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map-greek-elections-2015-sept

The map above (adapted from Wikipedia) shows the changes in Syriza’s and New Democracy’s electoral fortunes between the elections in January, 2015 and the new elections yesterday.

A couple provinces flipped to Syriza, and three turned to ND. In short, no meaningful change at all, a fact also reflected in both the number of seats Syriza won (from 149 to 145) and its share of the popular vote (36.3% to 35.5%). As before, it is expected to remain in coalition with the patriotic right ANEL. The main opposition party, the center-right main opposition party (and party of the Greek oligarchy) failed to make any gains, nor did the Communists, nor – despite widespread fears on this account – did the extreme right Golden Dawn. Popular Unity, composed of Syriza renegades who couldn’t stand Tsipras’ betrayal on austerity, such as former Communist and previous Syriza Energy Minister Panagiotis Lafazanis and the fiery human rights lawyer Zoe Konstantopoulou, failed to make it into the new Parliament at all.

This, along with Tsipras’ steadily high approval ratings (still at 60%+), is something of a surprise (at least to me) coming as it does amidst the tumult of the past few months. Consider:

  1. Tsipras epochally screwed up negotiations with the Troika, resulting in both harsher austerity conditions and an extra shock to confidence in the Greek economy. Despite Varoufakis’ urgings, no measures were undertaken to make preparations for transition to the drachma. This made their hardball approach with the ECB not credible and they very predictably got called on it and had to fold. In the process, the Greek electorate was betrayed – Syriza had promised no further austerity – and recalcitrant party members were purged.
  2. Complete failure at international relations, probably stemming from Tsipras & Co.’s belief that internal Greek style politicking works there as well. European institutions trust him no more than they did back when the headlines were screaming “Communism!” on Syriza’s victory, and he has also lost the trust of Russia since it soon became obvious that their only intentions in cozying up to Moscow were to use the prospect of closer energy and diplomatic relations with Russia as a scarecrow to extract more concessions from the EU without actually intending to follow through with anything.
  3. Early on in his tenure, Tsipras committed to sweeping “reforms” on immigration policy: The abolition of illegal immigrant detention centers, amnesty to anchor babies, calling on journalists to remove the word “illegal” from their lexicons. Work begun on a mosque in Athens, as if the country had no other, more pressing priorities. In retrospect, the timing couldn’t have been worse, with the recent immigrant influx making some of the Greek islands like Lesbos virtually uninhabitable for the natives.

And yet here we are. Despite a catalogue of failures across economics, international relations, and immigration; of internal backstabbing and electoral betrayals – Syriza has essentially maintained its ratings. Why?

First and foremost, I suppose, Greeks might have the perception (probably correct) that they have no other real choice. A Syriza voter might not want to submit to ECB diktats, but would still consider it preferable to voting for Communists (KKE) or the Neo-Nazis (Golden Dawn). This apathy is reflected in lower voter registration (presumably as Greeks continue voting with their feet and emigrating) and lower turnout, translating into a 12% overall decrease in total number of votes cast between during these September elections relative to January.

Also, up until a few months ago, many people still believed that Syriza were hardline socialists or even Communists, instead of the opportunistic left-liberals most of them actually are. This means that even as Syriza lost votes to apathy, it might have gained roughly equal numbers of converts from people who might have previously viewed them as being rather too extreme.

Golden Dawn continues doing surprising poorly, increasing their share of the vote from 6.3% to 7.0%. Even though they are one of the most hardcore far right parties in Europe, making many voters averse to them in principle, it is still perhaps surprising that the rise in votes for them was so relatively modest, since they are resolutely against both austerity and immigration – both very pressing hot button issues for Greece. As it is, both Brussels liberals screeching about the spectre of a Nazi junta in Greece and the Greeks hoping for the coming of… a golden dawn? continue to be disappointed.

What I would suggest is surprising is that the Independent Greeks (ANEL), a right patriotic party that is Euroskeptic, anti-immigration, and unlike Golden Dawn, well within the respectability Overton Window – as I understand it, it is approximately Greece’s equivalent of the German AfD – has not improved its standing. They did not betray their electorate by voting for austerity, and opposed Syriza on their pro-immigration stance, which must surely have worked to their favor in the context of today’s immigration crisis. To the contrary, ANEL saw one of the largest relative declines in its share of the vote, from 4.8% to 3.7%. Unless it has unusually uninspiring, stupid, or corrupt leaders – I am not well versed enough in Greek politics to have any opinion on that – I do not see why this should have happened.

 
• Category: Foreign Policy • Tags: Crisis, Elections, Greece 
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See data. For real, this time.

russian-gdp-overtakes-germany

While it is perhaps a big strange to start thinking of Russia as a high-income economy, it’s not so surprising when looking at concrete statistics such as vehicle consumption, Internet penetration, etc. – all of which are now at typical South European and advanced East-Central European levels (even if there’s still some way to go to converge with the likes of France or the US).

In per capita terms, this means that the average Russian is now about as rich in terms of real goods he can buy on domestic markets as a typical citizen of Portugal, Greece, Estonia, Poland, or Hungary (though with the caveat that most of the latter places have a lot less income inequality). Below is a table showing the GDP per capita, PPP (current international $) of Russia and comparable countries:

2008 2009 2010 2011 2012
Czech Republic 25,885 25,645 25,300 26,209 26,426
Portugal 24,939 24,892 25,547 25,586 25,305
Slovak Republic 23,210 22,546 23,149 24,112 24,896
Greece 29,604 29,201 27,539 25,859 24,667
Russian Federation 20,276 19,227 20,770 22,408 23,549
Lithuania 19,559 16,948 18,120 21,554 23,487
Estonia 22,065 19,470 20,092 21,996 23,024
Chile 16,435 16,190 18,607 21,001 22,655
Poland 18,021 18,796 20,036 21,133 21,903
Hungary 20,432 20,249 20,734 21,455 21,570
Latvia 18,090 15,928 15,944 19,103 21,005
Croatia 20,215 19,158 18,546 19,817 20,532
Turkey 15,178 14,578 15,965 17,242 17,651
Brazil 10,393 10,357 11,187 11,634 11,909
China 6,202 6,798 7,569 8,408 9,233
Ukraine 7,311 6,312 6,691 7,215 7,418

Furthermore, it’s looking as if Russia might have a real chance of overtaking Portugal next year. Just as Putin promised in 2003! (Double GDP; overtake Portugal in 10 years). But even if that fails, at least overtaking Greece is all but assured, so even if Russia misses out on Portugal it will still get to say it is no longer the poorest “proper” European country.

(Republished from Da Russophile by permission of author or representative)
 
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If you ever manage to get a troupe as diverse as Latynina, Mark Adomanis, the Cypriot Communist Party, virtually every financial analyst, Prokhorov, and Putin united in condemning your crass stupidity and cack-handedness, it’s probably time to stop and ponder. But it’s safe to say that’s not what the Troika – the European Commission, European Central Bank, and IMF – tasked with managing the European sovereign debt crisis is going to be doing any time soon. They seem to be living in la la land.

Here is the low-down. Contrary to German/ECB propaganda, Cypriot public finances, while nothing to write home about, are not in a catastrophic state. The debt to GDP ratio, far from ballooning out of control like Greece’s, was actually lower than Germany’s as late as 2011! This was despite Cyprus being steadily hammered by the global financial crisis and the massive explosion at a naval base in 2011 that cost it about 10% of its GDP.

cyprus-debt-dynamics The main problem was in its financial sector. Although it should have been safe on paper, Cypriot banks had the bad fortune to have had many operations in Greece – which hemorrhaged money as Greek debts were restructured under EU guidance. These involved painful austerity, but the principle that bank deposits would be inviolable held across the PIIGS. But for Cyprus, the Eurocrats – egged on by Schäuble in particular – decided to make an exception, demanding a “bail-in” as part of any financial rescue package. For the ultimately trifling sum of $6 billion, they were prepared to erode basic principles such as sanctity of property that the EU is founded on.

According to Edward Scicluna, the Maltese Finance Minister, his Cypriot counterpart Michalis Sarris was for all intents and purposes brow-beaten into accepting the deal – a 6.75% levy on deposits of less than 100,000 Euros, and 9.9% on everything above that – that the country’s parliament would later decisively reject. The Europeans, according to him, were dead-set on “downsizing” Cyprus’ supposedly overgrown financial sector and in particular its status as a tax haven and alleged center of Russian money laundering. After 10 grueling hours of discussions, Sarris finally conceded, and as soon as that happened, “Schäuble demanded that all wire transfers to and from the Cypriot banks would cease forthwith.”

In other words, they wished to destroy Cyprus’ financial system, and it seems certain that they have succeeded in this. As soon as the banks reopen (now delayed until at least May 26th), who exactly will continue to keep their deposits in a Cypriot bank?

This wanton destruction however seems to have been based not so much on any sense of pan-European fairness or social justice as misconceptions about the nature of the Cypriot banking system, or even more mercenary motives such as a desire to help Merkel win the upcoming elections or encourage capital flight from the PIIGS to German banks (the latter possibility was raised, only half in jest, by Craig Willy). As we see above, Cyprus’ sovereign debt situation was manageable. While it is true that it had a huge financial sector relative to its GDP, this is not atypical for a nation of its small size and location (consider Luxembourg, or London were it independent from the UK), and this sector did not experience any critical difficulties until the EU-spearheaded restructurings of Greek debt into which C ypriot banks were heavily invested, as a natural result of their geographic and cultural position.

How Cypriots see the Cyprus crisis.

How many ordinary Cypriots see the Cyprus crisis.

Nor is it even true that the Cypriot banking system mainly serviced dodgy offshore aristocrat types. Of the €68 billion in deposits as of end-January 2013, some 63% were held by Cypriots, and 7% were held by citizens of Eurozone countries, while 30% were held by nationals of other countries *. Although according to honored representatives of the Eurocrat class like Jean Pisani-Ferry, it is the Cypriots’ own fault for banking in their own damn country as opposed to Germany:

And of that 30%, not all was held by Russians, as Cyprus is popular among Chinese and Iranians too (indeed, an acquaintance who was there recently saw far more signs in Chinese than in Cyrrilic). As for the notion that all or even the majority of Russians with money are “oligarchs”, “mafiosi”, and “Chekists” (interchangeable terms, to many of the people who engage in this kind of rhetoric)… well, no way to statistically prove it one way or another, so anecdotes will have to suffice. Ironically enough, the only Russian I know with a bank account in Cyprus is actually a fairly anti-Putin liberal, and as far as I know not an oligarch or a mafiosi – unless you consider journalists to be such. The commentator JLo also reports a liberal acquaintance with money in Cyprus. No doubt those two will be thrilled to hear from former Economist Russia journalist Edward Lucas, whose Russophobia is frankly pathological, that as Russians with money in Cyprus they should be automatically expropriated.

This is not of course to argue that having such a large segment of the Russian economy “offshore” is a good thing. Many Russians really do have accounts in Cyprus because of its perceived benefits such as the local (English-based) legal system, greater financial security, greater ease of capital movement around the world, and yes, tax evasion or “tax optimization” as it is euphemistically called – and productively utilized by entirely respectable Westerners like Mitt Romney. It would undoubtedly be a good thing if there was less of that and ironically the Troika’s ham-fistedness will have only helped Russia in its struggles to de-offshore its economy. But what is entirely mendacious is to start throwing around terms like “money laundering” as if they were synonymous with offshore banking, or “the Russian mob” as if it was synonymous with “oligarchs”, “Russian politicians”, “Russian bureaucrats”, and all Russians in Cyprus in general for that matter. There is of course some overlap between all these categories but to conflate them all as the Lucas types insist on doing is pathologically Russophobic, and frankly driven by the very same Bolshevik spirit that they profess to despise but actually embody.

Many Western papers even went so far as to hint that the reason Russia was so “concerned” about Cyprus was because Putin and other members of his inner circle had money in Cyprus. This was echoed by the (viciously anti-Putin) Russian business newspaper Vedomosti, which alleged that “it is hard to believe, but it appears as if European politicians are ready to risk a lot in order to pressure a certain influential politician secretly hiding money in Cypriot banks.” They did not have the courage of their convictions to say it outright, but the hidden subtext is obvious to all. We call these conspiracy theories. Were this true, in fact, it would be indicative of severe schizophrenia on Putin’s part – that is, if he actually DID have quadrillions parked in Nicosia – considering that previous discussions on Russian loans to Cyprus had been linked to Cyprus becoming more proactive about revealing the identities of Russians with bank accounts there to the Russian tax authorities.

How the Western media/political class see the Cyprus crisis.

How the Western media/political class see the Cyprus crisis.

At this point it hardly bears mentioning that, as an institution that so regularly and pompously lectures Russia about things like rule of law and sanctity of property rights, it is quite hilarious that the Troika would “demonstrate” those concepts by doing things like retroactively abrogating European-wide deposit insurance of 100,000 Euros and freezing and confiscating the savings accounts of the very Russians whom they expect to listen to their pontifications.

But as these recriminations and general debility went gone back and forth, Nicosia burned. The initially proposed “medicine”, it seems, will turn out to be the deadly pill that kills the Cypriot financial system. It is hard to imagine anyone, be they foreigner or even Cypriot, now willingly leaving their money in Cypriot banks; trust has been destroyed, and short of capital controls, massive bank runs and capital outflow seem to be all but inevitable whenever the banks open again. The original $15 billion that could have nipped this problem in the bud is probably no longer sufficient. I don’t pretend to have any precise idea of how things will develop now – Will Cyprus hurtle out of the Eurozone? Will contagion spread to Spain and Portugal? Will Gazprom get exploration rights to the recently discovered oil fields in return for loans? Will China get involved? – but a few things I think we can be pretty sure of: (1) The ECB/Eurocrat class are either utterly, frightfully oblivious, or have altogether darker ulterior motives; (2) The Cypriot banking system is finished; (3) It will be a reality check for Russians who firmly believe their assets are automatically safe abroad and will help the de-offshoring process, though I don’t expect any sudden radical changes because there are still plenty of alternatives like Latvia which I hear is getting pretty hot with Russian money nowadays.

PS. For further reading (and people who influenced my perception of this) consult Mercouris, Dmitry Afanasiev (Russian version at Vedomosti), and Craig Willy’s Twitter.

*UPDATE: The commentator Temesta links to an article by Paul Krugman in which he points out that “Cypriot residents” very likely directly include foreigners:

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.

That said, speculation is one thing, concrete numbers are another: “Cyprus Central Bank Gov. Panicos Demetriades, in an interview published Thursday in Russian newspaper Vedomosti, offered more specifics. “The deposits of Russians range from €4.943 billion to €10.225 billion, depending on how you count them,” he said.” Even if the highest estimates of $20 billion are correct, it would still mean that the total value of Russian deposits there account for less than 25% of the total.

(Republished from Da Russophile by permission of author or representative)
 
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I just remembered I’d made some in 2012. It’s time to see how they went, plus make predictions for the coming year.

Of course I failed to predict the biggest thing of them all: The hacking that made me throw in the towel on Sublime Oblivion (remember that?), but with the silver lining that I could now split my blog between my interest in Russia and my interest in many other things. After all tying my criticism of the Western media on Russia with topics like climate change and futurism and HBD was never a very good fit. Overall I am very satisfied with the new arrangement.

Predictions For 2013

(1) Russia will see slight positive natural population growth (about 50,000) as well as significant overall population growth (about 400,000). Do bear in mind that this prediction was first made back in 2008 when a Kremlinologist who did the same would have been forced into a mental asylum.

(2) The life expectancy will reach 71.5 years, the total fertility rate will rise to 1.8. The birth rate will reach a local maximum at about 13.3-13.5 (it will then remain steady for a couple of years, and then begin to slowly decline) while the death rate will go down to about 13.0-13.2). Net immigration should remain at about 300,000.

(3) Putin will not be overthrown in a glorious democratic revolution. In fact, things will remain depressingly stable on the political front. As they should!

(4) Currently Russia is one of Europe’s most corrupt countries. While it’s certainly not at the level of Zimbabwe, as claimed in the Corruption Perceptions Index, it’s not like having the Philippines, Romania, or Greece for neighbors on an objective assessment is anything to write home about. I believe that Russia missed a great opportunity to undermine the rotten culture of official impunity that exists there by refraining from prosecuting former Moscow Mayor Luzhkov with his Montenegrin villa, billionaire wife, and his VP Mayor Resin who wore a $500,000 watch following his dismissal in 2010. Today a similar opportunity presents itself with blatant evidence of large-scale corruption on the part of former Defense Minister Anatoly Serdyukov and his female hangers-on (see the comments threads here, here at the Kremlin Stooge for details). There are conflicting signals as to whether charges will extend to the very top, i.e. Serdyukov himself. Having incorrectly anticipated a Luzhkov prosecution, I am now once bitten, twice shy. So I’ll take the lame way out and call it a 50/50.

(5) Needless to say, the economy remains as uncertain as ever, and contingent upon what happens in the EU and the world. In the PIGS the economic contraction is finally starting to slow down, but Greece is something of a disaster zone, and Spain is raiding its pension fund to keep afloat. If this becomes unsustainable this year then the EU member states will have to make some fundamental choices: Fiscal union? Or its division into a “Hanseatic” core and Mediterranean periphery? Which of these three things will happen I find impossible to even begin to foretell… As applied to Russia, under the first two scenarios, it will continue plodding along at a stolid but unremarkable pace of 3-4% or so GDP growth; if things come to a head (as they eventually must) and Germany decides to toss the Latins overboard, then the divorce I assume is going to be very, very messy, and we can expect Russia’s economy to fall into recession.

(6) No special insights on foreign policy. Ukraine may join the Customs Union; however, I suspect that’s more likely to happen in 2014 or 2015, as Yanukovych faces re-election and has to make a choice between continued prevarication between it and the EU, and encouraging his Russophone base. The creeping influence of the Eurasian Union will likely keep US-Russian relations cold; whatever the current disagreement that’s talked about (Magnitsky Act; Dima Yakovlev Law; Syria; Libya…) I lean to the “Stratfor”-like position that at heart the US just does not want what it sees as a “re-Sovietization” of the region – which the Eurasian Union is, in geopolitical terms, if under conditions much softer than was previously the case – and will thus be driven, almost by force of instinct, to oppose this trend.

How did I do for 2012?

Here is the link again. In short, this wasn’t the best year for my predictions.

1. “So that’s my prediction for March: Putin wins in the first round with 60%, followed by perennially second-place Zyuganov at 15%-20%, Zhirinovsky with 10%, and Sergey Mironov, Mikhail Prokhorov and Grigory Yavlinsky with a combined 10% or so.I later ended up refining this, and running a contest. My predictions for the five candidates were off by an aggregate error of 14%. The heroic winner was Andras Toth-Czifra (who has yet to get his T-Shirt – my profound apologies dude, it will be done…) Half a point.

2. “I will also go ahead and say that I do not expect the Meetings For Fair Elections to make headway.” Correct, although this was self-evident to anyone not afflicted with Putin Derangement Syndrome (which admittedly doesn’t include 90% of Western Russia journalists). Full point.

3. Here I made general points that I still think fully apply. That said, my own specific prediction turned out to be false. “But specifically for 2012, I expect Greece to drop out of the Eurozone (either voluntarily, or kicked out if it starts printing Euros independently, as the former Soviet republics did with rubles as Moscow’s central control dissipated).” Wrong! I am perhaps foolhardy to do so, but I repeat this prediction for this year. I really don’t know why the Greeks masochistically agree to keep on paying tribute to French and German banks when they know full well they have no hope of ever significantly bringing down their debt-to-GDP ratio without major concessions on the parts of their creditors. Zero points.

4. Last year I made no major predictions about the Russian economy; basically, unexciting but stable if things stay normal – a downswing if the EU goes down, albeit not on as big a scale as in 2008-2009. I was basically correct. One point.

5. “I expect 2012 will be the year in which Ukraine joins the Eurasian common economic space.” Nope. To activate their Russophone base, they decided to go with the language law. Zero points.

6. “Russia’s demography. I expect births to remain steady or fall slightly… Deaths will continue to fall quite rapidly, as excise taxes on vodka – the main contributor to Russia’s high mortality rates – are slated to rise sharply after the Presidential elections.” Too pessimistic on births, albeit understandably so because Russia’s cohort of women in their child-bearing age has now begun to decline rapidly (the echo effect). Although ironically enough however I am one of the most optimistic serious Russia demographers. In reality, as of the first 10 months of 2012, births have soared by a further 6.5% (which translates to a c.8% increase in the TFR, bringing it up from 1.61 in 2011 to about 1.74 this year – that’s about the level of Canada and the Netherlands – while deaths have fallen by 1.5%, implying a rise in life expectancy from 70.3 years in 2011 to about 71 years in 2012 (which is a record). Most remarkably the rate of natural population growth is now basically break-even, with birth rates and death rates both at about 13.3/1000; the so-called “Russian cross” has become a rhombus. Still, considering that my predictions were basically more optimistic than anyone else’s (even Mark Adomanis’), I still feel justified in calling this n my favor. One point.

So, that’s 3.5/6 for the Russia predictions. I will be very brief on the non-Russia related ones, as this is a Russia blog.

7. Wrong, Romney did not win LOL. Although later I did improve greatly, coming 12th out of 66 in a competition to predict the results of the US popular vote. I now owe a few bottles of whiskey to various people.

8. US did not attack Iran, but I gave it a 50% chance anyway. So, half point?

9. “But I will more or less confidently predict that global oil production in 2012 will be a definite decrease on this year.” Too early to tell.

10. “China will not see a hard landing.” Correct.

11. “Record low sea ice extent and volume. And perhaps 100 vessels will sail the Northern Sea Route this year.More like 46 vessels, and completely correct on extreme new sea ice lows.

12. “Tunisia is the only country of the “Arab Spring” that I expect to form a more or less moderate and secular government.” I think that’s basically correct.

13. Protests will not lead to any major changes outside the Arab world – yes.

14. “The world will, of course, end on December 21, 2012.” Correct, we’re now living in a simulation, the real world having ended as I predicted.

(Republished from Da Russophile by permission of author or representative)
 
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So yesterday morning I was sitting at the bar with my homies, in a Russian sailor vest and with a big Russian flag draped round our table. It was 0-0. Whatever. Russia had mounted several good attacks, and was bound to score eventually, and even if it didn’t, as long as the Poland – Czech game remained drawn there was nothing to worry about. Russia would remain first in its group and wouldn’t even have to face off against the Teutons in the quarter finals. As the 2 minutes added time ticked down, I took my eyes off the screen, readying to order my second Shocktop (good thing about the Euro? One can legitimately start drinking from the morning). Then a blunder from Ignashevich sent the ball straight into the path of the Greek captain Karagounis, who got a clear shot straight into the Russian goal.

Now that I’ve calmed down a bit from the disappointment, and looking at things objectively, I do not think the Russian team played particularly badly – as was commonly argued by enraged Russian fans calling for Fursenko’s head. They made several strong attacks in the second half, hitting the bars twice, and a header from Dzagoev came close too. They had 70% possession, more attacks, and were tactically superior. The most impressive Greek effort came from Karagounis, who dived in the penalty box and got a yellow card for his trouble. While several commentators argued the Greeks should have gotten a penalty, on closer inspection of the video its clear to me that the Swedish ref made the right call.

Then the Czechs scored. This was fast becoming a catastrophe. At first, I wasn’t overly concerned because I was under the impression that goal difference took preeminence over face to face results. Only by the 75th minute did I discover my mistake; UEFA apparently no longer operated by FIFA rules in this regard. If Russia lost to Greece, it was out. And then, it was out for real, as a last ditch Russian kick went wildly overhead.

It’s a pity, and I don’t only say this because I was rooting for Russia. I agree with Owen Polley that Russia had the most entertaining play after Spain, and that the Greek side was “dreary and negative” (the Spaniards who knocked out Russia in 2008 were at least fun and elegant). And this disappointed a lot of people besides myself; Russia seems to have been everyone’s “dark horse” candidate (i.e., not Spain or Germany) to win the tournament. The only consolation I suppose is that the Poles didn’t go through, what with their hooligan attacks on Russian fans. I will now switch my support to Ukraine – though chances are, I’m sorry to say, it will be knocked out by a mediocre but nonetheless superior English team the day after tomorrow – and to Greece, for the elementary reason that if it manages to eke out further wins then Russia’s loss won’t look quite as dreadful in comparison.

(Republished from Da Russophile by permission of author or representative)
 
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Just in case you thought the correlation between human capital and economic development was an artifice of the post-socialist world, here is a similar graph (R2=0.4273) for all the world’s countries that have participated in the Math and Science portions of the PISA or TIMMS (8th grade) international standardized student assessments.

education-economy-global-1

The methodology is the same as described in the previous post. As you can see, the relation is every bit as strong at the global level. However, you may point to a few outliers. How to explain them?

Corruption, institutions and “governance”, “ease of business” indicators, etc. are all next to useless; in fact, it has even been found that some corruption is better for growth than no corrupt at all (though there is a critical point of extreme corruption at which it becomes deeply harmful).

But these are minor technical discussions. As far as I can see, there are only three major factors that explain why some countries diverge from the close correlation (R2=0.8393) between human capital and economic development observed in normal countries with a long history of capitalist development: (1) Major exporters and mineral exporters, relative to their total GDP; (2) Countries with a legacy of socialism and central planning; and (3) Countries with small populations that are also major financial, tax haven, or tourism centers.

education-economy-global-3

As you can see from the graph below, the conventional countries would form a nice best fit exponential curve (R2=0.8393). So would the countries with socialist legacies (R2=0.4908), albeit with greater dispersion and at a systemically lower level than the normal capitalist ones – especially once you remove those among them with substantial resource endowments. The same in reverse applies considering those countries that have managed to occupy niches in tourism, providing tax havens, and above all in financial services (R2=0.6014) – they do systemically better than the normal capitalist countries. The only countries to defy this iron correlation between are those whose oil production enables their populations to live off the rents from it (R2=0.0002); but these Rich Oilmen countries are very few in number, and concentrated in the Gulf.

The Capitalist Normals

The Capitalist Normals (blue) have long histories of capitalist development, and while some – like Australia or Argentina – may have large primary resource endowments, they cannot be said to dominate the economy. They have a very close correlation (at least by social science standards) between levels of human capital and economic development. The developed countries in this band occupy the global technological frontier. As usual, the outliers tend to be exceptions that prove the rule, so I’ll focus on them.

Argentina does slightly better than its PISA scores might otherwise indicate, but here there may be a few explanations: (1) Older Argentinians are far better educated than their counterparts in most of the rest of Latin America; (2) Low school-leaver human capital may be in part compensated by having the continent’s highest tertiary enrollment ratio.

UPDATE: The Argentina outlier is solved. According to Steve Sailer, Argentina’s low score is thanks to the scrupulousness of its school administrators, who – unlike most other countries – took the effort to track down the truants and drop-outs, who constituted 39% of its school-age population. Without this effect, Argentina’s score would have been about 40 points higher, i.e. above Mexico, and similar to Chile and Bulgaria, that is to say right where it should be. Sailer also makes the observation that since truancy tends to be more prevalent in poorer countries – a factor that is only rare adjusted for in the PISA tests – the gap in the human capital of older schoolchildren between the high-scoring developed world and the low-scoring developing world are, if anything, even higher than recorded in these tests.

Syria and Jordan both do a bit worse than their potential. Perhaps the influx of poor Palestinian refugees depresses Jordanian per capita wealth, while Syria is hampered by an extremely statist economy.

Israel is a major positive outlier. One explanation is that there is a lot of math and scientific aptitude diversity within Israel, with Arabs and Sephardi Jews performing badly and Ashkenazi Jews doing much better and perhaps a great deal of variation within the higher-IQ Ashkenazi group in particular; however, this is not borne out in the statistics, with the standard deviation for Israeli scores no higher than in many other countries. So why is it richer than, say, Turkey? No idea. Maybe because of US financial help, which is not inconsiderable. Maybe because the entrepreneurial Jew stereotype is correct even if the clever Jew stereotype isn’t.

Greece is a minor positive outlier, but their debt crisis is cutting it down to where it should be; as with Ireland a few years ago (it used to be an outlier in 2007 but is no longer). I guess the invisible hand has a sense of justice.

The United States is the most significant positive outlier, getting almost $10,000 more GDP than would be warranted by its human capital levels, which are comparable to Sweden or Australia. One major factor is surely that Americans simply work much longer than Europeans; their productivity levels, output per hour worked is, in fact, virtually equal to that of Germans or Swedes. It also helps that it has plentiful land per capita with the world’s best natural riverine transport system – and useful land, not permafrost like in much of Russia or Canada – and controls the world’s reserve currency.

Korea is a major negative outlier, one of the world’s cleverest countries but one that hasn’t yet even fully caught up with Italy. However its case – as is, to a lesser extent, that of Finland and Taiwan – is explainable by the simple fact that for them, “convergence” isn’t a finished process; they continue to grow relatively rapidly by already-developed country standards, they do not have any debt or fiscal crises, and they can expect to continue moving in the direction of ultra-rich countries like Switzerland and Singapore in the next decades. That said, Japan – also a minor negative outlier – indicates there may be diminishing returns to ever more impressively educated populaces.

It is important to emphasize, also, which countries in this category are NOT outliers: Brazil, Mexico (despite a substantial oil endowment), Indonesia, India, and Turkey. Also South Africa, which is not in this database, but can be inferred to have very low human capital based on its still prevalent illiteracy and very low TIMMS (4th grade) results. Now Brazil and India are regarded in the Davos press as superior to Russia, and in the long-term superior to China also (by virtue, so their argue, of their democracy and “demographic dividends”); the other nations cited here have all at one time or another been suggested as replacements for Russia in the BRIC’s.

If we are however to regard human capital as the main determinant of the natural level of economic development, and the “potential gap” between the two to be the most reliable determinant of future growth prospects, then the best BRIC by far is China, followed by Russia; to the contrary, India and Brazil (and any prospective BRIC’s members) are unremarkable.

The Red Tigers

The Red Tigers (green) are countries with major legacies of socialism and often central planning. It is interesting to observe that countries where reforms started earlier (e.g. ex-Yugoslavia, East Central Europe) and where markets played a greater role under socialism are much closer to the “equilibrium level” indicated by their levels of human capital. That said, despite their relative affluence, their “potential gaps” are still substantial; for instance, the Czech Republic and Poland have human capital basically equivalent to that of Germany or the US, but are still up to twice as poor in terms of GDP (PPP) per capita. This implies that this group will continue converging to advanced developed countries in the years ahead.

Practically all outliers in this group are negative, and were already covered in the previous post. But to recap:

China is the mother of all outliers, and no doubt a very significant one – it has 1.3 billion people living at lower middle income levels (although a few provinces remain distinctly Third World) but their high-school students now outperform the US and most of the EU. In my opinion this is the result of a very special situation.

The Maoist state suppressed economic growth to a degree unprecedented in virtually any other state in the socialist camp; it also started from a very, very low base. But despite its ruinous economic views, its social policies – including basic education – were implemented far better than in almost any other low income country, and that on top of (a) their reverence for scholarship that only had its equivalent in the Protestant emphasis on literacy and (b) the observed high IQ of Chinese overseas communities which may have a genetic component. This means that when China introduced market reforms, the “potential gap” between its human capital and existing level of economic development was vast to a degree probably unprecedented anywhere else in the world and in all history. Hence thirty years’ worth of 10% GDP growth that shows no sign of stopping (in fact, China’s relative performance exceeds that of any other Asian tiger in their stage of rapid development). And barring a major and unexpected discontinuity is should NOT stop until China reaches the level of per capita wealth Korea, Taiwan, or even Switzerland.

One minor caveat is that rapid development means that this “potential gap”, while vast, may no longer be quite as vast as indicated by the graph. Note that according to some estimates, China’s PPP GDP is now larger than America’s, which would give a GDP (PPP) per capita of $10,000-$12,000 or so.

Armenia, and to a lesser extent Serbia and Bosnia-Herzegovina, are negative outliers. Their cases are clear; they suffered from destructive wars in the 1990′s, and in Armenia’s case it remains surrounded by neighbors from hell.

The ex-Soviet countries without oil, such as Ukraine and Moldova, tend to be deeply negative outliers. One reason is that they reformed slowly (while the Soviet-era system crumbled about them), and late; and have suffered from particularly incompetent and avaricious governance; as I argued in a prior post, Ukraine never left the period of “anarchic stasis” that characterized Russia in the 1990′s. However, Ukraine’s perspectives aren’t looking good, at least in the short-term. Perhaps it’s because corruption, etc. are still so high that – while they normally don’t have much of an effect – reach such critical levels that they significantly stymie growth; an alternate, and more benign, explanation is that Ukraine’s GDP (PPP) is underestimated – it was not adjusted upwards like Russia’s in the recent OECD and World Bank recalculation of relative prices – meaning that Ukrainians already live better than the statistics indicate, their “potential gap” is smaller, and thus understandably there is less room for fast GDP growth.

Azerbaijan, Kazakhstan, and Russia are curious creatures in that in their case, the resource windfall boon works against the socialist legacy curse. This means that, despite that they are ex-Soviet – i.e., the economy was more deeply distorted and reforms started later than in much of the rest of the socialist camp – they are nonetheless on the upper part of the human capital and economic development curve, along with countries like the Czech Republic or Romania, and are not outliers like Ukraine or even Latvia.

At this point I would also like to demolish the myth of Georgia as a shining beacon of unimpeded economic progress in the Caucasus. It will not transform into Switzerland or Singapore, or even Estonia, any time soon, i.e. the next few decades. Its human capital is very low and it is already fairly close to the maximum economic potential enabled by it; this may be an achievement on Saakashvili’s part, who massively – one might say recklessly – liberalized the Georgian economy, which caused (or accompanied) a big growth spurt in the mid to late 2000′s. But it is unsustainable, first because Georgia is now far nearer the limits imposed by its low level of human capital; second, because if anything human capital has declined under Saakashvili (e.g. tertiary enrollment has nearly halved as university fees exploded, making post-school study much less affordable for ordinary Georgians).

The Oilmen

The Oilmen (red) are those very lucky countries with lots of oil and small populations. It is almost always oil; the sole exception in my sample is Botswana (diamonds and minerals).

Unlike either the Capitalist Normals or the Red Tigers, there is no correlation between levels of human capital and economic development among the Oil Guzzlers. That is because the oil production per capita effect, which relies on geological luck of the draw, overpowers all others. That said, they could be divided into a few distinct groupings.

(1) The Rich Oilmen. Qatar, Kuwait, and the UAE, and to a lesser extent Saudi Arabia, Bahrain, and Oman, are all fabulously rich thanks almost exclusively to their resource endowments. Their human capital is unimpressive and would not otherwise come anywhere near supporting their oil-enabled luxurious lifestyles. Their attempts at diversification are to be lauded, e.g. finance and tourism in Dubai, or journalism in Qatar, but these efforts are critically reliant on attracting foreign specialists with (oil) money so they are not sustainable.

(2) The Casual Oilmen. Norway and Russia benefit greatly from their oil windfalls; for a start, they largely rule out fiscal worries. Benefiting from uninterrupted capitalist development, Norway has transformed itself into one of the world’s wealthiest nations; even if it didn’t have oil, it would still be as rich as Sweden. Russia will probably never reach Norway’s level because the latter has far more oil per capita; nonetheless, it has a decent manufacturing base (e.g. capable of making stuff like GLONASS and advanced fighters) and a moderately growing economy that has no reason not to converge to Italy by 2020 and perhaps Sweden by 2025 or 2030. Tight supply and growing demand means that it is very unlikely that oil prices will fall and remain low in the foreseeable future, but even on the off chance that they do, Sergey Zhuravlev has calculated that the effects on Russia’s economy are going to be modest in the medium-term and negligible in the long-term.

(3) The Poor Oilmen. Oil is likewise of help for plugging budget holes to Algeria, Kazakhstan, Iran, Venezuela, Mexico, and Azerbaijan. However, unlike the case for the Rich Oilmen, their populations are too numerous to live off in sumptuous comfort off the rents; oil production per capita is too low. This means they can’t fly off into the stratosphere like the Rich Oilmen. They need non-oil based growth to become rich. But unlike the Casual Oilmen they are unlikely to achieve much of that because their human capital levels are very modest. If there is an oil crash, past experience – e.g., Venezuela in the 1980′s and 1990′s – suggests that they will be in for many years of stagnation and fiscal crises.

The Bankster Nations

The Bankster Nations (crosses) tend to be small countries which have managed to become major financial, tax haven, or tourism centers. Their GDP (PPP) per capita tends to be higher than the level suggested by their human capital, but not to anywhere near the same extent as the Rich Oilmen.

Liechtenstein is the biggest outlier in my database; its human capital is respectable, but its GDP (PPP) per capita at $141,000 is literally off the chart. No wonder when their population is a mere 30,000 souls. Luxembourg, Singapore, and Hong Kong have all carved themselves out very profitable niches as financial centers serving neighboring economies that are much bigger but also more regulated. Macao is Asia’s gambling center (and unofficial a conduit for Chinese money laundering). Cyprus serves a similar money laundering and reinvestment function for Russian nouveux riches, to the extent that the Russian government recently bailed out the island. Mauritius is a tax haven, and is also – along with Malta and Trinidad & Tobago – a popular vacation spot.

Switzerland is an entire nation that has devoted itself to financial services (including the more shady, secretive ones) as well as other very high added-value stuff like precision engineering and pharmaceuticals. And it has become extremely rich.

Without exception all these places are doing better or far better than the average Capitalist Normal country. That said, even here there is a definite correlation between human capital and GDP (PPP) per capita. These activities may require less hard work and scruples than is typical for other industries but they still require brains – especially for the high-end finance stuff. Not so surprising then that it is the highest human capital countries like Singapore, Hong Kong, and Switzerland that have become so prominent in it.

(Republished from Sublime Oblivion by permission of author or representative)
 
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In terms of new cars, they now are. According to 2011 statistics, Russians bought 17.6 new automobiles per 1000 people. This indicator is still quite a bit below most of Western Europe, such as Germany’s 38.5, France’s 33.4, Britain’s 31.9, Italy’s 30.1, and Spain’s 20.0. However, it has already overtaken most of East-Central Europe, whose figures are: Czech Republic 17.0, Slovakia 12.5, Estonia 11.7, Poland 7.2, Hungary and Ukraine both 4.5, Romania 3.7. Likewise, some countries that by the 1990′s came to be regarded as natural parts of affluent Europe are now behind Russia on this measure: Portugal 14.4, Greece 9.0.

Now this is just one example, and the market for one consumer durable good isn’t going to be perfectly reflective of the overall situation. The crises in the PIGS may be temporarily dissuading nervous consumers from making large purchases; another factor to consider is that their overall car fleets are bigger and newer than Russia’s, so there is not as much of an incentive to get new cars. And taking into account a much larger basket of goods, the World Bank estimates Russia’s GDP per capita (at PPP) to be $20,000, which is still considerably behind $25,000 in Portugal and the Czech Republic, and $32,000 in Spain.

What’s all the better is that the current improvements in Russia’s relative position are happening against the background of extremely benign debt dynamics; aggregate debt is only 74% of Russian GDP, compared to 184% in China, 280% in the US, and more than 300% in most of Europe. This leaves it with a great deal of fiscal and monetary wiggle room in the event of a renewed global crisis that is no longer available to the developed world or lauded emerging markets such as Brazil, India, Poland, Turkey, and Poland. While the affluence gap between Russia and the most developed nations remains large it is nonetheless being steadily and sustainably closed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Source: The Oil Drum].

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

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

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

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

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

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

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

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

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

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

What about the 2011 Predictions?

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

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

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

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

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

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

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

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

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

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

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

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

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

(Republished from Sublime Oblivion by permission of author or representative)
 
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As readers of this blog know, I have long regarded the return of economic crisis as an inevitability (because the core energy and no-growth predicament facing the Western world wasn’t solved in 2008-9 but merely kicked further down the road by increasing debt and printing money). It looks like 2012 will be the crunch year, as a series of inter-related crises are rapidly converging: (1) The European sovereign debt crisis; (2) The continuation of the chronic US inability to balance its books, and of instability in the Middle East; (3) The probable onset of serious declines in global oil production, as new oil megaprojects are no longer able to compensate for accelerating decline from existing fields; (4) heightened risks of a war with Iran, as the narrow window opens between the start of US delivery of the next-generation bunker buster MOP (from November 2011) and the culmination of the Iranian nuclear weapons program and its hardening against air strikes (next year or two).

The European debt crisis dominates headlines, with the Anglo-Saxon media crowing about the lazy, shiftless Meds (as opposed to the diligent and careful Germans) and blaming socialism for their problems. This of course has a number of flaws within it. Greeks work the most hours in the EU – 2000 per year, relative to 1300 in Germany. And the only major EU nations without huge debt and fiscal problems are the Scandinavians, who are about as “socialist” as one gets nowadays.

But this is all sidestepping the fact that debt and fiscal crisis afflict the entire Western world, and it is just that – due to the special political weaknesses of the Eurozone – have manifested first and foremost in Greece, Italy, and Spain. However, a look at the actual statistics reveals that even the “serious” countries are in a great deal of trouble. For instance, in 2010 both the US and Britain had bigger primary deficits (cyclically adjusted) than “basketcase” Greece, whereas Italy’s was actually positive! The Meds’ total net government debt is larger, but on the other hand, if even France is beginning to experience perturbations – a country whose fiscal balances are better in every way than Britain’s or America’s – then it surely cannot be long before the crows come home to roost in the Anglo-Saxon world.

The fiscal crisis

Below are two tables that would be very informative for discussions about the crisis, as they overturn many of the lazy myths and tropes populating the discourse.

debt-sustainability

Though the US position looks salvageable because of the positive GDP growth less cost of finance indicator (suggesting that its ability to pay back its debts are growing faster than the debts themselves), I am not convinced of the reliability of that indicator. First, it assumes fast growth – growth that has yet to materialize despite massive fiscal and monetary stimulus since 2008. Second, it assumes that interest rates on Treasuries will remain low – but that assumes a US that is becoming rapidly indebted and making signals it is going to inflate it away remains an investor safe heaven. It shows zero ability to make a credible commitment to eliminating the budget deficit, which is only going to be compounded as the baby boomers start retiring.

pollaro-budgets-debt

This chart from Michael Pollaro shows that in some respects the US position is actually worse than those of the PIGS in aggregate. For every $60 it received in revenue, it spends $100, and it would take almost 6 years for the US to repay its debt if the entire budget was devoted to it. In contrast, the average PIGS figure is $78 in revenue for every $100 in spending, and it would take them only 2 years of their combined budgets to repay their debts.

The position of Britain is very weak. It’s economy, and especially its budget, is highly reliant on the City of London. The tanking of the financial system has resulted in zero growth (GDP is still about 5% below peak 2007 levels) and chronically high budget deficits at around 10% of GDP, and the prospect of a second recession with pull the figures even further into the red. Nor has a weaker pound stimulated an export based recovery. Britain’s big trump card is that its bonds have very high average numbers of years to maturity, so refinancing will be easier even if its rates were to suddenly lurch upwards. Now its still over-extended and will probably go bankrupt within this decade, but probably later than the Meds or even the US.

Germany has a strong position, with only a modest budget deficit and reasonable levels of debt. Overall, it is net global creditor, with a net international investment position of 37% of GDP. But this presents another problem. Quite a lot of that is in the forms of loans to and assets held by its banks in the stricken Med region. A meltdown there would send the value of these assets plummeting, necessitating massive bailouts that could in turn threaten even Germany’s solvency. Hence, a possible reason for the recent poor sales of German government bonds.

Despite chronic budget deficits and an astronomic public debt of 220% of GDP, I actually think that Japan may be the country in the least danger in the medium-term future. 95% of its government debt is domestic, largely to Japanese corporations, which lend to the government for social spending in exchange for the understanding that tax rates will be held low. But those same banks and corporations are flush with cash: Japan’s net international investment position is an impressive 56% of GDP. In a way, it’s just a different method of financing a welfare state. It’s still probably unsustainable – domestic investors too may dry up, especially as the Japanese population continues to age and begins to spend rather than save – but I’d wager less so than the US or most of Europe.

Fiscally secure nations include China, Latin America, Scandinavia, and Russia. China has problems with various non-performing loans and municipal over-indebtedness, granted, but these weaknesses are largely mitigated by its phenomenal growth rate and a net international investment position of 36% of GDP. Latin America and Scandinavia tend to have responsible fiscal management and adequate growth rates.

Russia has globally low levels of government debt, its citizens likewise have low debt levels (a feature more of its underdeveloped credit system, granted), and an international net investment position of 17% of GDP. Though the budget deficit is currently balanced thanks to high oil prices, a significant drop can take them into the red very quickly and deeply; however, this is NOT a problem because it is a near certainty that on average oil prices in the next decade will remain high and rise further. What IS a problem is that Russia is a “high-beta” economy, highly affected by developments elsewhere – in 2008, its recession was deeper than in any major Western economy (though compared to them it also had the strongest recovery). The primary reason was the sharp cut-off in Western credit to Russian banks and corporations, resulting in multiple refinancing crises. Today, this problem is less acute, with the Russian banks and corporations having learnt that such dependence may be a problem – nonetheless, a huge sovereign debt crisis in the West can still give Russia a very sharp knock in the short-term.

The exergy crisis

This brings us to another side of the issue: peak oil. Oil reserves are depleting, and global production – after being on a plateau from 2005 to today – will probably begin to consistently fall from 2012 as oil megaprojects sharply fall off. Furthermore, a war with Iran, and its possible capability to blockade the Strait of Hormuz for some time, may cause an extremely disruptive spike in world oil prices, as 25% of world oil supplies transit through the Persian Gulf. On the other hand, China is right now entering the mass automobile age, with the numbers of cars sold per year overtaking the US in 2010. So we will see a rise in demand from China and other emerging markets.

But this is not all. As discussed on other posts in the blog, e.g. here, here, economic growth in general is crucially dependent on net energy availability and the efficiency with which it is converted into useful work. Both indicators have slowed to a crawl, and quite soon the former may well go into reverse. Furthermore, the reality of open global markets with limited global energy supplies means that countries will be more and more competitively bidding for the high-EROEI energy sources that remain (primarily, oil). The US in particular is highly dependent on oil to power its service-based economy, but it simply cannot afford oil to the same degree as can China (see this excellent Oil Drum post A Brief Economic Explanation of Peak Oil for an explanation). This means that the economic pie is now limited, and growth in one place (above all, China) is now to the detriment of growth in other already high-income places (the US, and the less efficient parts of Europe). For a limited time, this issue can be bypassed by the accumulation of debt in the high-income countries – much of which, it should be noted, is loaned out from China and the oil exporters. But poor countries lending to maintain rich country living standards is bizarre at face value, and it is unsustainable in the long-run.

How to survive the coming storm?

From the investment perspective: Keep assets in US dollars, but only those that can be sold off at relatively short notice.

Though dangerous in the short-term, China, Russia, and some countries in Eastern Europe are very good long-term plays. In particular, buying in at the depths of crisis can pay huge dividends in the future. A good bet right now: property in Bulgaria and Minsk.

Natural resources are another excellent long-term play (including gold – a good bet in a time of instability). However, it is probably not a good time to buy in right now, as there is the risk of a sharp (but short) fall once the economic deterioration gathers critical pace.

If you have the means to be an independent financial speculator, try out US CDS. The US will probably never formally default – controlling its own currency, at the most, it will do so via inflation – however, the perceived risk of default WILL be reflected in those instruments. Don’t bet the farm on it, as they’re high risk, but do consider setting aside 10% of your investment poll into this or similar instruments, as the returns have the potential to be mindbogglingly high.

The other two BRIC’s, India and Brazil, I am not so certain of because their low human capital precludes very fast growth.

In terms of specific sectors in the long-term, probably the best bets are IT and medicine because the entire world is aging, and when people are unemployed, they will spend their time on Facebook and playing video games.

Perhaps I’ll have another post on the other aspects of how to keep afloat in the coming era of turbulence. Keep an eye out for it.

Reread S/O posts about the return of geopolitics to Europe and my decade forecast and piece on future superpowers, and continue reading this blog as it is ahead of so many issues well before they started becoming conventional wisdom.

(Republished from Sublime Oblivion by permission of author or representative)
 
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The response to the last global crisis only consisted of kicking the can further down the road, and the chickens are showing signs of coming home to roost. Of particular note: (1) the recent upwards spike on bond yields for Italy and Spain*; (2) The political paralysis in the US that may (conceivably, if unlikely) shut down government on August 2nd and send it into default; (3) oil prices are again inching up to the levels that coincided – and some argue significantly contributed to – the last recession; due to the realities of peak oil and rising Chinese demand, there is little to be done about this.

Question for consideration: How will Russia be affected by a possible Greece-style scenario unfolding in Italy, Spain, or even the US? (More generally, how do you think the next global financial and economic crisis is going to play out? What effects will it have on the Eurozone, US dollar’s status as reserve currency, etc?).

I don’t know the answers to any of these questions (if I did I’d be out there getting rich not writing this post). However, I can offer a provisional framework that may help you think about this issue.

Russia Positives

  • Very low sovereign debt; fiscal books are more or less balanced.
  • High oil prices… for now.
  • A moderately paced recovery has almost returned output levels to peak-2008.
  • Households far less reliant on borrowing to finance consumption than in typical developed nations.

Russia Negatives

  • Dependence of the budget on oil prices.
  • In 2008, one of the main causes of the sudden collapse in industrial output was the draining of liquidity. Russian industrial groups had relied on Western financial inter-mediation for accessing capital. From August, this suddenly dried up as the crisis exploded and global investors scurried to the “safe haven” of US Treasury bonds. So several related questions for today:
  1. To what extent has the Russian private and quasi-state sector reduced this dependence on foreign credit since 2008? (My impression: by a bit, but not fundamentally so).
  2. In the case of a global credit crunch, will Russia be spared? On the one hand, its macroeconomic fundamentals are very good (RELATIVELY speaking); on the other hand, this was the same case in 2008 and widespread sentiments that Russia was a “haven of stability” patently didn’t work out.
  3. To what extent will the fact that the next crisis will likely be one of sovereign collapses benefit Russia relative to other countries? After all in 2008 investors parked their savings in the bonds of countries perceived to be stable; above all, US bonds. This was because this was a primarily financial / banking crisis and sovereigns remained solvent. This calculus may be fundamentally different in the next crisis. Where can the safe haven investor invest? Euro bonds are out of the question. No bond vigilantes have yet appeared for US Treasuries, but surely with the chronic inability to cut the deficit this will eventually change? The yuan isn’t convertible… for now.
  4. So only commodities are left as a major investment vehicle (which benefits Russia), HOWEVER… big sovereign defaults will force the world economy back into recession, lower oil demand, and relieve pressure on commodities leading to a collapse of their prices – which is bad for Russia. Alternatively, prices may remain high if investors remain big on commodities and Asian demand quickly makes up for any shortfall in developed country demand for commodities – which is good for Russia. Which of these two forces will win out?
  • Dependence on credit for consumption. Credit based purchases were beginning to play a huge role in Russian consumption in 2007-2008; this was cut off and constitutes another main cause of the depth of its 2009 recession. This dependence on credit for consumption is already creeping back in 2011, though it has yet to reach the levels of early 2008.
  • Stampede effect. Despite aforementioned good fundamentals, many institutional investors have rules to abandon EM’s if a global financial crisis strikes (regardless of the specifics of the country in question). To avoid losses, other investors are forced to flee too.

Go, discuss.

* At the beginning of this year I speculated which of the “dominoes” among the PIGS, the US, and Japan would fall first when the global economic crisis resumed. Perhaps the PIGS will prove to be the weakest link after all.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Republished from Sublime Oblivion by permission of author or representative)
 
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After a year long hiatus from interviewing Russia watchers, I decided it was time to get back in the game. As it happens, my attention first fell on a Europe blogger – and not just any incisive, counter-intuitive scribbler whose intellect and analytical acumen is matched only by the number of themes he is prepared to expound upon, but also someone who has experience in politics (work in both the US Congress and the European Parliament), journalism (with the EU policy news site EurActiv), ideological adventurer (started off very neocon, but Iraq War and education fixed that), and a fellow rootless cosmopolitan (having been raised in France and briefly in the US, and studied at the London School of Economics). I am talking of none other than Craig Willy, who writes the irreverent (and informed) Letters from Europe.

Craig Willy: In His Own Words…

What first sparked your interest in blogging and Europe, and how did the twain meet?

I’ve been in love with history, politics, thought and argument since I was maybe 14. I remember very clearly telling a friend at the time that I wanted to “be paid to say my opinion”… Perhaps not the easiest career path and not one I persistently pursued!

Blogs don’t provide money, usually, but they are an absolute liberation for the aspiring writer: costs are zero, middlemen are eliminated, and you can reach every person on the planet who has Internet. How could I not blog? I started my first blog in 2004 and I don’t think I’ve changed the mix of more analytical pieces with humor, including on Euro-nonsense.

I have always been interested in Europe as I was born and raised here (specifically in France and the UK). I have been interested in the EU insofar as it seemed to represent Europeans reclaiming their power in the world and historical agency. It usually fails in this respect and hence I used to find the United States of America – its historical role, politics and foreign policy organizations – much more interesting. I now think all areas of the world are worthy of study. The US is probably over-written about and, being based in Brussels and involved in EU journalism, I can genuinely add value writing about European affairs. If I wrote about the US I would be just another opinion. I also think Europe needs more pan-European writers: it is a very real entity but it has no public space.

Do you see yourself, first and foremost, as a blogger, journalist, or pundit? What are your best and worst experiences in these roles?

I do not see these as mutually exclusive. They all feed into each other as I often draw on my journalistic work for my blog and the people I meet through blogging often end up being professionally useful. I am not a pundit because I don’t have the fame.

My best experience, and it is ongoing, was beginning formal journalistic work in Brussels a mere three months ago. It’s the first job I really enjoy and find stimulation in, and one that doesn’t feel “false”. It’s also one in which I’ve learned a really incredible amount about how media really work, the complicity between politicians and journalists, the endless plethora of lobbies, pols, NGOs, etc trying to influence the news with their inane press releases, as well as the intricacies of various EU policy areas in practice.

The worst I don’t know. Well, as every blogger knows, blogging can be a lonely, unglamorous and perfectly un-remunerated activity. And still we do it. I don’t think we can do otherwise!

In the long run, I hope to become a completely independent blogger-journalist. In truth, objective text does not exist and to the extent that blogs recognize their subjectivity they are more honest than “normal journalism”. The main difference is in tone, a different idea of balance, and adapting to the publication’s style. In being part of a large organization – which has its culture, clients and priorities – you are obviously also far less free.

I am very attached to my freedom.

Who are the best Europe commentators? Who are the worst?

You know my Google Reader is chock full of European blogs and RSS feeds, and I have some difficulty answering that question…

Actually, the worst is undoubtedly one of the neo-Maurrassian race-baiting French pundits. I will pick Éric Zemmour as he is by far the most famous and influential of them and because as a Jew himself he should really know better than to constantly (and smugly!) demonize black and/or Muslim Frenchmen.

As to the best it is very difficult to say… J. Clive-Matthews, aka NoseMonkey, might have been the best EU blogger but he no longer writes much. Fistful of Euros was easily the best pan-European blog, but it was collaborative and the project has declined in output and coherence. There are lots of very good bloggers whom I usually disagree with but who both have large audiences and are worth reading whether Euroskeptic Tory MEP Daniel Hannan, Libération journalist Jean Quatremer or the Leninist Richard “Didn’t Get the Memo” Seymour. I wouldn’t settle on one person however and there is no really good pan-European blogger. It’s a hole I kind of aspire to fill…

You lived for substantial periods of time in France, the UK, and the US. What are their respective charms and blemishes? If you had to choose, where would you prefer to reside permanently?

The UK tends to be more down-to-earth and unpretentious than the other two. Americans, particularly those of the Midwest and my Dad in particular, have a wonderful “can-do” spirit and optimism. The French, if you can get a secure job, I think have succeeded most in reconciling the constraints of modern civilization with living a “good, flourishing life.”

Oh dear… I often go on rants about the absurdities and prejudices of this or that country. I don’t spare anyone and I could go on forever if I start… So I won’t!

If you could recommend three books about European politics and/or history, what would they be?

First, I urge everyone to read In Defense of Decadent Europe [AK: Click to buy] by the great French intellectual Raymond Aron, ideally in the original French though an abridged English version is available. Written in 1977, there is no better analysis of the strengths and weaknesses of “Western Europe” and the European Economic Community (precursor to the EU), its democracies and economies, their superiority to the Communist bloc, the unremarkable nature of the Communist countries, the course the Soviet Empire’s collapse would take, the mirage of Socialism (it appeared the Communists might win elections in Italy and a Socialist-Communist coalition nearly did in France)… The book is so lucid and right – it has nothing to do with Neoconservative simplifications and idiocies – that it convinced me a contemporary observer really can understand the world he inhabits. You don’t need to wait for time to give you “perspective” or the opening of the government archives. It is a better analysis of Europe in the Cold War than probably the majority of books that have appeared on the subject since.

Some of this might seem dated – environmentalism, neoliberalism and the War on Terror had yet to appear – but it is quite amazing how many subjects he touches upon that are still perfectly relevant, such as dysfunctional oil-rich countries and the glut of unemployed and overqualified graduates (already!). Incidentally, people should read everything by Aron. Most of it is available in English (The Opium of the Intellectuals [AK: Click to buy], Progress and Disillusion, War and Peace between Nations, Clausewitz…) but it is worth learning the French language just to be able to know his thoughts in the original.

Second, read everything by the great Marxist historian Eric Hobsbawm, and in particular Age of Extremes [AK: Click to buy], his history of the “Short Twentieth Century”. It is world history but Europe dominates it. He is a very lucid, very balanced and incredibly erudite historian and you can only come out of his books feeling more knowledgeable and intelligent.

Third, I have some trouble. I have yet to read a really good book on the EU actually. Tony Judt’s Postwar is more of a continental encyclopedia and doesn’t really deal with the EU. All the books that explain the EU tend to be textbook-style and very boring. I’ve heard Alan S. Milward’s The European Rescue of the Nation-State and Edgar Morin’s Penser l’Europe are very good, the latter is resting on my bookshelf, but I’ve yet to read them. Jeremy Rifkin’s The European Dream [AK: Click to buy] and John McCormick’s The European Superpower are worth reading but are pop works rather than “great”.

I suppose I will settle on Perry Anderson’s The New Old World [AK: Click to buy]. It is a very good introduction to Europe today from a Marxist perspective. As such it is mostly critical but like Hobsbawm very informed and provides a very good overview of various national politics, enlargement, the EU itself and EU integration theory (if you’re into that sort of thing…).

The US vs. EU quality of life debate may be cliché and overdone, but I can’t help asking a Europe buff this question: which would you say offers the preferable socio-economic model? (OK, it’s obvious from your posts that EU > USA. Please expound.)

The first point I want to make is that anyone who claims lack of “government” systematically leads to more economic efficiency and better outcomes is simply misinformed, wrong and perhaps arguing in very bad faith. You have the whole history of industrial civilization contradicting them. Look at 19th century America, Bismarckian Germany, Meiji Japan, Stalin’s Soviet Union, postwar Europe and Japan, the “Asian Tigers” or China today: each of these countries achieved stunning economic and industrial growth with some combination of tariffs (all of them, basically), industrial policy (publicly-funded railroads), mercantilism (support for export-oriented “national champions”, the undervalued Yuan) or even outright State control of the economy.

So I get pretty frustrated with the whole Republican spiel about laissez-faire dynamism and sclerotic Europe. You have to be incredibly ignorant of economic history – and I would say they very probably are – to believe what they do and the slurs they sling at Europe to justify the economic and social mess they’re making of their own country.

The second point is that though I am not an economist or an expert on economic or industrial policy, I can read statistics and they tend to indicate that modern civilization leads us to produce and consume more without this necessarily adding to either national well-being or personal happiness. It is true that the US’s GDP per capita is significantly higher than Europe’s. Why is this? It is due to a proportionally larger and younger active population, to longer working hours, and – it is true – to very high productivity (slightly higher than in most European countries).

But what have they done with this wealth? The numbers are eloquent. Americans eat so poorly and are so inactive that generals warn youth obesity is a threat to recruitment and national security. Energy efficiency and transport are catastrophic: the US emits almost 40% more CO2 than Europe (including Turkey and the Balkans) despite having a smaller economy and over 300 million less people. And it isn’t like the transport system is any good! Incidentally, this inefficiency, beyond environmental concerns, is a completely needless attack on America’s energy independence and national security.

The healthcare system is an economic and social disaster, costing almost twice as much per capita as that of France (one of the more expensive European healthcare systems), for not noticeably better and much more unequal outcomes. So much for “market efficiency.” Then there’s the prison-industrial complex, some 2.3 million people behind bars, on the scale of the Soviet gulag and by far the most in the world today, with many millions more under probation and other forms of police-state supervision. This reduces the unemployment figures and provides jobs for prison wardens in certain districts, but the costs are huge: billions of dollars wasted are nothing compared to the ruin this has inflicted on the black community. This is not due principally to excess criminality, but to draconian drug laws, discriminatory justice, weak welfare, and a conscious decision that the defense of the socio-economic system should be done in the most coercive way possible.

Most of these problems are not inherent to the American character or even US politics. They can be traced back, very precisely, to the failure of Lyndon Johnson’s Liberalism and the triumph of Ronald Reagan’s Conservatism. That was when the country and its political leadership completely failed to address oil dependence, the expanding prison population, embraced the doctrine of eternal war as an integral part of American nationalism, lost the egalitarian tendency, and so on.

If anything, I do not champion Europe’s various economic and welfare models. Europe is far from perfect and no one claims it is. It’s simply that the American alternative is unalloyed crap and the discourse about it, particularly by Republicans, is so manifestly false, hollow and hypocritical. An informed person could only see the US model for what it is: sickeningly inefficient and unjust. Even Americans see this: when Americans say in polls they want the income distribution on Sweden (easily the most “Communist” country today) but elect a Republican Congress, my brain simply can’t cope with fathoming that level cognitive dissonance in the American public (you made this point once). [AK: You mean here, where I talk of American false consciousness?] It is literally maddening.

As this blog focuses quite a lot on Russia, I can’t avoid asking you for your thoughts on EU – Russia relations. Are they improving or worsening? Is it at all plausible for Russia to enter the EU by 2025, and would it serve either of the two parties’ interests?

I think relations are good. There are no fundamental problems. Of course there are serious divisions within Europe – the new members understandably being very suspicious. (Although I like to tell them it only took a few years for France and Germany to make up after the Second World War…) Russia’s relations with France and Germany, incidentally, are very good. Paris and Moscow have similar visions of a multipolar world and both aspire to be genuine world powers while Berlin and Moscow are united by economic collaboration that can get downright incestuous (see Gerhard Schröder).

I cannot say what Russia’s destiny is. On the one hand, Russia and its near-abroad make up one of the four great poles of Western civilization, the others being (Western) Europe, North America and Latin America. That is to say as an economic, cultural and geopolitical space, it is and has long been distinct from “Europe” and, in my opinion, Russia needs to think about how it can weld the post-Soviet space into some kind of coherent economic and social union. I am not someone who believes that much was gained by the replacement of a stable Soviet Union with the collection of ethnic conflicts, impoverished and corrupt oligarchies, and poxy Central Asian dictatorships we have now.

On the other hand, I often think Russia must be reconciled with Europe in some way. There is an undeniable kinship and shared history but I don’t see how closer ties could work in practice. We are still very, very different and I don’t see all that much convergence. I think there is no chance of membership by 2025. Maybe by 2050 if Russia continues to grow but also becomes much more democratic. On the other hand, in the long run, how could Russia not join? The level of economic interdependence is always growing and the logic of regional integration often genuinely ineluctable. It would certainly make the linguistic situation very interesting if the Union has 150 million Russophones and perhaps more if Ukraine and others join…

How dangerous do you consider Europe’s reliance on Russian natural gas? With the anti-nuclear fallout post Fukushima, and France’s recent banning of gas fracking, do you think this dependence will grow in the next decade?

I don’t think it is all that dangerous. Russia needs European money almost as much as Europe needs gas. Russia can pick a fight with smallish poor Eastern European countries but I don’t see what it could possibly gain in conflicts with its Western European partners and the gatekeepers to the biggest economic area in the world.

I am not sold on nuclear as a way of reducing energy independence. It can be used en masse to provide almost all your electricity, but electricity is only about 20% of the energy we use! A lot depends on whether renewables become a non-negligible source of energy and the extent to which fossil fuels are replaced by electricity (particularly in transport). Clearly nuclear has taken a catastrophic hit in Europe though, everyone but France is pretty much giving it up. France will maintain its capacity however and who can say which way the wind will blow in 10 or 15 years?

One of the biggest Russian gripes regarding Europe is its travel restrictions. To visit many European countries, Russians need to expend considerable time and effort to procure a visa. Is a visa-free regime possible within the next 5 years?

Access to its labor market is one of the most valuable things the EU can grant to another country. It is also, today, one of the most controversial due to the current anti-immigrant sentiment and race-baiting politicians. I can’t really say whether a visa-free regime will be possible within five years.

On the one hand, the very charming and funny Russian Ambassador to the EU Vladimir Chizhov said in an interview said he was upset by the recent developments in Europe because it would undermine his negotiations for a visa-free regime (by the way a very interesting interview covering lots of other subjects).

On the other hand, I was very surprised last November when EU granted visa-free travel rights to Albanians and Bosnians. They’re the sort of foreigners whose alleged criminality politicians would normally make noise about. The European Commission, which has little power itself, would normally cave in to the demands of said politicians.

HARD Talk with Craig Willy

ANATOLY KARLIN: I know that you have a great deal of enthusiasm for the European project. However, many observers – including myself – are skeptical about its longterm sustainability. The economic crisis has fueled popular resentment, e.g. the Greeks cursing outside financial authorities for imposing steep cuts to public spending, while the Germans deride them for their fiscal profligacy and dislike having to bail them out (recent polls suggest a majority of Germans want the Deutsche Mark back). The political right is enjoying a Europe-wide resurgence. National interests appear to be diverging, e.g. with France focusing on the Mediterranean, while Germany deepens ties with Russia. Border controls are reappearing. The global economic situation is cloudy, and high oil prices seem to be here to stay, presenting a further panoply of challenges to European solidarity. So is ever deeper union a realistic prospect, or is there a chance that the EU will end up as little more than a glorified free trade area by 2020?

CRAIG WILLY: As a disclaimer, I’ve gotten much, much more critical of EU officials and pols since I’ve come to Brussels. I am still wedded to the project however and I think most of the nonsense EU officials engage in is ultimately due to structural constraints imposed on them by the national governments.

The EU is not much more than an economic entity but it is much more than a free trade area. In fact, as soon as you have a commitment to a customs union (e.g.: a common external tariff and common trade negotiations with foreigners) and genuine single market, you can’t help but be a de facto economic power and have substantial integration, such as a common EU patent, common EU property rights, common EU approach to GMOs, and so on. The EU remains the world’s biggest economy and the truth is most international relations today involve economic issues above all. As such, the EU isn’t a wholly inappropriate entity for the (let’s call it) postmodern world.

I am pessimistic about further integration for at least another ten years. A lot depends on whether the national governments decide to reform the EU to actually make it democratic. There needs to be a connection between the elections to the European Parliament and the President of the European Commission. There is nothing in the treaties that makes this impossible; the pan-European parties only need to get their act together and agree on candidates. Commissioner Michel Barnier recently suggested that this happen and that the Commission and Council presidencies incidentally be merged. If this were done, there would be a genuine European politics and an identifiable face/mandated chief executive for the EU.

It is possible if they want it. Democracy is impossible without a common language but English has long been establishing itself as the lingua franca among Europeans. South Africa and India, much poorer countries with if anything harsher internal ethnic divisions, prove that multilingual and multiethnic democracy is possible. Of course, national leaders don’t want a democratic EU, like the old Italian and German princely states they prefer to maintain their own power, they prefer division to the common good. It doesn’t help that the current panoply of European leaders – Merkel, Sarkozy and Berlusconi in particular – are absolutely disgraceful for their lack of ambition and venality.

ANATOLY KARLIN: The discourse on Europe’s demography is decidedly pessimistic, though perhaps unreasonably so (in 2010, France may have overtaken the US in total fertility rates). Nonetheless, the pessimism is not without cause, as France (and the UK) are exceptions rather than the rule. Most of Europe, including the biggest countries – Germany, Italy, Spain, Poland – have been reproducing at well below replacement level rates for over two decades. What impact will this have on Europe’s economic dynamism and the welfare state? And in a world of limits to growth, could Europe’s demographic clouds have a silver lining?

CRAIG WILLY: I think the world needs less babies. Europe is less wasteful environmentally than America, but if every Asian and African achieved a European standard of living the Earth would become unlivable and exhausted within a few years.

Ageing is a huge challenge and will put incredible strain on Europe’s finances and lead to reduced power in the world. Low birthrates can also be a problem and the relative decline of France in Europe in the 19th Century can be directly attributed to the fertility of its German and British neighbors.

On the other hand, these are universal challenges characteristic of modern civilization. I would point to three things that make me optimistic about Europe:

  1. Birth rates on the whole are collapsing in developing countries. UN reports stress that, by the time they reach our oldish demographic profile, they will not have achieved the West’s current levels of wealth. As such, their pension, economic and health problems will be significantly worse than what Europe faces. (I hope that doesn’t sound like Schadenfreude!)
  2. East Asia’s birth rates and ageing are even more catastrophic than Europe’s! There is a very clear pattern here: an East Asian country develops very fast, Western commentators fret about our “decadence” and how we will be bought out by said East Asians, said East Asian country turns more-or-less gracefully into a fortified retirement home. I think of Japan of course but also of the forgotten “Tigers” South Korea, Singapore, Taiwan and Hong Kong. They all have birth rates around 1.2-1.4, lower than Europe. China, big scary China, is if anything in a worse situation. It is still very poor on a per capita basis but its fertility rate has dropped below 1.5. Given the trend in neighboring countries, I don’t know that the one-child policy is the only reason for this.
  3. The EU’s latest demography report points to some very interesting and counter-intuitive trends in terms of future family patterns that suggest godless French-style cohabitation, late-age childbearing and strong childcare policies are the cause of higher birthrates in certain countries. It is definitely worth reading the introduction at least. Another thing was that it points to the recent increase of EU fertility to 1.6 and perhaps soon to 1.7. It is unevenly divided across the Union but it not all that different from American non-Hispanic whites’ 1.8. Of course America has massive immigration and, as such, the US’s demographic weight in the world will continue to increase massively, while Europe’s has basically peaked. Speaking of “Eurabia”, Hispanics have a fertility rate of 2.9, almost 50% over the average, and immigration is not really letting up. Isn’t it much more likely that we see a Hispanicization of America? Certainly California, New Mexico, Texas and Florida look like they might be destined to return to Latin civilization…

ANATOLY KARLIN: You’re not the biggest fan of the “Eurabia” thesis. I totally agree with you, but I will play devil’s advocate. Please explain why you discount the possibility that: (1) the number of Muslims in Europe is under-counted (e.g. due to political correctness); (2) that migration from Muslim countries will not grow in the coming years, on the background of Europe’s demographic problems and population stress in Africa and the Middle East; and (3) the increasing radicalization of Europe’s Muslim populations (e.g. one third of British Muslims support the death penalty for apostasy).

CRAIG WILLY: I can’t talk to the statistics. I think they are basically accurate: 10% in France, 2-5% in most Western European countries, zero in Eastern Europe, and a certain number in Britain but outnumbered by immigrants of other origins (Indians, West Indians, Christian Africans, not to mention other Europeans…). The number of Muslims will increase over the next 40 years but will not be overwhelming.

There is clearly a strong, perhaps growing, cultural divide between European “natives” and European Muslims. Muslims are more conservative on the whole, somewhat like Hispanics in the United States but the difference is definitely more pronounced. I am not convinced Muslims are radicalizing. In France and Italy, the places where Muslims now live used to be poor working-class white areas. These areas tended to vote Communist (20-40% of the vote in France and Italy used to be Communist). I don’t see even the beginnings of mass political radicalization among European Muslims despite the fact they live in if anything more difficult circumstances. I actually would like more radical politics, not Islamist, but perhaps more of France’s anticolonial Indigènes de la République, its answer to America’s Black Power movement.

I am not convinced European countries are fully capable of accepting Muslims as equals and integrating them. Many Europeans seem to think the immigrant can and must integrate first before he is allowed to have the same job, have his children go to a decent school, or move into a nice area. It’s obviously a chicken and egg thing but many people aren’t able to accept this.

The climate and discourse in France in particular is getting pretty scary, the Front National acquiring a veneer of respectability and professionalism, and Sarkozy’s center-right actually embracing its anti-Muslim discourse. E.g.: the burqa ban, the “polygamous welfare-frauds” (our “welfare queens”), the ridiculous “Debate on National Identity,” openly racist statements by ministers (quote “too many Muslims”). It is quite depressing.

Europeans have demons sleeping inside them, like every other human being in the world. But our history has meant our demons came out in a horrifying way. Less than 70 years ago we slaughtered as many Jews and Roma we could get our hands on in a fit of organized psychosis and industrialized murder. Less than 20 years ago some Europeans decided there were “too many Muslims” and that there was only one solution to this “problem.” It’s something worth worrying about. We live in what are, even with the recession, relatively good and peaceful times. I worry for the Muslims if we ever started having really serious economic and social difficulties in Europe.

Back to the Future

Many pundits don’t like to put their money where they mouth is. Though I’m sure you’re not that type, feel free to confirm it by making a few falsifiable predictions about Europe’s future. After a few years, we’ll see if you were worth listening to.

Oh dear, I’ll have a crack at it:

  • No significant additional integration until 2020 or even 2025. No significant “rolling back” either however.
  • The Eurozone survives and expands to several Eastern European countries by 2020. Britain does not join.
  • The cultural divorce between Britain and the continent will grow. It will perhaps become insurmountable if Scotland acquires its independence. Britain will stay inside the EU however albeit with its continued semi-obstructive “yes-but-no” denialism.
  • The European economy will have near-zero growth in the coming decades for demographic reasons, productivity will continue to rise, its technological leadership will continue, and its overall size might increase if enlargement continues.
  • Turkey will not join before at least 2035, if ever. Most of the Balkans will have joined by then.
  • Socialism will not make a significant return barring an even more serious economic crisis. Social equity in Europe will decline somewhat, but not as much as in America.
  • Race relations will get worse.
  • European leaders will continue to be wholly materially and psychologically dependent on the Americans. They will not develop an independent foreign policy or a “common” foreign policy.
  • The socio-economic gap between the US and Europe will grow, as will the cultural one on abortion, gay rights, militarism and the like.
  • “European politics” will very slowly but surely emerge as interdependence becomes more glaring, the use of English spreads, and the Union is democratized. It’s an apparently undetectable process, like tectonic plates moving, but you can very clearly see the trend decade on decade.

What are your future blogging plans?

I plan on continuing with Letters from Europe but am also looking to start much more semi-professional and collaborative blogging.

These include revamping Future Challenges, a blogging platform on long-term trends funded by the Bertelsmann Stiftung. As its Western Europe editor, I’m hoping to turn it into the standard for analyzing the continent’s long-term trends on energy, demographics, migration and economics.

I’m also involved with bloggingportal.eu, a very useful aggregator that brings together the sleepy world of EU bloggers. Its readership is not incredibly high, but it includes a fair number of prominent EU journalists and communications professionals. I highly recommend you sign up to its daily RSS of best posts from the EU blogosphere (a very good filter).

Finally, I’m thinking of launching some sort of multilingual pan-European blog. It’s still a little sketchy but it would involve something like national-oriented bloggers writing in German or French (and thus it being possible to get reasonable audiences, unlike for EU-centric blogs) while also translating these posts systematically into an English main feed. You’d then have overlapping global, EU and national audiences. I don’t know if it can work but my dream would be a cross between Glenn Greenwald (God bless him) and Fistful of Euros.

Arthur Miller once said “a good newspaper is a nation talking to itself.” I think that is true. Currently, even European leaders don’t read each others’ newspapers. They discover themselves and their continent, collectively, through the pages of The Economist, the Wall Street Journal and the Financial Times. Besides the particular political agenda of these publications, there is something wrong here in having the “continental conversation” through media that are either foreign or from not the most committed European country. Besides that, Europe is hardly their main focus. I hope to contribute in a small way to creating that infamous “European public space”.

I wish you the best of luck in that endeavor, Craig, and thank you for answering S/O’s questions!

As I said at the start, I’m planning to revive the Watching the Russia Watchers (and interesting others) series again in the next few days, carrying on from the interviews with Kevin Rochrock (A Good Treaty) and Peter Lavelle (Russia Today) last year.

If you wish me to interview you or another Russia watcher, feel free to contact me.

(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.