipient signs of the latter were already being felt as early as Q2, when consumption growth slowed to 13.0% from 19.1% in Q1, and fell further to 9.9% in Q3, and investment slowed due to uncertainties about the world economy. The report repeats a criticism of the Russian economy that it frequently makes, that investment is heavily concentrated in a few, mainly nontradable sectors (resource extraction and in the transport and communication category, out of which pipeline transport accounted for a significant part) and 22% share of investment in the GDP, which is low by the standards of the east Asian tigers.

Labor Markets

Real wages continue to outpace productivity growth, undermining competitiveness, but wage growth has begun to moderate while unemployment—a lagging indicator to real economic activity––has declined further. However, this will not last since labor-intensive, nontradable employers in construction and retail, as well as restructuring banks, are going to lay off worker and thus the unemployment rate will likely start increasing by year end. (NOTE: again, breaking news have overtaken prior, cosier projections. Unemployment rose to 6.1 percent from 5.3 percent in September – and that’s for October.)

Externals: Current Account, FDI, Debt

In the nine months of 2008, Russia began to experience a globally incited “sudden stop” and a reversal of capital flows, followed by a rapid fall in oil prices—but the current account has held well. Despite rapid import growth driven by strong domestic demand, trade and the overall external current account continued to improve on the back of record high oil prices. The fall in oil prices will significantly affect the trade and external current accounts only in Q4 of 2008, when export deliveries based on past lower oil price will take place. More worrisome, however, is that the nonoil external current account continues to deteriorate quickly in 2008 as import volumes grow considerably faster than nonoil exports. In Q2 of 2008, the nonoil external current account deficit sharply increased to almost USD60 billion, and further to USD62 billion in Q3, making Russia’s balance of payments position particularly vulnerable to a sudden drop in oil and gas prices.

(NOTE: However, it is not critical, as could be gleaned from Russia’s balance of payments for H1 2008 and a few quick and crude calculations. Goods imports of 135bn $ were countered by oil/gas exports of 159bn $ and other goods exports of 78bn $, and add a deficit in services trade of 11bn $. Assuming everything remains constant except the value of the oil/gas exports* means that we need ((135+11-78) * 2 = 136bn $) in the latter to retain a positive current account. (* In practice, the value of Russia’s other exports will also decline because most of them are commodities like metals, lumber and grain; on the other hand, imports will certainly fall too due to global deflationary forces, a weakening ruble and falling consumer demand, thus presumably cancelling these effects out.) Even assuming a pessimistic oil price of 50$ per barrel for 2009 (in practice, most economists think it will be around 70-80$, albeit there is currently a downward tendency to revisions), that would simply take us back to 2005, when the average was 50.04$ (or 54.99$ inflation-adjusted). In that year, Russia exported 148bn $ of oil/gas (nor will export volumes change much between 2005 and 2009). Thus, even in this ‘low’ scenario we get a current account surplus of 12bn $ – and even if we undershoot, there still the matter of Russia’s 450bn $ reserves as of November. From this I’d venture to say Russia has ample resources to pursue a gradual correction, rather than sudden devaluation, of the ruble; and to undertake serious counter-cyclical fiscal measures. But more on that later…).

After record inflows in 2007, Russia has experienced a sudden reversal in capital inflows since mid-year. After reaching a peak 84.3bn $ in 2007, the capital account surplus fell to just 0.5bn for the first three quarters of 2008, due to a sudden reversal in Q3. It also reflected much slower accumulation of reserves of official reserves in 2008 relative to the previous year, despite a much stronger current account. This was due to changes in investment sentiment and changes in foreign exchange expectations that had previously bet on further ruble appreciation.

In 2008, capital flows became more volatile, and the banking sector experienced a sharp reversal of capital inflows. Foreign direct investment—non-debt-creating capital flows that can also bring new technology and knowhow—registered a decline due to changes in domestic laws and investor sentiment. Look into the report for greater detail into the structure of Russia’s capital account and reasons behind the fall and restructuring of FDI. The decline in FDI was partly offset by greater reliance on external borrowing. This made the capital account more vulnerable to changes in investor confidence and borrowing and refinancing conditions.

Russia’s private corporate and banking debt grew rapidly in the first half of 2008 and total external debt rose by 50.1bn $ in the second quarter of 2008. Meanwhile, sovereign external debt remained modest. However, the ostensibly ‘private’ corporate sector includes many state-controlled enterprises like Gazprom, which account for most of the debt stock. A graph of Russia’s external debt structure is provided below:

While the overall share of short-term external debt of Russia remains low, accounting for less than 20% of total external debt, the share of short-term debt in private financial institutions is significantly higher at around 40%. Many smaller banks with weak deposit bases are going to struggle with the higher borrowing costs and sharply increased rollover risk, although a positive effect would be to encourage consolidation in Russia’s fragmented banking system.

Russia’s external debt maturing in the final two quarters of 2008 is 120bn $, while the amount requiring repaying or refinancing for the whole of 2009 is less than 100bn $. Rolling over debt is going to be tough, especially for smaller private institutions, due to higher refinancing prices and drops in stock that could otherwise have been used as collateral. However, systematic risk remains limited because of the government’s resolve to support the systemically important banks and a sizable package of measures taken to date.

(NOTE: From the graph above, a great deal of debt repayments are scheduled for Q3 and Q4 of 2008, and I would imagine its likely that most of the ‘on demand’ lenders are also asking for their money back now. As such, the strain on Russian companies and banks with big external debts should ease from 2009, and presumably so too will requests for bailouts and pressure on the reserves.)

Monetary Policy

The central bank has gradually begun to change its policy of exchange rate switching towards inflation targeting, making the exchange rate more flexible. Monetary tightening, like raising reserve requirements and interest rates, reduced money supply growth from 27.8% to 8.3% in the first three quarters of 2007 and 2008, respectively – albeit not enough to rein in inflation driven by high inflation expectations and high aggregate demand.

But with liquidity risks rising sharply, the central bank moved decisively to support liquidity in the system and help restore confidence during the September liquidity crunch. Dramatic worsening of global financial conditions in the third quarter of 2008 and the liquidity crisis in September caused the central bank to change the policy course and provide substantial liquidity in its efforts to alleviate the confidence crisis and unfreeze the interbank credit market. These actions were swift, appropriate, and proportionate to the problem at hand. And they helped to temporarily stabilize the financial markets after the tumultuous week of 15-19 September. An estimated 400 billion rubles of additional liquidity (15bn $ or 1.2%t of GDP) were pumped into the economy in September and October, when the reserve requirements were dropped sharply to 0.5 percent. This temporarily alleviated the sharp liquidity and confidence crisis in mid-September, but liquidity pressures continued later in October and prompted the government to take additional measures to ensure the rollover of external obligations by banks and corporations (again see below). In hindsight, this was the right decision, helping avoid more difficult liquidity conditions in September and early October than otherwise.

Inflationary expectations, higher import prices, combined with loose monetary and fiscal policy in 2007 and early in 2008 have resulted in an upturn in CPI inflation, which reached 11.6 percent in the first ten months of 2008. Slowing growth and aggregate demand should alleviate these pressures, albeit not enough to meet the government’s 11.8% target for 2008 – the Central Bank recently revised its year-end CPI inflation target to 13%.

Fiscal Policy

Russia’s consolidated (general) budget was executed with the strong surplus of 11.1% of GDP in the first nine months of 2008, compared with 9.4% for the same period in 2007, mostly due to higher revenues from sky-high oil prices. However, according to preliminary data from the Ministry of Finance, the consolidated non-oil balance amounted to -0.2% of GDP, compared with about 0.7% surplus last year. Given the seasonality in expenditures, a sharp fall in oil and gas prices—and the recently announced increases in government spending to weather the impact of the global financial crisis—the fiscal position is expected to deteriorate toward year-end, with the non-oil deficit possibly exceeding the last year’s -2.9% of GDP. The report argues that given the risks to the financial system and the real economy, such a red-shift (ha!) is justified in the short-term; albeit if energy prices stabilize at the current low level, long-term expenditures must be adjusted to ensure fiscal sustainability.

(NOTE: for perspective, in their last April report on Russia’s economy, the World Bank concluded that at constant prices of 60$ per barrel Russia would have to maintain its non-oil primary fiscal deficit below an estimated 4.7% of GDP to maintain long-term fiscal sustainability. So even in a crisis year, Russia does not have to tuck into its seed corn – unlike some other countries, like the US, which have gorged on it even in the fat years (see p.3 of Things That Fall Apart, Eric Kraus). Furthermore, the constant 60$ per barrel scenario is unrealistic in practice – those who indulge in Schadenfreude at the recent economic difficulties in Russia or Venezuela should remember that oil prices have a cyclical element, and their recent collapse in no way invalidates the overriding long-term secular upwards trend – one which will in several years produce a far more devastating spike that in 2008, since from 2008 new oil supplies will fall off, average field depletion rates accelerate and the world economy and oil demand will presumably rebound. Anyway, I’m getting off-topic here and in any case this is material for a future separate post.)

After discussing details of the Russian 2008-2010 federal budget, the report goes on to confirm my support for a loosening of the fiscal policy stance, since ‘counter-cyclical fiscal policy has a better chance of affecting the real economy when there is a sizeable fiscal surplus, as in Russia, as opposed to when additional public debt might risk aggravating the underlying fiscal problems’.

Policy Challenges

Russia’s first challenge is to limit the overall impact of the crisis on liquidity and the real economy while not losing control of the public finances and not letting inflation get out of control. Although a delicate balancing act, in contrast to itself in 2008 and many other emerging markets today, Russia has strong macroeconomic fundamentals (huge reserves, budget and current account surpluses, a ratio of external short-term debt to total international reserves of around 0.18 (Q2) and a fairly low overall external debt of 35.9 percent of GDP) and its policy response so far has been ‘swift, massive, and broadly appropriate’.

The second challenge is to intensify the efforts to diversify the economy, strengthen institutions as well as the financial sector for sustained, long-term growth. A lot of standard platitudes about the need to diversify the economy, strengthen the financial sector and pursue structural and institutional reforms.

The third challenge is to continue the integration into the global economy, including
the acceleration of accession to the WTO.
Globalization and rule-based international frameworks and yadda yadda are great! (Not that I disagree, but first Washington has to let Russia into the WTO).

The fourth challenge is to limit the impact of the crisis at the regional level and be vigilant to the emergence of non-payment problems. Due to problems with obtaining credit, regions that rely on narrow tax bases or engaged in deficit spending may undergo problems, and recommendations on dealing with said problems.

Finally, a prolonged economic slowdown into 2009 might require an introduction of a well targeted and structured, fiscal stimulus package to enhance key drivers of sustained economic growth. Due to the growing output gap, receding inflation risks and comfortable reserve cushions, it would be a good idea to introduce temporary fiscal stimuli (a combination of spending
increases and targeted tax cuts) to unlock investment and boost flagging aggregate demand. More platitudes on the need for transparency and due attention to moral hazard.

Outlook for 2008-2009

The report emphasizes the global financial outlook is very much uncertain and could have wholly unforeseen ramifications. Their key assumptions are oil prices and world GDP growth of 101.5$ and 2.48% in 2008, and 74.5$ and 0.93% in 2009, respectively; and impacts on the Russian economy and policy responses so far. Thus, Russian growth is projected to be 6% in 2008 and 3% in 2009 (down from 6.5% pre-crisis), while employment will increase from 5.3% to 5.9% by year-end. (NOTE: as previously pointed out, it appears that Russia is already in recession (Edward Huge notes that PMI for both services and manufacturing below 50 in October), employment for that month already up to 6.1% and very gloomy figures for November manufactuing).

Inflation is predicted to be 13.5% for 2008 and probably no less than 12% in 2009. The situation is complicated since there exist ‘opposing factors of slowing economy, credit crunch, and reversal of capital inflows and additional liquidity and public expenditures’. (NOTE: one of the very few silver linings here is that since the severity of this sucker (to borrow Bush’s lexicon) is so great, the problem of inflation in Russia will recede, as in the US; the problem comes après le deluge.)

Twin surpluses (federal fiscal and external current account) will substantially decline and capital account deficit would widen with further capital outflows. Federal fiscal surplus in 2008 would likely remain within 3.5% of GDP range but could decrease further in 2009, reflecting lower oil export revenues and additional public expenditures now under consideration. Current account surplus would be around 100bn $ in 2008 and about 40bn $ in 2009. Capital account would deteriorate in 2008 to about 50bn $ and then to 100bn $ in 2009, largely reflecting the repayment obligations and the lack of large new FDIs or portfolio investments until the global crisis nears the end. The attendant impact on CBR reserves should be limited to a possible loss of no more than additional 100bn $ in 2009, including the announced policy interventions in support of the banking and corporate sectors.

As for the summary…well, see the first six paragraphs. I’m not going to repeat anything, except to remind you that I plan to make another post on the WB Report, this time on its second part, Anatomy of the Crisis.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Just wanted to point out there is an on-going four-way debate at Streetwise Professor‘s blog between him, commentator Michel, myself and (at times) Timothy Post. In SWP’s words, it is about “(a) the breadth of Russian prosperity, (b) its dependence on oil prices, and (c) the likely future course of oil prices” and despite the subject matter and our ideological differences, it has been generally civil and very interesting.


The Great Debate

Check out Michel’s Comments
(and Russian Poverty, later offshoot) – not really

The Debate

$67.88

EDIT: It’s a fast evolving situation…I find it easier to give a few more links of interest on international/Russian finance.

“One Babushka Said” – Timothy Post, an “on the ground” kind of person with well-argued (optimistic) post meshing stats, personal observations and analysis.

The contrarians (SWP) – never let it be said DR doesn’t link to opposing views…

Moscow Housing, Boy, I’m Glad He Cleared That Up!, Better and Better, Information Management – Flirting with Catastrophe, The $64 Question.

EDIT2: During the fallow period at Da Russophile before I moved to Sublime Oblivion, I spent (too much) time banging my head against the wall in the following SWP threads. This post however is now coming to a definitive end since now I have a new, vastly revamped blog to fill up with sublime goodness…

In chronological order since the last edit:

I Know There’s Some Leverage in There Somewhere, Human Capital, Nick Eberstadt is Not a Long Wolf*, The Price of Political Risk,The Market Price of Risk, More Generally,Roger That,Worser and Worser,If you believe that . . .,Life on a Volcano,That Was Fast,Like Minds,Hostages,The Financial Crisis in Russia Begins to Bite.

(Republished from Sublime Oblivion by permission of author or representative)
 
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What with all the noise about the ongoing credit crunch, all around financial apocalypse and burgeoning signs that it is beginning to spill over into Main Street like a torrent of water from a collapsing dam, I thought it’s about time we take a look at this “sucker” (to use Bush’s blunt term) and it’s likely effect on Russia.

The MSM highlights the problems of Russian banks in attaining credit, which has lead to a drastic slowdown in construction, much harder access to credit and the near collapse of Russia’s major stock market, the RTS. Moscow house prices fell by around 25% from their peak, to my personal consternation.

Nonetheless, despite the torrent of sad tidings, I remain bullish on the Russian economy. Its strong fundamentals and relatively low level of integration into the world financial system mean that it will weather the storm much better than either the insolvent financial systems of the Anglo-Saxon sphere or the many catastrophically over-leveraged, deficit-wracked economies of East-Central Europe.

Other people have different opinions. La Russophobe has embarked on a bizarre series of posts purporting to show the ‘horror of life in Vladimir Putin’s Russia’ as supposedly reflected in the RTSI over the past month (but obviously not the past decade). Actually, the linkages between the real economy and financial markets are very complex and vary between countries. In the Anglo-Saxon ‘shareholder’ model, equity financing plays a key role in financing companies so stock markets are vital in assessing the overall state of the economy. In Russia, most economic sectors are weakly tied to the RTS, much of whose capitalization can even be described as ‘prestige’ listings. Even though the RTS has fallen twice as fast as the Dow Jones or FTSE, its collapse is far less damaging to the Russian economy than the latter are to the American and British economies.

(The same can be said for China, and to a lesser extend ‘stakeholder’ economies like Germany or Japan. For instance, the Shanghai SSE‘s implosion did not affect China’s GDP growth in the slightest. The contraction of the Nikkei by three-quarters from its 1990 peak resulted, or rather reflected, not a depression but merely a decade of slow absolute GDP growth).

Although the astronomical rise in the RTS from 1999 to 2006 has been correlated to Russia’s economic boom, it would never have reached such stratospheric heights without cheap global credit coupled with institutional investors chasing the best returns. The recent evaporation of credit has demoralized those investors, who have fled from risk towards ostensible safe-havens, e.g. US treasure bills.

Russia is not only an emerging market, but most of the value of the RTS is composed of energy companies. Since commodity prices have lurched sharply downwards due to weakening Western consumption and lower appetite for (risky) commodity speculation, Russia’s RTS has been hit with a ‘double wammy’, which explains why it has fallen so far down, out of all proportion to its fundamentals or most other emerging markets. Its armed intervention against Georgia’s invasion of South Ossetia had little to no effect – as the Nikitsky Fund’s most recent issue of their newsletter Truth & Beauty (and Russian Finance), Hope, shows in the article Anatomy of a Crisis, the RTSI has been going down at a linear rate from April 2008, with few discernable disruptions during or soon after that war.

In short, the collapse of the RTS does not herald Russian financial apocalypse, contrary to what La Russophobe thinks (but obvious to anyone whose views on the economy and finances aren’t exclusively shaped by the quack intellectual Illarianov and others of his ilk). It seems that the ignorance of Kim Ziegfeld and her fawning sycophants is exceeded only by their sheer hatred of Russia and its people (e.g. see Frank’s comments here – is that shit allowed on Blogger??).

Now I have only a layman’s knowledge of finance, so one would expect Craig Pirrong, a “Streetwise” Professor of Finance at the University of Houston (a respectable institution, AFAIK) with a special interest in Russia, to knock me down hard with amazing arguments and financial gobledegook well in advance of any objection I could muster. Alas and alack, I suspect his populist Russophobia got the better of him, based on his articles Under Pressure and Check Out Michel’s Comments.

Still, they’re useful in that they’ve provided me with a kind of focus to put down my own take on Russia’s financial straits. So what I’ll do is selectively quote from the two articles (selectively not in the bad smearing way, but in the summarizing, getting all the salient points down way) and provide rebuttals.

[Unsupported waffle about violence specialists in warring clans]

Everyone’s attention is turning to the stability fund. In virtually all of the commentary written since the beginning of the meltdown in August, the phrase “the $570 billion dollar stability fund” has been repeated like a mantra, an incantation that will ward off a return to 1998. As commentor Michel points out, however, the government has already committed a substantial fraction of this sum in various market and bank support schemes, none of which have stemmed the bleeding.

The market apparently has its doubts too. Credit default swaps (EEEEEEEK! CDSs! Run for the hills!) on Russian government debt rose 52 basis points to 352 bp, as compared to 36 bp in May ‘07. If the stability fund makes Russia immune from default, why the bulge in CDS prices? (Part of that is due to an increase in the market price of risk in these unsettled times, but certainly part reflects a perceived increase in the probability and severity of a default.)

I think Michel has put his finger on the matter. He conjectures that “[m]any have been lusting after those billions for years, and the crisis was the perfect cover to launder piles of money from the reserves to the offshore accounts of friends of the regime.”

In brief, although the existence of the fund makes survival of the current system in Russia more likely than it would be in its absence, it is not a talisman. If the crisis–in the US, in Europe, and in Russia too–shows anything, it shows that $570 billion can evaporate in a trice. That is especially true in a country like Russia, where the formal institutional safeguards are so weak. In a highly personalized natural state, rife with corruption, where the state is essentially the cash cow for aggressive and amoral individuals who are comfortable with the use of violence, when the deluge begins, no property is safe. So, to those who repeat “the $570 billion dollar stabilization fund” to lull themselves to sleep, I say–there are monsters under the bed. And it is at times like these that they come out and play.

OK so the main argument is that CDS prices on Russian sovereign debt has soared therefore things are bad. CDS are basically bets on the country or company or whatever defaulting on their debts. It’s his first (and I think strongest argument).

On the other hand CDS have soared throughout the world. Some casual Googling has revealed that oil-rich Kazakhstan, which also doesn’t lack for petrodollars, has a spread of more than 1000 points; Ukraine is at 1700. Many other countries in east-central Europe, the Baltics and the Balkans rate in the hundreds. Iceland is at 567, so…

What!? Granted the article is from September 29th, but Iceland in the same league as Russia (a large net creditor) and below Ukraine!? Iceland, whose liabilities even then had soared well past its puny GDP, since it had taken over Glitnir, and with its other main two banks about to hurtle into the abyss!? I can only conclude that CDS are driven mostly by market sentiment and don’t provide a realistic appraisal of the risk of default relative to other countries…

Now to quote the commentator Michel…

Today, the Russian media has answered my question as to how long it will take before the funds run dry.

According to gazeta.ru: 110 business days.

“Золотовалютные резервы России сокращаются, в борьбе с кризисом, и если в таком объеме тратить их дальше, то резервов, по оценке экспертов, хватит на 110 торговых дней.” (source: http://gazeta.ru/financial/2008/10/09/2852776.shtml).

Vedomosti put it a bit more poetically as their entitled their article “Reserves Melting Right Under Our Eyes.”

They give the reserves half-a-year at the present rate of spending: “Проблемы могут начаться, если продолжать такую политику полгода-год: в ситуации снижения темпов экономического роста накачка ликвидностью может вызвать необходимость девальвации.”

Taking foreign currency reserves have lessened by 16bn$ in a week and thus arriving at the idea that they will diminish to nothing within a few months is just meaningless linear extrapolation. It’s like saying that since the US total public debt grew 573bn $ in the last month from October 9th, it would reach 17tn $ (from 10.3tn $ today) by the same period next year.

But that’s not even the main point. What I’d like to ask is why did Michel not bother pointing out that of that week’s 16bn $ fall, some 10bn $ of that was directly linked to the strengthening dollar – which was mentioned on the very same article he linked to?

Finally, the entire point of having foreign reserves is to use them to avoid crashes in times of international financial crisis. I mean, that’s what they’re for, right? A continuation of smooth growth in a period of severe Western recession would be well worth the entirety of those reserves.

Michel then links us to another article, curiously enough entitled Russia: Better placed than most to weather the crisis. Curiously, because he uses it as the basis to continue his criticism.

One final comment. In reading the Financial Times, one article notes that “Alexei Kudrin, the finance minister, said on September 16 that the federal budget would begin to run a deficit if oil fell below $70 a barrel.” However, on September 19th, the Russian government announced that it would be increasing military spending by 25%. If you put these two facts together, you realize that if the price of oil drop anywhere near $70 a barrel, the Russian government will be running a deficit. The price of oil is already in the mid 80 dollar range and the global recession has just begun. This means that the Russian state may already begin running deficit budgets by next year, just as its reserve funds start to dry up.

All well and good, except that: a) average prices for the year, which is what matters, are well higher than 70$ (remember the recent 147$ spike and all that?), b) military spending has risen at those rates for years, in line with growth in its nominal GDP, and in fact most of that 25% rise is just a restatement of already existing spending plans that have been played up by the Western media rather than anything new and c) this ignores Russia’s and OPEC’s mutual interest in keeping the oil price high, at around 90-100$ (Saudi Arabia also needs those kinds of prices to balance their budget), and their recent moves towards closer co-operation to achieve that goal.

Now unless China suffers a serious shock to its economic ascent, reduced American oil usage will be more than compensated. Otherwise, the oil price will be squeezed up, wedged as it is between the Scylla of stagnant or falling extraction and the Charybdis of soaring demand from industrializing Asia (sorry, I’ve really fallen in love with that phrase. When that happens I sometimes just start incorporating them into my writing for a few weeks, whether the situation calls for it or not). Sorry to rain on your gas-fueled party, Michel.

You are right, they are probably there already. And, the 6-months predicted as to when the reserves disappearing is based simply on what the Central Bank has been dishing out to stabilize the ruble (i.e. keep it within the 25-26 ruble to the dollar range). The 200 billion or so in new spending will have to come out of the budget, which will push it deeper into the red.

This is wrong on two counts. Firstly, the budget for 2008 is projected to be firmly in the black (+4.5% of GDP). Secondly, and more importantly, the money for propping up the domestic financial sector is not even coming from the budget. It comes from repatriating Russian reserves parked abroad in G7 sovereign debt securities. Since the problem with the credit markets in Russia is overwhelmingly one of illiquidity (rather than insolvency, as in the Anglo-Saxon economies) it’s unlikely that a large portion of these reserves will actually be lost.

And now it’s time for the Professor to take the reins again…

The country teeters on the economic brink–the world does, but Russia is arguably closer to the brink than just about anybody else–and if the deluge comes, a disappointed people that had put its faith in Putin and Putinism will turn on him (and it) in a fury.

This statement is beyond my powers to comprehend. Iceland is worse off. So are many over-leveraged (mostly central-east European) states with huge current account deficits – Latvia, Estonia, Ukraine, Turkey, Argentina, Bulgaria, Hungary, Romania, etc. So is, in all likelihood, the US and Britain, who’s financial systems increasingly appear to be generally insolvent. Do you still live on Earth, Professor?

The $5 billion loan to Iceland, another extravagance apparently driven by geopolitical calculation, is another bizarre choice under the circumstances.

5bn $ in relation to 500bn $ is nothing. And it’s still far from decided. Although, I think paying 5bn $ for Keflavik without an Operation Red Storm Rising and neutralizing the SOSUS line (not that I think Russia will achieve so much, but still…) is far more cost-effective than spending 700bn $ on, erm – how exactly did the US benefit from Iraq??

Anyway, I’m done with the Professor. Though I’d like to thank him, Michel and La Russophobe for summarizing the Russia “doomer” arguments and making it easier for me to marshal my own take on it into what I hope has been at least a semi-coherent form.

My predictions? The RTS will continue its decline, but at a slower pace for the rest of the year. Then investors will realize that everything there is insanely undervalued, like in 1999, and it will explode back into four-digit territory next year. This will roughly coincide with a rally in oil prices from December 2008.

The construction sector will decline next year, although general consumption should not be affected as much since little of that depended on credit, even as late as 2008 (that’s the advantage of having weak linkages to the global financial system). Investment will fall for one or two quarters, but will stage a resurgence after that once confidence is regained. Russia will grow at around 7.0% this year and 5.5%-6.5% in 2009, while much of the G7 goes into a severe recession.

But before we go, what of the global financial crisis itself?

Notice that all these countries which depend on oil revenues to balance their budgets, from fiscal conservatives like Russia to populist spendthrifts like Venezuela and Iran to countries that live almost exclusively from oil exports like Saudi Arabia all need at least 70$ to balance their budgets.

Now consider that since oil is a relatively competitive industry on the global level and collusion generally fails even within OPEC, prices will tend towards marginal cost by standard microeconomic theory. The unpalatable implication is that the marginal cost of oil extraction has risen dramatically in the past few years, and is today well in excess of 50$ per barrel (a few Google searches confirm this deduction).

(Hence Kudrin’s, IMO misguided, push to lower windfall taxes on Russian oil company profits – I’d rather continue taxation, invest the proceeds in building up a more sustainable energy infrastructure and reap the benefits of higher oil prices for an oil-exporting country. Taxes can be lowered to boost production in the future when oil prices become much higher relative to today).

Supply has become limited and it now takes ever more capital and energy inputs to produce another barrel, thus costs rise exponentially and an ever share of the industrial base must be devoted to energy extraction to prevent decline. Meanwhile, gradually plateauing net energy extraction makes the prospect of continuous traditional economic growth far into the future an increasingly unrealistic proposition, and recognized as such. The result? Collapse of a financial system build on the assumptions of continuous growth.

Perhaps this crisis is simply an unconscious recognition of this inconvenient truth?

In any case I suspect it is merely the first of many that will percolate through the global economy as oil supplies reach their peak, ushering in an era of oscillation between grinding deflationary recessions and tepid, inflationary recoveries. The time has come when long-term planning becomes ever more difficult. I suppose you could model it as the tipping point when political capital no longer renews itself sustainably. Lol.

Gross output, starting with oil-importers who use energy with the most inefficiency, will decline. Demand destruction will presumably start with its most inefficient users, e.g. away from SUV drivers, air conditioners, etc. Energy flows will increasingly accrue either to those who would make the most efficient use of it (perhaps in proportion to their level of human capital and the energy-efficiency of physical capital in their industrial base, which would favor countries like Germany, Japan, Korea and China, but hurt the likes of the US, Britain, the Mediterranean and Mexico), or to those who can lock them in (either via sovereignty over energy sources, e.g. Russia, Saudi Arabia, Iran, etc, or through military conquest, e.g. possibly the US in Iraq).

However, overall world GDP will continue to grow until at least the point when energy production is at its maximum (and provided that it isn’t first overwhelmed by a pollution crisis). If by then a sufficiently large sustainable energy infrastructure is not yet in place, terminal decline and collapse will follow.

As I mentioned in my article on Russia and Limits to Growth, the fate of humanity will be determined by which of these exponential trends – resource and pollution limits to growth versus sustainability and universal informatization – will win out. Perhaps I should do a thesis on this or something?

(Republished from Sublime Oblivion by permission of author or representative)
 
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Let’s start with two excellent new resources I’ve recently come across. Russia: Other Points of View states its objectives thus:

We believe there is need in the public forum for a venue which offers opinions and facts that at times may differ from the prevailing view in western media.

Hmm… Sounds quite similar to Da Russophile, in fact, and makes a substantial part of our News posts redundant. As such I’ll be referring to it frequently.

The other is the Moscow Defence Brief, an English-language quarterly that offers analysis on Russian, Eurasian and world military affairs from a Russian perspective.

Moving onto developments in Russia, the economy continues to boom, driven by investment and consumption. The vast majority of foreign investors have made handsome gains and are bullish about future prospects, despite recent global financial perturbations that have cut the RTS back below 2000 by around a quarter from its peak. Manufacturing growth remains strong at 8.4% for the first half of 2008 (artificially brought down by 0.6% yearly growth on June, due to the effects of celebrating Euro08 successes on Russian productivity). Overall industrial growth of 5.8% is as usual lowered by anemic growth of 0.5% in the extractive sectors, including a 0.6% fall in oil production (as covered in the previous News, Russia has now almost certainly reached its oil production peak). While slowing down in Moscow, the construction boom continues apace in the rest of the country. Russia’s mean salary has surpassed 700$ this year and as of May in real terms salaries and pensions had increased by 14.5% and 13.8%, respectively, on the same period last year. The Sukhoi SuperJet 100 made its maiden flight and Cisco announces investment in venture capital fund to focus on Russia and CIS.

No wonder then that Russia has overtaken Germany as Europe’s biggest car market, with 3.8mn units expected to be sold this year (compared with 3.2mn in Germany) and Russia (with 2% of the world population) predicted to account for 20% of global growth in the automotive market through to 2015. The Economist has a much more detailed (and, unusual for it, quite professional) overview of Russia’s bourgeoning car market. Exploding purchasing power means car sales are expected to approach 4.5mn units by 2010, when it is expected car ownership will rise to 253 / 1000 people. Government industrial policy has led to the world’s major car producers rushing to build factories in Russia, with their new capacity by 2012 estimated at 1.6mn units (in effect doubling Russian car production from 2007).

On the other hand, the Economist‘s oily hallucinations continue (“Is it “peak oil” or a speculative bubble? Neither, really”). The last “really” says it all, really. When you were so really, really wrong on predicting 5$ oil back in 1999, might as well burrow your head even deeper into the conventional ‘wisdom’. (Really reminds me of Newsweek‘s ‘Russia is really, really weak‘ line, made fun of in the eXile.) And to connect these issues together, the Economist repeats its catechism that a) Russian oil production is stagnating due to a lack of investment as opposed to basic geological limits and b) its economy is more dependent than ever on oil. This is in stark contrast to the Financial Times (‘Running on empty? Fears over oil supply move into the mainstream‘), which is beginning to see the light. Gazprom predicts oil will reach $250 in 2009.

Nikitsky Fund released an apocalyptic-sounding issue of its excellent Truth and Beautnewsletter, the Crack of Doom. Many things, from medium-term American economic prospects to long-term global sustainability, do indeed look apocalyptic…

The World Bank has revised its GDP estimates for 2007. According to the new figures, Russia overtook the UK last year to become the sixth-largest economy in the world and second in Europe behind Germany. Its PPP gross national income per capita reached 14,400 $, which is comparable to that of Croatia or Poland.

Russia has managed to occupy 9 places in the list of the world’s top 500 supercomputers in June 2008. Although it doesn’t sound impressive, it is a significant improvement on previous releases of the list; and besides, it is dominated by just a few players (the UK, Japan, France, Germany and above all the US, which accounts for more than half). As I pointed out here, national strength in things like supercomputers, nanotechnology and electronic connectivity will be to this century as steel, oil and literacy were to the last. Moscow State University also released a list of the Top 50 supercomputers in Russia and the CIS.

Medvedev’s new Presidency has brought a new burst of rhetorical energy to themes such as fighting corruption, easing bureaucratic regulations on small businesses and computerization. My interpretation on this is that just as restoring state power and implementing a national industrial and socio-economic policy were the dominant talked-about themes at the start of Putin’s first and second terms respectively, and followed up by measures to that effect, so this is the prelude to the sort of institutional reforms that are becoming increasingly important for further economic growth and rapid convergence to advanced industrialism. But we’ll see.

Western hypocrisy is heroically exposed by Gorbachev, Russia’s UK ambassador and Medvedev.
The demographic situation continued to improve over the first five months of May, as noted in my recent Demographics series of posts. There was an almost 10% increase in the crude birth rate, which nonetheless strongly suggests the TFR will exceed 1.5 this year and thus more than exceed the projection in the High scenario. On the other hand mortality has stagnated, the crude death rate rising by 0.7%. Nonetheless, I strongly suspect this is just a short-term flunctuation, in particular in view of the fact that the alcohol / food price ratio has plunged this year due to huge food inflation (the close link between that ratio and death rates was explored in Demographics II; the fact death rates have stagnated, rather than plummeted (as in 1994 and to a lesser extent post-1998), may actually be a positive sign, since it would indicate mortality is slowly but incessantly becoming divorced from the affordability of alcohol). Here’s a table showing mortality and fertility in Jan-Apr 2008 by region and change over the previous year. A few notes. Lower mortality in Muslim and rich Russian regions (Moscow, Tyumen oblast), higher birth rates in Muslim and less densely populated (e.g. Urals, Siberian, Far East) regions.

(Two remarks. It seems that the bigger the increases in number of births per month, the bigger the increase in deaths. For instance, January and April both saw relatively big increases in mortality and fertility as compared to the previous year; February to a lesser extent. March saw a small increase in fertility and small drop in mortality. May say smaller fertility and a big drop in mortality. As far as I’m aware the number of days per month remains constant from year to year (with just one minor exception, leap year Februaries), Russian maternal mortality and even infant mortality is statistically insignificant here. So I ask the question, do more babies lead to more heart attacks or something? (Most mortality increase was due to heart attacks; deaths from external causes fell). Secondly, a prediction – mortality will increase during July. With all the celebrations ensuing after Russia’s football successes that month, this is more or less inevitable.)

I found an interesting demographics opinion piece from the Moscow Defence Brief, Russia does not need a pro-immigration policy. It is true that the benefits of immigration as a source of cheap labor (as opposed to an intelligent policy of letting in only well-qualified, easy to integrate, ‘especially desirable’ workers) are overstated. I disagree with two of its claims, however. The idea that Russia’s hypermortality doesn’t actually exist because of the effect of illegal immigrant deaths is complete nonsense (they make up, ultimately, only a small fraction of Russia’s population and most of them will be young people with comparatively very low death rates). Secondly, it is not a good idea to replicate American suburban planning (for the purposes of increasing fertility, according to the article) as it is even now becoming obsolete with the era of expensive oil.

Boosting Population a Vague Science – comprehensive, conventional article about Russian demographics from Moscow Times. Happiness in Russia has increased, which should help lower mortality (unhappy people tend to die younger and Russia, as with other post-Soviet republics, have one of the world’s lowest levels of happiness).

Rampant inflation and political crisis in Ukraine do not stop it from intensifying Russophobic moves in language, religion and NATO enlargement.

Russia, along with China, vetoed sanctions against Zimbabwe in the UN (pushed most aggressively by the UK, who I suppose dislike this particular African tinpot despot because unlike the others he messed with the British whites who got the land they stole from indigenous blacks, stolen back. And I find it a bit suspicious that you have all these piteous people who whine about supposed torture, genocide, etc, but seem free enough to find and talk with Western journalists, especially those from the BBC). While this is certainly not an altruistic action on Russia’s/China’s part, it’s not as if the West concerns itself itself much (at all) over the plight of ordinary working Zimbabweans, as proved by British insistence that their companies withdraw from the country and their ruthless, cowardly support for sanctions.

Tensions have risen over Abkhazia, with both Georgia and Russia warning of a risk of war, while Russia and the US have hosted suspiciously simultaneous war games in the region. The Rise and Fall of Georgia’s UAVs casts doubt on whether the video of a Russian fighter shooting down a Georgian UAV (as shown in the previous News).

As for the video provided by Georgia, there are several reasons why their authenticity is in doubt. First, UAVs are made to observe objects on the earth, not in the air. Their cameras are housed in a semisphere on the underside of the vehicle, which makes it extremely difficult to focus on another flying object. The chances that this sort of camera could have caught another flying object at the very moment when it fired a missile are simply nonexistent.

Second, as a rule, high-definition photos and video are stored on board the UAV, while only low-quality pictures are sent in real time, due to the restricted bandwidth of the transmission system. The video shown by the Georgians was ostensibly captured in real time, since the UAV was destroyed, and the low quality of the video does not allow for the identification of the type of plane, let alone the country to which it belongs. Arguments to the effect that «the aircraft has a twin rudder and is therefore Russian» simply do not stand up to examination.

This article concludes that the “Georgian Army would be quickly defeated if Tbilisi tries to settle the conflict by force”.

Further to the excellent NY Sun article casting doubt on the mainstream Western account of Litvinenko’s death (poisoned by polonium by nefarious KGB agents), the Independent produces a piece worthy of its namesake, The Litvinenko files: Was he really murdered? It mostly covers the same points.

BP has been treating Russians as subjects (Financial Times) - the point of view from the Russian oligarchs, who reject British claims of Russian intimidation and strong-arming, and argue that BP has thwarted the company’s expansion plans abroad and long-term strategic development, in a bid to shore up reserves for BP itself.

Assessing Russian fighter technology concludes that since the end of the Cold War, Russian military aviation has for all practical purposes closed the technological gap with the West. Very succinct and detailed. Nagorno-Karabakh: Shift in the Military Balance analyzes the balance of power between Armenia and Azerbaijan, and concludes it is tilting towards Baku. Russian nuclear forces, 2008. Baiting the Russian bear – US plans for ballistic missile defences in eastern Europe risk alienating Russia and stirring up old resentments.

I liked Sean’s little insightful scribblings, Surveying Putin’s Generation and Putin: Leader or Revolutionary? He also penned a cynical critique of Nemtsov’s White Paper.

Kissinger penned Unconventional wisdom about Russia, emphasizing for US concern for Russia’s strategic interests if it wants to have its way in the world.

Russia’s energy drive leaves US reeling – Russia continues to strive for greater control over Eurasian energy flows under Medvedev, this time venturing into Africa. Washington’s reprisal (blocking Russian oil companies’ access to Iraq) was met by further Russian interest in a gas OPEC, with Iran as the other main partner.

The ever brilliant Nicolai Petro reports on yet another Western MSM smear job on Russia in Mr. Levy and the Magic Media.

The Misconception of Russian Authoritarianism – PhD thesis by an American graduate student at the University of St.-Petersburg makes a forceful argument that Russia has decisively shed its authoritarian past and is engaged in building up stable long-term democratic institutions.

Russia’s Other Great Victory – the War Nerd’s colorful (as usual) account of Russia’s crushing defeat of Japan in Manchuria in 1945. A Japanese POW’s life-affirming account of his time in Siberia.

Russia’s hawks (rather tellingly) support McCain, who will accelerate America’s decline (as per contributor Brother Karamazov’s theory). Not that that’s very relevant however since Obama will almost certainly win.

Michael Averko pens some excellent articles, including Chechnya, EU-Serbia and a Disputed Lands Update, Contradictions to the “New Cold War” Theme and book review of Not My Turn to Die.

For a laugh take a look at this Russphobic drivel (its volume continues to increase). School-child spanking afficianados from the conservative neo-imperialist Telegraph have decided Bully-boy Russia needs a lesson in manners. Loco Lucas indulges in more of his heartfeld mad rantings in Kremlin’s blast from the past in the Daily Mail (a British tabloid read by their near-illiterate football hooligans) and his spymania and Molotov cocktail fetish. The poor maiden Georgia is in jeopardy. Professional Russophobe freak Max Hastings belives Hopes of close cooperation between Russia and the west are now dead. I have a lively exchange with deranged La Russophobe here and sent a letter complaining about the inaccuracies in the Enough Rope for Russia WSJ Op-Ed, albeit to no avail.

Russia: A totalitarian regime in thrall to a Tsar who’s creating the new Facist empire takes the cake, however. The title alone wins it.

Russia performed far better than generally expected in Euro2008, losing only to the champion. I think it certainly has the potential to win the World Cup in South Africa; perhaps Hiddink’s luck could make it finally realize that potential. In any case it’s certainly not a bad bed (most bookies give returns of 25:1).

Finally, polls. Plans for summer holidays – since 1997, the number of Russians without money for holidays decline (from 30% to 20%), while a constant percentage plan to remain at home or on their dacha. Those planning to go abroad or to the Black Sea region remain few in number abut are on the increase. Russians tend to be positive about Israel and neutral/apathetic on the Palestine issue. Most Russians favor a policy of diplomacy and restraint towards regions of the former USSR. This detailed poll on corruption shows most Russians are tired of it, want greater measures against it and think it has registered a slight improvement over the past three years. Internet penetration is spreading fast but is still at relatively low levels nationally, especially amongst the older generations. Most Russians continue to read avidly.

(Republished from Sublime Oblivion by permission of author or representative)
 
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For all the noise being made this month about Georgia, about NATO, about Tibet, etc, possibly the most portentous is that it seems Russia hit its oil peak (strictly speaking, its second – the first happened in 1987), well in line with peakist predictions. Production increases via application of new technology, as seen in the late 90′s and early 2000′s have been mostly exhausted; there are no megaprojects to bridge the gap beyond 2010. (There has been some noise about new oil field discoveries off Brazil’s coast which could contain as many as 33bn barrels, which has our dear Economist rejoicing: “the discoveries do suggest that the gloomiest pundits are wrong to predict that the world will soon run out of oil”. Just two problems. The issue is not about the world running our of oil – it’s about economically damaging declines in production which will, and are, hitting crucial sectors like transport and agriculture. Secondly, and more to the point, even the high estimate of 33bn barrels is enough for less than half a year of today’s demand of 85bn barrels.) Massive expansion in Russia has been the main reason while oil is peaking now, rather than five years ago. This, coupled with stagnant Saudi Arabia ‘refusing’ to increase oil production so as to leave more for future generations and oil prices rising to 120$, looks set to vindicate the Oil Drum predictions below.

The phenomenom of peak oil is starting to become a new conventional wisdom. Krugman penned an excellent article on this, an interesting example of mainstream economists and “doomers” getting wedded:

Nine years ago The Economist ran a big story on oil, which was then selling for $10 a barrel. The magazine warned that this might not last. Instead, it suggested, oil might well fall to $5 a barrel.

In any case, The Economist asserted, the world faced “the prospect of cheap, plentiful oil for the foreseeable future.”

Last week, oil hit $117.

It’s not just oil that has defied the complacency of a few years back. Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven’t heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?

How you answer this question depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views.

The first is that it’s mainly speculation — that investors, looking for high returns at a time of low interest rates, have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of Pets.com.

The second view is that soaring resource prices do, in fact, have a basis in fundamentals — especially rapidly growing demand from newly meat-eating, car-driving Chinese — but that given time we’ll drill more wells, plant more acres, and increased supply will push prices right back down again.

The third view is that the era of cheap resources is over for good — that we’re running out of oil, running out of land to expand food production and generally running out of planet to exploit. I find myself somewhere between the second and third views.

There are some very smart people — not least, George Soros — who believe that we’re in a commodities bubble (although Mr. Soros says that the bubble is still in its “growth phase”). My problem with this view, however, is this: Where are the inventories?

Normally, speculation drives up commodity prices by promoting hoarding. Yet there’s no sign of resource hoarding in the data: inventories of food and metals are at or near historic lows, while oil inventories are only normal.

The best argument for the second view, that the resource crunch is real but temporary, is the strong resemblance between what we’re seeing now and the resource crisis of the 1970s.

What Americans mostly remember about the 1970s are soaring oil prices and lines at gas stations. But there was also a severe global food crisis, which caused a lot of pain at the supermarket checkout line — I remember 1974 as the year of Hamburger Helper — and, much more important, helped cause devastating famines in poorer countries.

In retrospect, the commodity boom of 1972-75 was probably the result of rapid world economic growth that outpaced supplies, combined with the effects of bad weather and Middle Eastern conflict. Eventually, the bad luck came to an end, new land was placed under cultivation, new sources of oil were found in the Gulf of Mexico and the North Sea, and resources got cheap again.

But this time may be different: concerns about what happens when an ever-growing world economy pushes up against the limits of a finite planet ring truer now than they did in the 1970s.

For one thing, I don’t expect growth in China to slow sharply anytime soon. That’s a big contrast with what happened in the 1970s, when growth in Japan and Europe, the emerging economies of the time, downshifted — and thereby took a lot of pressure off the world’s resources.

Meanwhile, resources are getting harder to find. Big oil discoveries, in particular, have become few and far between, and in the last few years oil production from new sources has been barely enough to offset declining production from established sources.

And the bad weather hitting agricultural production this time is starting to look more fundamental and permanent than El Niño and La Niña, which disrupted crops 35 years ago. Australia, in particular, is now in the 10th year of a drought that looks more and more like a long-term manifestation of climate change.

Suppose that we really are running up against global limits. What does
it mean?

Even if it turns out that we’re really at or near peak world oil production, that doesn’t mean that one day we’ll say, “Oh my God! We just ran out of oil!” and watch civilization collapse into “Mad Max” anarchy.

But rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living. And some poor countries will find themselves living dangerously close to the edge — or over it.

Don’t look now, but the good times may have just stopped rolling.

No wonder survivalism is becoming respectable again.

(Not that I think the world is going to become a Mad Max abode; there’s still plenty of discretionary energy consumption that can be cut, and in the longer term future both wind and solar energy have very good prospects. Nonetheless, according to this study, “Exergy services can be equated to exergy inputs multiplied by an overall conversion efficiency. which, of course, corresponds to cumulative technological improvements over time. Based on this hypothesis economic growth from 1900 to 1975 or so is explained almost perfectly, exceptfor wartime perturbations.” Hence I suspect there will be a period of serious economic disruption in the period between 2010-20, when oil and natural gas spiral down and both coal and uranium will be hard pressed to fill the gap (economically viable reserves may well be close to peak, as described here (coal) and here (uranium), and 2030-50, when renewable energy starts to come on-line in a really big way.)

Not surprisingly, two key trends – rising energy prices and climate change – are colluding to produce a scramble for the Arctic and its lucrative hydrocarbons deposits. Russia has foresightedly been marking territory by staking claims in the UN, planting its flag at the North Pole sea floor and carrying out strategic bomber flights over the Arctic. Canada, Denmark and Norway have also been getting on in the action, while the US has been lethargic. Climate models indicate an ice-free summer by 2015, meaning northern Russia will become a major new transportation hub between Europe and East Asia (thus making the old dream of a North-East passage a reality).

While wildlife wilts, agriculture booms – “Greenland is experiencing a farming boom, as once-barren soil now yields broccoli, hay, and potatoes”, and Russia keeps getting warmer. (What with rising world grain prices and the big lands left fallow following the Soviet collapse, it is easy for Russia to cement its status as a leading grain producer (from 81mn tonnes in 2007 to 110-120mn tonnes within a decade) by expanding the agricultural sector, a trend explained in The Medvedev Economy and confirmed by state investment into agriculture.) Not only will Russia remain a major hydrocarbons exporter, but will add cereals to its portfolio (which will, besides, increase in price), thus avoiding the fatal Soviet situation where profits from oil exports were eaten up by having to buy Western grains.

But returning to the FP Arctic Meltdown article and hydrocarbons,

The largest deposits are found in the Arctic off the coast of Russia. The Russian state-controlled oil company Gazprom has approximately 113 trillion cubic feet of gas already under development in the fields it owns in the Barents Sea. The Russian Ministry of Natural Resources calculates that the territory claimed by Moscow could contain as much as 586 billion barrels of oil — although these deposits are unproven. By comparison, all of Saudi Arabia’s current proven oil reserves — which admittedly exclude unexplored and speculative resources — amount to only 260 billion barrels.

Currently, Russia has passed its second oil peak. Could the above make for a third peak? Discovery precedes recovery by around 30 years. 586bn barrels is about twice bigger than oil reserves in Russia proper before extraction ever began. Without ice, the extractive environment in the Arctic will be comparable to that of the North Sea. As such, it is plausible that Russia may even, around 2020-30, experience a third oil peak, at a time when global supply is severely constrained and prices are at 300-400 $ per barrel. What with its current (relatively low) consumption, this means that Russia may be spared from the energy crunch that will hit other energy-dependent economies in this time period.

Perhaps most significant will be the geopolitical impacts (which, btw, we have covered in Towards a New Russian Century?). Russia is going to have to fundamentally rethink its traditional conceptions of itself as a land power, strategically weak and surrounded by predatory peoples who periodically exhaust the carrying capacity of their lands and launch invasions. It is going to become surrounded by ice-free water on two sides, along whose coasts will accumulate a rapidly expanding population (especially if environmental collapse causes mass immigration from South Asia, the Middle East and the Far East). This, along with a much greater stake in coastal transportation and off-shore hydrocarbons deposits, will require a much more powerful navy. No wonder Russia has tentative plans to create the world’s second largest surface navy within the next two decades, to which purpose a 410x100x14m drydock is currently under construction at Severodvinsk.

The IMF has released its prognosis for the world economy. A slowdown is inevitable, driven by a US correction due to a housing crisis and its contagion of the world financial system.

Global growth will decelerate in 2008, led by a sharp slowdown in the United States, amid a housing correction and a financial crisis that has quickly spread from the U.S. subprime sector to core parts of the financial system, the IMF says in its latest World Economic Outlook.

Citing the unfolding financial market turmoil as the biggest downside risk to the global economy, the April 2008 report said the IMF expects world growth to slow to 3.7 percent in 2008—0.5 percentage point lower than what was forecast in the January 2008 World Economic Outlook Update.

Further, world growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record 3 percent or less growth in 2008 and 2009, equivalent to a global recession.

The main emerging market economies will diverge rather than decouple, with growth in China, India, Russia and CEE slowing but not catastrophically so, remaining close to their long-term trend rates.

However, the government is even more optimistic, projecting 7.6% growth for 2008. Considering that Q1 GDP growth was 8.0%, driven as in the year before by consumption and investment, they have grounds for their optimism. On the other hand, CPI (inflation) is rising worrying fast, reaching an annualized rate of 13.3% this March, although it should be noted this is a worldwide phenomenom experienced by China (8.3%), India (8.6%), Czech Republic (7.1%) and Latvia (16.8%).

The Ukraine (26%+) has been hit not only by high food and energy prices, but populist government largesse. (To take their minds off these matters, perhaps that’s why Hitler action dolls have gone on sale there, more proof if any is needed of the proclivities to fascism of certain sections of Ukrainian society. Gazprom will probably end 2008 as the company with the world’s second highest revenue (around 41.5bn $), similar to the budget of an economic basket case, say, Ukraine (43bn $). (Can’t help making these cheap shots, just ignore them if they irritate you).

The IMF has also released new estimates for GDP growth through to 2013. By the end of that period, Russia’s PPP GDP should overtake Latvia’s and be level-pegging with Poland’s. The rise in nominal GDP is projected to be more dramatic (graph lifted off this thread):

The Economist has an interesting graph breaking down GDP increase for major regions in the world by capital, labor and total factor productivity (GDP itself can be expressed as a Cobb-Douglas function of the above 3 components) from a WB report, Unleashing Prosperity.

It is a splendid vindication of the ideas I expressed in Education as the Elixir of Growth. There, I made the argument that the education/’Human Capital Index’ (HCI) of each country is matched to a ‘potential GDP level’; where there is a large gap between potential and actual GDP, economic growth is highest. This above all explains the impressive economic growth we’re seeing in well-educated but relatively poor countries like Russia (once it abandoned its socialist shackles), and explains well the unimpressive growth of countries like Brazil, an badly-educated country with a correspondingly unimpressive economy.

However, the linkages between HCI and productivity are even higher than between HCI and GDP (as GDP also depends on labor and capital inputs, which themselves depend on other demographic and social factors). From the chart, we can see that middle-income CIS countries (of whom Russia is, by far, the largest and most significant) had the largest increases in TFP, thus reflecting the huge gaps in its potential and actual productivity. While China’s absolute growth was much larger, almost half of it was down due to increases in labor and capital. However, considering China’s recent labor shortages and its unsustainably high investment rates, it is very unlikely that double-digit growth will continue in the near-to-medium future, particularly further taking into account that a) exports will be hit by US recession and b) from 2009 onwards the oil peak will start biting ever harder (as covered above). Latin American countries were the worst performers, seeing no improvement in TFP – in other words, they are about as productive as their levels of human capital allow them to be (withouta resource windfall or two).In a snapshot of other economic and related news, the housing bust has spread to the UK. Haiti’s government collapses after food riots – an ominous foreboding of things to come elsewhere? Between 2000 and 2007, median family incomes stagnated in the US, in stark contrast to the period between every other recession (the fact that the 2000′s saw a broad consumer boom becomes all the more worrying). The falling dollar has made US assets attractive, and Russia has accumulated around 10% of US steelmaking capacity – although it has not limited itself to the US, but also went on a shopping spree around Germany. Russia may allow the ruble to appreciate to rein in inflation. Moscow’s budget is now as big as New York’s. Confidence in the economy is increasing. According to the FT, Moscow could become Europe’s second financial center (after London) in ten to fifteen years. The Russian ‘brain drain’ has to a large extent ceased as funding and salaries increase in academia.


On 21st April, Georgia accused Russia of an “unprovoked act of aggression” after a Russian jet allegedly shot down an unmanned Georgian reconnaissance plane over Abkhazia. This came in the wake of Russia stepping up its political representation in the region, while Georgia implicitly compared Western policy towards Russia with Nazi appeasement. Meanwhile Putin urged the West not to ‘demonise’ Russia. (The IHT has a piece that criticizes US aloofness in its relations with Russia in The Missing Debate.)

Watch the cool video below, it’s now every day that you get to see a MiG-29 fire an R-60 missile at CBDR, within visual range and head on.
Presumably Russia wishes to make a statement that it is ready and willing to defend Russian citizens (i.e. the vast majority of Abkhazians, and South Ossetians). It is also Russia’s traditional foreign policy level over Georgia – it’s separatist enclaves – being exploited. When Georgia pursued a relatively neutralist line towards Russia (under Shevardnadze), Russia kept at arms length from the separatists, but established a military presence in the region. Now that Georgia has received a promise of eventual membership from NATO, however, the levers have been pulled. If Georgia received MAP at the next summit, expect formal recognition of Abkhazia and South Ossetia.
A German man is on trial in Germany for allegedly selling military technology to Russian intelligence. The Russian Army apparently has some serious problems with obesity. Greece agrees to host a section of Gazprom’s planned South Stream pipeline. Berlusconi held his first foreign meeting with Putin on 17th April, and Robert Amsterdam penned an acerbic yet poignant portrait of the less wholesome similarities between the two countries.
The most recent data on Russian and American strategic nuclear armaments, as declared for the START Treaty, is available here. In contrast to the late Soviet period, it is now the US that has a preponderance of platforms. The breakdowns in deployed systems, Russian and US respectively, go as follows: ICBM’s (481 to 550); SLBM’s (288 to 432); heavy bombers (79 to 243); total (848 to 1225). The breakdown by numbers of deployed warheads is: ICBM’s (2027 to 1600), SLBM’s (1488 to 3216); heavy bombers (632 to 1098); total (4147 to 5914). The breakdown by throw-weight for ICBM’s and SLBM’s is 2370MT to 1830MT. In other words, while Russia has a slightly larger overall megatonnage, it has fewer strategic platforms and its missiles are less accurate. This is not yet a critical situation, what with the current international relations paradigm; nonetheless, further investments are necessary, particularly into the submarine and bomber part of the triad as well as ABM, in anticipation of the end of MAD due to the development of effective and comprehensive missile shields – which are closer to fruition, at least in the US, than most people realize. Perhaps I’ll write more on this in the future.
An interesting article from the Times on WMD developments in Syria and North Korea.
Foreign Affairs has The Age of Nonpolarity as its kindpin article for May/June.
Summary: The United States’ unipolar moment is over. International relations in the twenty-first century will be defined by nonpolarity. Power will be diffuse rather than concentrated, and the influence of nation-states will decline as that of nonstate actors increases. But this is not all bad news for the United States; Washington can still manage the transition and make the world a safer place.
Indeed, one of the cardinal features of the contemporary international system is that nation-states have lost their monopoly on power and in some domains their preeminence as well. States are being challenged from above, by regional and global organizations; from below, by militias; and from the side, by a variety of nongovernmental organizations (NGOs) and corporations. Power is now found in many hands and in many places…Today’s world is increasingly one of distributed, rather than concentrated, power.
Getting everyone to agree on everything will be increasingly difficult; instead, the United States should consider signing accords with fewer parties and narrower goals. Trade is something of a model here, in that bilateral and regional accords are filling the vacuum created by a failure to conclude a global trade round. The same approach could work for climate change, where agreement on aspects of the problem (say, deforestation) or arrangements involving only some countries (the major carbon emitters, for example) may prove feasible, whereas an accord that involves every country and tries to resolve every issue may not. Multilateralism à la carte is likely to be the order of the day.
I agree that the US is in relative decline and about the rise of multilateral pragmatism in diplomacy. Nonetheless, I question the thesis that state power is eroding. The state remains as strong as ever, and far stronger than their equivalents a hundred years ago. Several European nations take in more than 50% of their GDP in taxes. This rate in the distant past was only reached during times of total war, e.g. WW2. States are most certainly not “challenged” by either global organizations (which are simply assemblies of states where they can seek concensus), militias (which have always existed) or NGO’s (which operate under statal jurisdictions).
Putin has become leader of United Russia, in addition to being the Prime Minister. Sean’s Russia Blog already has an excellent analysis in Gensek Putin (which also features a nice little demographics discussion in which my posts on the matter were mentioned).
That of course raises the issue of whether a nothing party like United Russia will actually give Putin something. As Konstantin Sonin noted in the Moscow Times, leading United Russia wouldn’t necessarily give Putin any guarantee over controlling the government. “The party has nothing to offer Putin in his struggle for power,” says Sonin…
The chairman position gives Putin virtually unlimited power within UR. Putin will have the power to appoint party leaders and suspend their powers, and override any party decision expect for those adopted at congresses. His removal is only possible with a 2/3 congressional vote.
If Putin can be taken at his word, he has plans for United Russia. In his address to the Congress he stated that the party of Power needed to “reform itself become more open for discussion and for taking into account the opinion of the electorate, it must be de-bureaucratized completely, cleared of casual people pursuing exclusively their own material gains.” Look out, there’s a new sheriff in town.
Plans have already been set in motion for the recognition of internal factions. Three “clubs” have been created within United Russia to represent its right, center, and left. There is the Center of Social Conservative Policy, headed by Andrei Isaev, the liberal-conservative “November 4th” club led by Vladimir Pligin, and the State-patriotic club led by Irina Yarovaya. Whether these clubs will actually mean anything in terms of inter-party dialog remains to be seen.
Putin’s chief task, if he chooses to take it, will be to rid the party of what he calls “corrupt people.” A task easier said than done. Historically, attempts to clean up party corruption have horribly failed. Often the anti-bureaucratic campaigns, purges, and even arrests within the Communist Party created more corruption. And like the Communist Party of the past, United Russia seems allergic to any real cracking down on its corrupt members. Last week, the United Russia dominated Duma rejected a bill which would require deputies to declare the incomes and property of their relatives up to three years after leaving office. Hiding wealth and property in the names of family members is a common, albeit crude way, of hiding corruption.
Basically, if Putin actually decides to lead United Russia, he’s going to have his hands full. Just because he is the almighty Putin doesn’t mean he will be successful.
Michael Averko has an excellent article in American Chronicle, Ukraine and “Russophobia” Uncensored, which covers more on the Annals of Western Hypocrisy (which goes on and on, World and Time without End). I’ve quoted the first three paragraphs:
Since the Soviet breakup, Ukraine has been geo-politically spun in two ways. When Ukraine’s less Russia friendly side appears to have enhanced its stature, there is an increased yearning to drive Ukraine away from Russia as much as possible. When Ukraine’s more Russia friendly grouping seems strengthened, there is greater talk of mutual respect for the two Ukrainian ways of viewing Russia. Another Ukrainian perspective falls somewhere in between the two.
On NATO expansion, “the will of the people”, takes a back seat for the Russia unfriendly crowd. The Orange Ukrainian government’s desire to have Ukraine in NATO has consistently run contrary to the majority of its citizenry. The explanations for this unpopularity include a not so well informed Ukrainian public, caught in a Cold War time warp.
In comparison, there is little second guessing of polls showing that most Ukrainian citizens have a positive attitude on their country joining the European Union (EU). For some, Ukrainians are ignorant when stating apprehension about NATO and knowledgeable upon agreeing with the anti-Russian consensus; albeit for not always the same reason.
Sean’s Russia Blog has comprehensive coverage of the Putin / Kabaeva rumors. Also a story about the hobbies of Russia’s nanotechnologists, e.g. building marchhead-sized chess sets.
Demographic stats from Rosstat have come out for Jan/Feb 2008. While the birth rate increased by 11.3%, so did the death rate by 2.6%, reaching 15.8 / 1000 from 15.4 / 1000 in 2007. Seems that January was not an anomaly – the rapid improvements seen since 2005 have petered out, at least temporarily. But this is not totally unexpected, however. As I noted in my demographics posts, there is a very close correlation between mortality and the alcohol/food price ratio. Overall inflation in Jan-Feb was 3.5%, food price inflation was 3.6%; but the price of alcohol increased by 1.9%. The alcohol/food price ratio has fallen further, perhaps to its lowest ever historical level. In other demographic news, in 2006 there were 1.6mn abortions in Russia, hugely down from the 1990′s but still 2 to 3 times higher per capita than in the West.
Finally a few public opinion polls. In February 2008, PEW released figures that showed 6 3% of Russians preferred a strong leader over democracy, down from 70% and 21% respectively in 2002, but a lot higher than in 1991, when a majority (51%) favored a democracy over a strong leader (39%). 74% would rather have a strong economy, while only 15% would like a good democracy. Ukraine, Bulgaria and even Poland show similar figures. In another rather interesting result, half of Russians agreed with the statement that ‘most people in society are trustworthy’, which is higher than the average for Eastern Europe and about average for Western Europe.
59% of Russians (almost certainly correctly) say there is no life on Mars, while 26% disagree. 49% of them believe that there’ll be a human on Mars and 59% think there’ll be a lunar base within the next 50 years. (Russia, like the US and China, has tentative plans for both enterprises). A new ‘Space Competitiveness Index‘ (whatever that means) has been compiled, in which Russia takes third place behind the US and Europe. China is fourth.
(Republished from Sublime Oblivion by permission of author or representative)
 
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Medvedev gives his first foreign media interview (to the Financial Times), in which he charts the bedrock of his presidency.

  • Will continue to pursue primarily Russia’s, not the West’s, interests.
  • Will work in tandem with Putin, to whom he is neither puppet nor rebel.
  • Will strive to root out “legal nihilism” / proizvol in Russia and corruption, including amongst the siloviki (“power people”) by asserting the law’s supremacy over executive power, cultivating popular respect for the law and improving the courts system, e.g. by raising pay for judges.
  • Will keep trying to demolish Russophobe myths.

Speaking of “legal nihilism”, it seems Medvedev has already started work in this area by forbidding state inspectors from carrying out checks on small businesses in the absence of a court ruling. Hopefully this should help expand the role of small businesses in Russia’s economy, which now make up just 1.1mn small businesses, 3.4mn individual businesspeople and 17% of GDP (typically 40-70% in advanced industrial countries), and expand the middle classes.

As I’ve covered here, NATO is split over whether to admit Georgia and Ukraine to a MAP (Membership Action Plan) at its summit in 2-4th April – western Europe, led by Germany, is opposed to antagonizing Russia and jeopardizing its co-operation on Afghanistan; the US is concerned about losing influence in NATO and many of the Visegrad countries are worried about Russian neo-imperialism towards its non-NATO Near Abroad. Another comprehensive account of the situation over at Christian Science Monitor, as well as pro-expansion pieces calling for public pro-NATO “education” campaigns in the Ukraine here and here (Vladimir Socor). This is because NATO membership in the Ukraine, as in Bulgaria and Slovakia before, is unpopular – the majority are against joining, and some Crimeans have mounted protests. Even in the West, a poll finds a broad desire to cooperate with Russia – pluralities oppose the American missile plan in every major European country.

In breaking news, McCain Backs Tougher Line Against Russia, calling for the West to cease tolerating “Russia’s nuclear blackmail or cyber attacks” and kick it out of the G8 (and replace it with such economic powerhouses and paragons of human rights as India and Brazil). Meanwhile, Joe Biden says that the Bush administration “rebuffed some sensible Kremlin proposals”, before claiming “Messrs. Bush and Putin largely abdicated these responsibilities”; accuses Russia of “bring Russophobia back into fashion”, before going on to encourage meddling in Russia’s internal affairs under the guise of improving American national security. Scratch a Russophobe, and you find a seething soup of paradoxes – just like with deranged Russophobe Lucas and his The New Cold War book, which was recently trashed in Prospect magazine (see review here). No wonder then that Putin cautions us to why the West is so intent on smearing Russia.

MOSCOW. Feb 14 (Interfax) – President Vladimir Putin believes that certain negative publications in the Western media on the state of democracy in Russia are an attempt to pressure Russia, and said that Moscow will not react.

“One must soberly look at what is happening in the media, and analyze. But reacting nervously would dishonor Russia. We’ll not go nervous,” Putin said at a news conference in Moscow on Thursday.

Some countries try to achieve their goals in a competitive fight, including through the mass media, Putin said.

“We all know that, definitely, a monopoly exists in the world (mass media) in some countries and, of course, political centers in these countries are trying to use these channels to influence our population, the population of European countries and the North American continent,” he said.

Such attempts fail, which can be seen, among other things, from the selection of Sochi as the host city for the 2014 Winter Olympic Games, he said.

“Various means are being used in the world to attain one’s political or economic goals,” including the media, Putin said.

“A discussion is on democracy in Russia. What’s the idea of heeding Russia’s opinion on Kosovo, some argue, if Russia herself is not a democratic country? We must understand for what purpose all this is being done,” the Russian president said.

The same refers to the problem of locating a missile shield in Europe, he said. “What’s the big idea listening to what these Russians think about missile defense? They cannot be trusted, because they have problems with democracy there,” Putin said.

Turmenistan, Kazakhstan and Uzbekistan have said they will start selling gas at “European” prices as of January 2009, effectively doubling them. This will hit Ukrainian industry hard; nor can they do much about it, since one of their main arguments about how Russia should supply them with subsidized gas was a threat to source it directly from Central Asia. Now that is irrelevant. Gazprom’s agreement to this means it will no longer be possible to provide allied Armenia with cheap gas; nonetheless, co-operation between Armenia and Russia will not stop, what with bilateral trade increasing by 60% over the previous year and heavy Russian investment into Armenia’s economy. Israel becomes visa-free for Russians. In a recent Levada poll, more Ukrainians would prefer to concentrate on joining the Union of Russia and Belarus (43%) than the European Union (30%).

Meanwhile, Georgian opposition leader Irakli Okruashvili has been given an 11 year jail sentence in absentia for extortion. Strange that they’d do that just a few days before the NATO summit. Still, the Western media would much rather concentrate on demonizing Russia – a playboy “fierce critic of the current regime in Russia” billionaire going missing must mean the KGB is at work again.

Russia’s economy continues to boom, with 7.8% growth in Jan-Feb 2008. A piece about how Moscow is Turning Old Factories Into Prime Property by converting its industrial areas into much more valuable office space and moving production out into the Moscow Oblast industrial parks. In the spirit of the times, Ruconomics offers three suggestions on battling corruption.

  • The law must be inflexible, prescribing a set list of instructions invulnerable to idiosyncratic bureaucratic interpretation.
  • The creation of an honest, independent judicial system.
  • Competitive media, free from pressure from vested interests and citizen monitoring of the bureaucracy.

Quite obvious, really. Also from the same blog, a post about a none too bright bureaucrat called Yakimenko, who wishes to solve the demographic problem via means of mass impoverishment, citing the experience of Africa and his own parents as an example.

At the global level, the credit crunch continues unabated as financial markets search for signs that the worst is over, what with Bear’s collapse, Lehman’s last-minute redemption and a rally across many of the world’s stockmarkets this past week. However, house prices continue on their precipitous decline, and it seems to me more and more that this is a case of general insolvency rather than simply illiquidity (the Fed, obviously, has the other idea). Finally, searching for signs that the trough has passes may well be a sign that things are actually really bad.

Perhaps the most convincing argument that we are not yet at the bottom is that so many people think that we are. The clamour to call an end to the crisis in recent weeks in itself shows that optimism has not been extinguished. History’s worst bear markets have been punctuated by many rallies when people thought the worst was over.

This may also accelerate the Euro’s displacement of the dollar as the world’s reserve currency, and as such weaken the US economy and its geopolitical power.

The Financial Times also has an interesting article on how, apparently, state ownership is no longer a burden for Chinese companies, what with their burgeoning profits (quite a change from the 1990′s) and innovative technological adaptation and marketing and managerial competence – although there are caveats to that success.

The world is having problems with rice production. Is the problem just one of institutional failure and trade restrictions, as the Economist sees it? Or is it something deeper, to do with exhaustion of carrying capacity and linked with things like the peaking of grain production per capita? Time will tell.

See Carla Bruni nude here. Who says politics can’t be sexy?

Talking about nudity, or representations of the human form in general, see the controversial film by Geert Wilders, Fitna, which was cowardly censored by Livelink. For if this kind of spinelessness continues, the above may become a thing of the past in Europe if the more dire predictions of Muslim demographics turn out to be true.

Finally, a word about the Tibet protests. The Western media is all up in arms over how the brutal PLA is crushing the freedom-loving Tibetans, neglecting to mention the fact that old Tibet was a feudal theocracy, that the demonstrating Tibetans display their anger by performing pogroms on local ethnic Han Chinese and ignoring the possible role of the CIA in stirring up unrest (see Tibet, the ‘great game’ and the CIA).

(Republished from Sublime Oblivion by permission of author or representative)
 
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This is how the Economist celebrates Russia’s presidential election – the Trouble with Russia’s Economy, represented by a bear gorging itself on oil (i.e. invoking the Myth of the Russian Oil Curse, which we have debunked far too many times to count on this blog). Guess we’ll have to do it again.

Never mind that organizations like the the World Bank, academic econometricians and even their own Economist Intelligence Unit disagrees, and that there is also OECD academic work that argues that ‘the resource curse – if it exists – is at least no fatalité’.

But whatever. Let’s analyse the article on what it says..

The emergence of genuine businessmen like Mr Bulanov, and their acceptance in society generally, may be Russia’s biggest achievement—and one reason why the economy is growing at 7% a year. But this has nothing to do with Vladimir Putin, who is standing aside as president this week. Mr Bulanov is no fan of Mr Putin; he prefers freedom to fear and corruption. “The only things that will stop me”, he says, “are a bullet or a prison cell.”

From the get go, the machine gears itself up for agitprop mode. Obviously the views of this one businessman reflect the views of the entire Russian business community.

Next they proceed to admit the blindingly obvious – yes, the Russian economy is no longer a basket case; yes, it has half a trillion dollars of FOREX reserves; yes, there is a consumption boom. (This is the difference between Soviet and Western propaganda: the latter, being much more subtle and nowhere near as overtly propagandistic, is thus far more effective and insidious than the latter). Of course, this tone doesn’t last.

By the end of 1999 Russia was already growing by more than 6% a year. In 2000 growth accelerated to 10%, a rate still not matched eight years later.

Immediately after they throw in a red herring, ostensibly proving that there is a gap between Russia’s potential growth rate of 10% and its real growth rate of 7%. Of course, what they decline to mention is that is that this is coming hard to on the heels of post-Soviet collapse and the 1998 financial crisis (which by official statistics shaved off around 40% of Russia’s GDP from its Soviet peak to post-Soviet nadir) – recovery is typically quick in the aftermath of economic downturns, as all that is involved is filling back underused capacity.

To be fair, at first Mr Putin worked hard to consolidate growth. His government simplified and cut taxes. Budget reform brought clarity and stopped the government making unrealistic pledges on spending. Mr Putin not only chose a liberal economist, Andrei Illarionov, as his economic adviser, but also listened to him. For the most part Russia used its oil windfall prudently, repaying debt, building up reserves and filling its stabilisation fund.

They deign to acknowledge Putin’s early achievements, although the attributal of it specifically and exclusively to Mr. Illarionov (a neocon dinosaur who disputes global warming, cites Freedom House reports and can’t even get the size of Russia’s GDP right) is dishonest.

Where did it go wrong? Mr Illarionov, who quit his post in 2005, argues that the breaking point was the attack on Yukos that began in mid-2003…The share of
crude-oil production controlled by state and semi-state companies doubled. Growth in oil output, which before the Yukos affair had been running at about 9% a year, slowed to just 1% by the end of 2007.

Three points have to be made.

Firstly, it is true that state ownership has increased in the hydrocarbons and some other extractive sectors. It is also true that the trend growth rate for oil extraction dropped from 9% from 2000 to 2004 to 2.5% from 2005 on. To project a linear relation between this and a slowdown in production, however, is simplistic at best. To see why, analyze the graph below.

This shows Russian oil production, historic and projected, from 1990 to 2050 (the table itself was compiled around 2000). The shaded areas show the the amount of oil discovered in that particular year.

Anyone familiar with the theory of peak oil will be aware of the fact that the amount of economically viable black gold is limited (at a specified price). Russia already had its oil peak, in 1987. Continuous big new discoveries have practically ceased since 1990.

Now from the late 1990′s a confluence of factors ensured that Russia (and the post-Soviet world in general) experienced a second peak. These were a) privatization of oil companies, b) increased investment due to post-2000 oil price rises and, mostly importantly by far, c) an influx of Western technical expertise, which vastly increased recovery rates. Indeed, the second peak has mostly been driven by increased extraction at Siberian super-giant fields due to improved technology.

Nonetheless, this only had the effect of increasing recoverable reserves; it did not increase them per se. Indeed, many analysts (including the one who compiled that graph) have been projecting Russia’s oil peak to around about 2010. Since the Hubbert peak is bell-shaped (i.e. slopes rapidly up, slowly approaches a plateau, and then increasingly slopes downwards), it would make sense for Russia’s oil production to be slowing from the mid-2000′s. Hence the aforementioned reduction in production was far more likely due to general peak oil dynamics rather than to government intervention in the sector.

Yes, state ownership in the oil industry rose from below 20% in 2004 to over 50% in 2007. Nonetheless, there is still a huge swathe of Russian oil companies not under government control (the mainstay being Lukoil, which accounts for some). Even here, there are several caveats. For starters, state-owned oil and gas companies do not necessarily have to perform worse than private ones – even in the case of Russia, Lukoil’s hydrocarbons production grew by 2% in 2007 – slightly below the 3% average of 2007 for the industry as a whole. Secondly, it is not clear whether increasing production is even currently desirable for Russia from a longterm perspective, since the value of oil is only set to increase in the future.

Finally, the Economist, like capitalists and the BBC, conveniently sells us the rope by which we’ll hang them. Yes, oil output growth has plumetted from 2000-2004 to 2005-2007. But this makes a mockery of the argument that Russian recent growth has been based on oil. This is because acording to Rosstat, GDP growth has been 6.9% from 2000-2004 (i.e. including the anomolous year of 2000, when growth was 10%). During this period, around a third of Russia’s GDP growth came from increasing hydrocarbons production, according to academic studies. From 2005-2007, however, growth was 6.4% in 2005, 7.4% in 2006 and 8.1% in 2007, for an average of 7.3% over the period. In other words, despite the step drop in oil output rise to a sluggish 2-3% per year, real GDP growth has actually increased!

“The problem is not that the Russian legal system is weak,” says Vitaly Naishul, who watches Russian institutions. “The problem is that it does not exist. The Russian justice system has as much to do with justice as the Soviet system of
trade with trade.”

I’m not sure what they’re doing quoting Naishul. Even this libertarian’s views are much more nuanced than those of the Economist.

That problem is as old as Russia, but under Mr Yeltsin the courts, however corrupt, were at least independent of the Kremlin. Under Mr Putin, judges have again turned into bureaucrats who rubber-stamp dubious administrative decisions.

Quoting Nicolai Petro’s excellent essay Russia through the Looking Glass in extenso will suffice to refute.

Historically Russians have had little faith in their legal system, but this too is changing under Putin. Thanks to a new criminal code and code of criminal procedures passed in 2002, a judge must approve arrest warrants, and the accused charged with a crime within two weeks, or released. Nationwide jury trials, another Putin innovation, today acquit 20% of cases; in 2005 Russia had its highest acquittal rate ever.

The constitutional court under chief justice Valery Zorkin has set a more independent course, criticising the December 2003 electoral law, striking down restrictions on media coverage of elections, and strengthening the rights of defendants and the role of juries. There are also clear signs that this liberalisation is continuing. In January 2006, the annual conference of chairs of regional courts proposed sweeping reforms that would virtually eliminate closed judicial proceedings. The state Duma (lower house of parliament) also passed, in a first reading, an important initiative in defence of privacy rights. This established a federal agency where a citizen can find out what information the government is gathering about him or her, and where this information is being kept.

It should therefore come as no surprise to learn that the number of citizens turning to courts for redress of their grievances has shot up from one million under Yeltsin to six million under Putin, and that 71% of plaintiffs win the cases they bring against government authorities.

Next.

“After Yukos nobody can feel safe,” says the owner of a factory making kitchen shelves in Kaluga. Instead of cultivating the rule of law, as Mr Putin promised, Russia was subjected to the rule of thugs, says Mr Illarionov.

Oh dear. A kitchen shelves manufacturer in a provincial backwater and a neocon maverick. Can’t they do any better? Disappointing effort, chaps.

The deterioration of Russian institutions has been tracked by the World Bank, Transparency International, the World Economic Forum and Freedom House. Russia’s corruption is on a level with Togo’s.

1. I have searched and I have found no World Bank metric that tracks institutions. If anyone can enlighten me please do so. The only thing vaguely related to this is the World Bank Group’s Doing Business project – while Russia’s rank there is far from impressive (106th out of 177 countries), conditions in 2008 are better than in 2004, when it was started.

Edit 25/03/2008: I have succeded in finding what they were talking about – WB Worldwide Governance Indicators. In fact, there was no broad deterioration – rather, stagnation. From 1996-2006, “control of corruption” slightly improved, “rule of law” stagnated and “voice and accountability” fell a little, to take a sample. A word of caution, however – like Transparency’s CPI, it is a measure of perceptions rather than objective reality. This is reflected in the rather absurd figures for ‘political stability’, which imply Russia was as stable in 2004-2006 as in 1996-2000 (when Yeltsin was appointing a new PM every other week).

2. It’s true that Russia’s Corruption Perceptions Index has fallen from 2.8 in 2003 to 2.3 in 2007. However, the Myth of Russian Endemic Corruption has been shown for what it is (a myth) in my article Reading Russia Right. I’ve quoted the relevant parts and inserted further comments in italics.

While there’s no denying Russia is plagued by corruption, to suggest it is endemic like in a failed state is ludicrous – and would frankly be obvious to anyone who has visited the countries on that list. The problem with the the Corruption Perceptions Index is that it’s a survey of outsider businesspeople and their subjective perception of the situation. While improving perceptions is an important goal, it does not necessarily correlate perfectly with reality. TI’s Global Corruption Barometer asks ordinary people how affected they are by corruption, for instance, have you paid a bribe to obtain a service this year? In 2007, 17% of Russians did – putting them into the same quintile as Bulgaria, Turkey and the Czech Republic. In other words, slap bang in the middle of world corruption, rather than at the end. As another example, Cameroon (2.4) is above Russia (2.3) in the CPI – however, some 79% of Cameroonians had to pay for a service in 2007, compared with 17% of Russians.

3. As for the WEF’s Global Competitiveness Rankings from 2006 to 2007, that’s an outright lie. Russia’s score went from 3.68 in 2004, 3.53 in 2005 and 4.08 in 2006 to 4.19 in 2007. It has also improved on its global rankings.

4. As far as I’m concerned Freedom House is a CIA front and its ‘findings’ should be taken with a pinch, or rather a barrelful, of salt.

Yet foreign and domestic investment keep rising, along with Russia’s credit rating. A survey of 106 foreign firms in Russia last year showed that 82% were broadly satisfied with the investment climate. Russian businessmen may grumble, but they still put up their money. Last year fixed capital investment rose by a record 21%, leading some economists to talk of an investment boom.

And as far as I’m concerned, these statistics mean more than any number of Western think-tank reports.

The real cost is one of lost opportunities. Growth of 7% sounds good, but it is far below Russia’s potential. Over the past few years, Russia has been outstripped (though from a lower base) by the former Soviet republics of Ukraine and Georgia, which have no oil. If Russia enjoyed the rule of law, was not stifled by inefficient monopolies such as the gas giant Gazprom and had roads rather than vague directions, its growth—given the oil boom—could surely have been in double digits.

According to IMF figures (note: 2006 and 2007 are projections: as such, I replaced them with official figures), from 2000 to the present average annual GDP growth was 7.3% in the Ukraine and 7.2% in Georgia, as compared to Russia’s 7.0%, so to talk of Russia being ‘outstripped’ is misleading, to be charitable. Secondly, this has been from much lower bases (GDP per capita in 2007 was 14,600$ in Russia, 6,900$ in Ukraine and 4,200$ in Georgia). Thirdly, unlike Russia, which to date has overtaken its 1992 GDP index by 11%, Georgia and Ukraine are both at around 80% of their immediate post-independence figures. Furthermore, average growth rates for Russia, Ukraine and Georgia from 2005-2007 (when oil production became a burden rather than a driver for Russia) were 7.3%, 5.5% and 9.5% respectively, so the real question should be – why is Ukraine growing so slowly?

The share of oil and gas in Russia’s GDP has increased, according to the Institute of Economic Analysis, from 12.7% in 1999 to 31.6% in 2007. Natural resources account for 80% of exports. Like a powerful drug, oil money has masked the pain caused to the Russian economy by the Kremlin. But the disease remains.

So we return back to Russia’s economy is an oil bubble thesis. OK. Oil prices have risen from 16.56$ / barrel in 1999 to 64.20$ / barrel in 2007 – in other words, by a factor of 3.9. On the other hand, its share in the Russian economy increased by just 2.5. While far from economically rigorous, this does suggest that in real terms the contributions of oil and gas to Russia’s economy have fallen. It also misses out the fact that since 1999 Russia’s MER GDP has expanded more than sixfold (from 196bn $ to 1286bn $), so even by that metric its non oil-related growth at international prices is extremely impressive.

It is true that natural resources account for 80% of exports (as opposed to 70% in 2000 – but this is again thanks to increases in the oil price). However, this is because of Russia’s comparative advantage in oil production. It strengthens the ruble, drives up labor costs and makes life difficult for manufacturers who want to export stuff. If Russia didn’t have oil, its export structure would be similar to Ukraine’s (machinery, equipment and metals). Resources aren’t a curse; they’re a blessing.

The problem, says Peter Aven, the head of Alfa Bank, is that Russia has failed to convert the oil stimulus into domestic production. Imports are growing much faster than manufacturing.

So what is their solution? Use the oil money to subsidize industrial expansion like in the Soviet Union? I also don’t see the link between imports and manufacturing – surely he doesn’t fall into the fallacy of thinking manufacturing is somehow more important/real than other sectors? Is retail, construction, finance, transport, any less important to a productive economy (all of which have been growing at 10+%)?

The rapid real appreciation of the rouble is hurting Russia’s producers, and many goods are of poor quality. This is why Algeria says it wants to return 15 military jets it purchased from Russia.

So what is their solution? The Central Bank does have a fine balancing act to carry out with limiting ruble appreciation and limiting inflation. In any case currency appreciation should typically force manufacturers to become more competitive.

Productivity remains far below that of most developed countries. In the first years after the 1998 crisis, labour and capital efficiency went up by 5.8% a year. But that growth was driven by using spare capacity left from Soviet times. Sustaining it will require more investment.

Without citing specific time frames or providing more recent estimates, this information is meaningless. As for investment, they have answered their own concerns. Do they even bother proof-reading this drivel?

Last year fixed capital investment rose by a record 21%, leading some economists to talk of an investment boom.

Next.

Officials have been trying to persuade themselves and others that Russia is an island of stability in a sea of economic troubles. But Yegor Gaidar, a liberal economist and former prime minister, says the Russian economy is highly sensitive to swings in the world economy.

True, at least as far as the resources and financial services based part of the economy goes. But as has been pointed out in this blog here and elsewhere, Russia has a twin surplus, half a billion dollars in FOREX reserves and minimal exposure to the mortgage crisis, which should stand it in better stead relative to many of the advanced industrial nations.

When the oil price is unpredictable and inflation is in double digits, spending more money seems unwise. Yet this is what Russia has been doing. After years of fiscal discipline, last year’s budget saw spending rise by 20% in real terms…The main beneficiaries of the spending increase last year were newly created state corporations, including those involved in nanotechnology and the 2014 winter Olympics—and those bureaucrats, who are skilled at enriching themselves.

Russian inflation is powered above all by foreign currency inflows and the global tendency towards expensive food and oil. Increased spending on strategic investments like this are unlikely to have much impact. It should also be borne in mind that nanotechnology in particular is a very wise strategic investment, as I’ve argued here.

It is little wonder that the gap between the top 10% and the bottom 10% of the population is growing, along with a sense of injustice. Russians have turned a blind eye to all this because average incomes are rising. If the trend reverses, they may start to ask harder questions.

Since 1994, the Gini index has remained generally constant in Russia according to the World Bank.

It’s said that to knock down a creaky old house you only have to kick the door in and the whole rotten structure will come tumbling down. I think I’ve done that here. The article is a mass of red herrings and ocassional false statements, narrated throughout by a deranged neocon (Illarionov). Once again the Economist is revealed as nothing but a highbrow rag when it comes to Russia coverage.

Well, that’s my bit done fighting the Russophobes. Here’s the news from other fronts:

Sean rips McFaul a new one – the full article can be read here on the eXile, critisizing his ridiculous Myth of the Authoritarian Model thesis (nothing there that you wouldn’t find in the writings of the likes of Lucas, just couched in quasi-academic language). For a comprehensive debunking see Fedia’s A Brave Kremlinologist. Too bad for him., which uncovers two outright lies and numerous statistical manipulations in the article. (For a laugh, read Stoner-Weiss’, the co-author’s reply, or more likely someone who claims to be her. Entertaining either way).

Taling about Fedia, he has also put up an absolutely excellent post exposing the lies and manipulation that lie at the heart of the Committee to Protect Journalists, which claims to apply ‘strict journalistic standards’ to investigate suspicious journalist deaths resulting from their professional work. He does this by examining all 17 cases reported in CPJ’s database of confirmed deaths during Putin’s presidency (2000-present day) to see if they belong to “confirmed” cases of journalists killed in the line of duty. I quote the summary of An Audit of the Committee to Protect Journalists’ Claims.

In summary, CPJ claims that 17 journalists were killed in Russia in since 2000 due to their professional activities. Examination of each case found that out of 17 claims, only 5 were correct (Domnikov, Khasanov, Klebnikov, Makeev, Politkovskaya), 8 were complete falsifications (Skryl, Ivanov, Scott, Shchekochikhin, Sidorov, Kochetkov, Maksimov, Safronov), and 4 were partial falsifications (Yatsina, Yefremov, Markevich, Varisov). If we assign the truthfulness value of 50% to partially falsified claims, the overall truthfulness rate of CPJ, given this sample, is 41%. Clearly, CPJ’s definition of “strict journalistic standards” as being only 40% truthful is at variance with what any reasonable person would expect. But it is very much in line with what one would expect from a propaganda outlet.

Of course, the desire to protect journalists’ lives is very noble. But the end does not justify the means. Engaging in outright falsifications while making the outrageous claim that “strict journalistic standards” are being followed discredits journalism as a profession and raises the obvious question of why should any special emphasis be placed on protecting that kind of people?

Demented Russophobe Loco Lucas continues his ravings, this time swallowing his laissez-faire capitalist instincts to pander to the left-wing readers of the British daily the Guardian with his messianic revelation of the New Cold War in Putin’s Playground. As can be gleaned from the Comments, his readers aren’t much impressed, nor most of those commenting on his blog (including yours truly).

There’s also his delightful 19th January Daily Mail piece (a British rag mostly read by their unwashed football hooligans) – Putin: the brutal despot who is dragging the West into a new Cold War – I demolished his thesis on Lucas’ blog here, as well as having a flame war with the Estonian crypto-fascist Giustino. The eXile also trashed it, both before and after publication.

(Republished from Sublime Oblivion by permission of author or representative)
 
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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.