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After a long break, a new contribution to the Experts Panel:

Shredding Sochi… in a Good Way

Western journalists have been in the business of dismissing Russian achievements and magnifying Russian failures ever since Putin drove them into a collective derangement syndrome – he even haunts their dreams, as recently revealed by the Guardian’s Shaun Walker – so the preemptive besmirching of the Sochi Olympics can’t have surprised anyone.

What is startling, though, is the unusually low competence of the effort, even by the standards of these people that are sarcastically referred to as “democratic journalists” in Russia.

The first and foremost attack revolved around the supposed corruption surrounding the Sochi Olympics. In 2010, the Russian magazine Esquire estimated that 48km of roads around Sochi consumed a cool $8 billion of taxpayer money, a sum that implied the asphalt might as well have been made of elite beluga caviar. Julia Ioffe cheerily transmitted these sophomoric calculations to the Anglosphere. The only problem with these actuarial wisecracks? Said road also included a railway, 50 bridges, and 27km worth of tunnels over mountainous terrain… which presumably made it something more than just a road. What was intended as a metaphor for Sochi corruption turned out to be, ironically, a metaphor for unfounded attacks against it.

There are incessant comparisons to the $8 billion spent during the 2010 Olympics in Canada. But this sidesteps the fact that Whistler was already a world-class ski resort, whereas Sochi’s infrastructure had to be built from scratch and at relatively short notice. The actual event-related costs of the Sochi Olympics are $7 billion, of which only half was directly drawn from the state budget. This is not to say that there was no stealing – of course there was, as corruption is a real problem in Russia, and is especially endemic in the construction industry. Navalny has created an entire website about it, and coordinated a campaign against Sochi with Buzzfeed and The New York Times. But what’s striking is that far from the pharaonic levels of misappropriation we might expected from the tone of the coverage, in most cases the markup was in the order of 50%-100% relative to “comparable” Western projects (and that’s after selecting the most egregious cases). This isn’t “good,” needless to say, but it’s hardly unprecedented in Western experience. In any case, a number of criminal cases have been opened up, so impunity is not guaranteed. (The most prominent “victim,” Akhmed Bilalov, has fled the country and claimed he was poisoned – all true to the form of emigre oligarch thieves from the ex-Sovie Union).

The lion’s share of the $50 billion investment in Sochi – some 80% of it or so – consists of infrastructure projects to make Sochi into a world-class ski resort that will provide employment in the restive North Caucasus, kickstart the development of a Russian snowsports culture, and draw at least some of the more patriotic elites away from Courcheval.

The second major angle of attack is Russia’s “persecution” of gays. This, presumably, refers to Russia’s new laws against the propaganda of homosexuality to children – no matter that very similar laws, in the form of Section 28, existed in the UK until 2003, and that sodomy remained illegal in some American states up until the same year. I bring these up not so much to engage in “whataboutism” as to point out that the moral standards that the West proselytizes so zealously have only been adopted (or dropped?) within the past decade. Furthermore, much of the rest of the world rejects those standards to a significantly greater extent than does Russia itself. As such, this campaign strikes such an absurd and nauseatingly self-righteous note that one cannot but suspect a cynical motive behind it. Snowden and Syria, in particular, come to mind.

The third, and by far the most repulsive, category of Western concern trolling about Sochi revolves around terrorism. After every successful terrorist attack in Russia, “experts” rush in to proclaim that it is an example of “Putin’s autocracy not working for ordinary Russians” (Kathryn Stoner-Weiss), that they “cannot rely on the protection of their government” (David Satter), etc. By extension, the IOC is wildly irresponsible for “jeopardizing the safety of fans and athletes” by awarding the games to Russia (Sally Jenkins). In reality, according to the world’s most comprehensive database on terrorism, the number of casualties in terrorist attacks in Russia has plummeted in the past decade, even as the jihadist movement has been reduced to a shadow of its former self; suffice to say that suicide bombing a bus in a second-tier city like Volgograd is now considered a great success among their ranks. I do not wish to tempt fate by ruling it out entirely, but with the “ring of steel,” pervasive telecommunications monitoring, and cooperation with foreign intelligence agencies that characterize Sochi security, the likelihood of a successful terrorist attack is surely low.

Consequent criticisms become increasingly deranged and unhinged from reality, much like the murderous HAL supercomputer fading away into childish gibberishness after it gets turned off. Thousands of people got evicted, their land stolen from them… except that the average compensation per person was $100,000. Sochi is apparently built on the bones of Circassians… well, if it’s a graveyard, I wonder what that makes the North American continent – a death world? The assertion that Sochi is an “unsuitable subtropical resort” with no snow… an assessment that would surely surprise the denizens of California’s Bay Area, who go skiing in Tahoe up until late April, and where average February temperatures are significantly higher than around Sochi. If anything, conditions are looking downright steezy. The metaphorical rock-bottom was attained by the BBC’s Steve Rosenberg, who made a photograph of a pair of side-by-side toilets that were then splashed around the media – up to and including The New York Times – as evidence of the graft and imbecility that characterized the Sochi preparations. The only problem being that the photograph was taken in the middle of a renovation. But, hey, we wouldn’t want to deny the Brits their toilet humor, now would we…

All this is not to say that the Sochi Olympics are some kind of pure monument to virtuous sportsmanship and international friendship. Of course not. From their origins in ancient Greece, they were always about money, competition, and prestige. Putin himself openly states that one of its goals is to showcase a new Russia. There are no rules preventing Western states from waging a media campaign against Sochi, and refusing to send their top leaders to the opening ceremonies – petty and unseemly, such actions only reflect badly on their authors. So be it… gapers won’t be missed.

(Republished from Da Russophile by permission of author or representative)
 
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By the usual standards of Guardian reporting on Russia, this one by GQ Russia editor Andrew Ryvkin is… well, about par for the course.

Citing a recent PwC report that Russia will overtake Germany to become Europe’s biggest economy in 2030, he asks, “Should we believe them?

Well, the PwC is just repeating predictions made almost a decade earlier by Goldman Sachs, which has thus far proved very accurate on the growing prominence of the BRICs in general, and of Russia in particular (regardless of repeated attempts to kick it out of that grouping, against the judgment of Jim O’Neill, the inventor of the BRICs concept himself).

So in effect Ryvkin is asking us whether we should trust a range of organizations with a great predictive record on the issue to the uninformed ravings of a Guardian hack.

Forget Russia’s very reasonable and respectable growth rates compared to the other Central-East European countries. According to Ryvkin, Russia’s downfall will be because it is “politics”, and not “strict economic policies”, that “rule these wintry lands.” What is the primary example he uses to demonstrate this?

One should also have sedatives close to hand while reviewing the figures. Russia has become one of the most corrupt countries in the world, and is barely making an effort to hide it. For instance, one of the Sochi 2014 Olympic projects – a 50 km road – costs nearly $8bn.

This meme was popularized by Julio Ioffe in the Western press on Russia back in 2010. It has also long since been long debunked, including on this very blog – although it continues to float around as a cliche among Russian liberal and journalist circles.

The only problem with looking at Russia through this failed state prism, without bothering to corroborate sources, is that in no sense can the Adler-Krasnaya Polyana route be described as just a “roadway”. Intended to be completed within 3 years in an area with a poorly developed infrastructure, this so-called “road” also includes a high-speed railway, more than 50 bridges, and 27km of tunnels over mountainous, ecologically-fragile terrain!

Then there’s this bizarre statement: “Germany, is currently associated with its policy of austerity, Russia is known for precisely the opposite.” That’s certainly news to me, as Russia has run balanced budgets for the past 2 years* – in stark contrast to, well, pretty much the rest of the developed world (including Germany for that matter).

And here you’re inevitably faced with a question: how would the Russian government act if it became a leading European economy and faced a crisis like the one in we have now in the eurozone, considering that this government has allowed the construction of a $160m/km road?

That is an extraordinarily remote possibility, seeing as Russia has fiscal unity and no significant sovereign debt (i.e. the lack of which define the European crisis). The very question is not only based on a faulty premise (the so-called “caviar road”) but essentially meaningless.

After some of the usual moralizing and content-free platitudes about the absence of Russian democracy, as well as the further extremely bizarre idea that the Chinese economy is not politicized like Russia’s**, Ryvkin wanders back on track with the usual spiel about how Russia is Nigeria with snow.

Here’s a question: who would want a Russian-made car, when even Russians don’t want them? Another one: who wants to fly Russian aeroplanes, when even in Russia people choose to fly on a Boeing or Airbus? But these huge industries still exist, resembling Frankenstein’s monsters of Soviet industrial might, brought to life by heavy injections of oil money and created by businesses that ultimately cannot produce a competitive product.

It goes against almost every aspect of economic, market-oriented logic, but it has nothing to do with the economy, because it aims to keep the workforce loyal to the government and project an image of a neo-Soviet industrial power. So is securing votes at the cost of your country’s economic development today a strategy worthy of someone who is going to lead the European economy in seventeen years? Is the strategy even smart?

Back in the world of hard facts and statistics, Russian car production was at 2.0 million units in 2011 (increasing by a further 15% in 2012) compared to 1.2 million units in 2000. Many foreign automakers have moved manufacturing into Russia, but that one presupposes is a good thing; that indigenous Russian brands haven’t done as well doesn’t mean much (which British brands are doing well apart from Rolls Royce?). There are few countries in which automobiles are a major export staple – incidentally, China with which Ryvkin incessantly compares Russia with isn’t one of them – and there is no good reason to expect Russia to become a major exporter of cars under any government, be it Putin’s or “even [a 10-year-old] (as long as he was smart enough not to stop the flow of oil and gas).”

That is because hydrocarbons are Russia’s comparative advantage, a concept which likewise explains why say Australia and Norway do not export much manufactured goods either. Ironically, the surest way to solve this “resource dependency” would be to get Ryvkin’s 10 year old President to ACTUALLY stop the flow of oil and gas.

That is also the reason why Ryvkin doesn’t work as an analyst at PwC but writes articles for the Guardian.

* Actually latest estimates show that 2012 had a deficit of 0.02% of GDP, but that’s of course basically a rounding error.

** Where to even begin here? For a start, consider the fact that the HQ’s of all the major Chinese companies have a “red machine” with a telephone link to Party functionaries

(Republished from Da Russophile by permission of author or representative)
 
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Keeping up with the Guardian’s stream of textual diarrhea in its Russia coverage is a quixotic task, and one that I do not really have the stamina for (although Alex Mercouris does this remarkably effectively). Still, when it comes to certain issues I’m particularly interested in, such as demography, or China-Russians relations as in this case, I feel pressed to comment.

The main thrust of this article is about comparing the neighboring cities of Manzhouli and Zabaykalsk to make some wider point about the two countries. And the comparison is not flattering to Russia:

Twenty years ago, Zabaikalsk and Manzhouli, which face each other across the border marked by a few strips of barbed wire, were settlements of about 15,000 people. But while Zabaikalsk remains a dusty border town, Manzhouli now has high-rise buildings, an indoor skiing facility, 3D cinemas and a population approaching half a million people. Russians flock to it for the shopping opportunities.

The only problem with this comparison? Zabaykalsk has 12,000 people as of the 2010 Census, whereas Manzhouli has 300,000. Furthermore, Manzhouli had 137,000 people in 1990 to Zabaykalsk’s 9,000 in 1989. Were the Guardian’s fact-checkers hung over from their Christmas celebrations?

But the wider and more important point is that this comparison is beyond absurd. It’s about as valid as comparing the 600,000-strong city of Khabarovsk (which is incidentally a success story; it might not have skyscrapers, but it is picturesque, prosperous, and consistently ranked as one of Russia’s most comfortable and business-friendly cities) with the bordering, 20,000-strong “dusty” village of Fuyuan to “prove” Russia’s superiority over China. I do not, of course, because I am not a propagandist like the Guardian, nor do I have an agenda, nor do I hold my readers in such contempt that they would fail to see the absurdity of apples-to-apples comparisons of cities that differ by an order of magnitude.

Now in all fairness the Guardian’s contempt for its readers is largely justified based on most of the comments. But not all of them. Lost in the scrum of Bear vs. Dragon fantasists (of whom there are far fewer in both Russia and China than in the West) was one comment by “Nobul” that’s well worth reprinting in full:

Let’s get real, stop screaming “yellow peril” and “Russian Far East on a knife’s edge”. There are not many (300,000 according to reputable Russian stats, not 3 million in the scaremongering gutter press) and won’t be many more coming Russia’s way because:
1. China does not have a “massive” population pressure. Its population is growing at a meager 0.5% a year and aging fast. If you followed the news in the last couple of years, there are now a labour shortage across the country. There are no surplus population to “export”.
2. People go where the money is. It is in the rapidly growing cities in China. The Chinese peasants do not want be pioneers in a foreign land as illegal squatters and get one crop a year with no means of guaranteeing profit or property rights.
3. Scaremongers repeat ad nauseum there are 100 million Chinese across the river from 6 million Russians, but fail to mention the population density of Heilongjiang is 80/km2, similar to that of the Ukraine (the UK at 250ish) and just as fertile with its own black earth. Do you expect Ukrainian hordes to invade Russia? The peasants there would rather seek better paid opportunities in numerous Chinese cities where they speak the same language than dilapidated ghost towns of the Far East.

In addition to 1), come to think of it, the Russian Far East is now if anything in better demographic health than North-East China, or Dongbei. According to the latest Census, China’s TFR is at 1.4, and the three major North-East provinces have China’s lowest birth rates outside the major metropolises. Russia’s average TFR is 1.6 as of 2011 and is higher than average in the Far East specifically.

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

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

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

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

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

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

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

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

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

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

(Republished from Sublime Oblivion by permission of author or representative)
 
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There is a wide divergence of views on Russia’s economic future. The pessimists project near zero growth (e.g. SWP, Guriev & Zhuravskaya), or even a renewed collapse if Europe goes haywire. The inventor of the BRIC’s concept (and Russia bull) Jim O’Neill of Goldman Sachs believes it will manage to eke out growth of 7%, nearly recovering the output lost in 2009. The consensus seems to be around 4-5% (World Bank, bne). In this post I’ll describe developments in Russia’s economy since I last did it in a systematic way in December 2008 and give some indicators of what to expect in the next few months and years. Most of this post is based on the information in the World Bank’s Russian Economic Report #22: A Bumpy Recovery.

1. After the sharp -7.9% contraction in 2008, Russia has began to recover at a slower than expected rate, with GDP rising by 2.9% in Q1 relative to the same period last year (in comparison with China’s 11.9%, Turkey’s 11.7%, Brazil’s 9.0%, India’s 8.9% and Mexico’s 4.3%). However, there are indications it accelerated in Q2. The slowness and bumpiness of the recovery is presumed to be due to the waning of crisis stimulus spending and continuing low demand.

The current recession was also significantly deeper and longer-lasting than the 1998 one, though its humanitarian impacts were almost insignificant (see later).

Also, the recovery has been uneven across sectors. Tradables and manufacturing sprang back very quickly in Q1 (as well as transport and comms), but retail stagnated and construction fell by 9%. However, the latest April (and May) figures show an improving performance in retail and construction.

Demand grew slowly on the back of recovering wages, but remains low due to sluggish credit activity and higher unemployment. Investment remains depressed, falling -4.7% relative to the same period last year in Q1 – “most enterprises appeared to be increasing their utilization rate of existing capacity while restocking inventories”.

2. The World Bank’s own summary:

Summary. Amid heightened global uncertainties, Russia is experiencing a bumpy recovery. Domestic demand is rising, but with high unemployment and limited credit and investment activity. Budget execution is better than anticipated due to higher oil prices. Implementing fiscal consolidation is a key medium-term policy objective. Dilapidated infrastructure, especially in transport, could pose serious risks to competitiveness and longer-term growth prospects.

3. Read the Report for the low down on unemployment, current and capital accounts and rollover of external debt obligations by Russian banks and companies. Nothing particularly new or interesting happening there.

4. What is really interesting is the graph of stock of credits to companies and households shown below.

Note how the flow of net credits stopped dead in the water after September 2008, after two years of furious expansion. This suggests that Russian companies had become highly dependent on debt-based growth in the years preceding the crisis. As soon as the spigots turned off in late 2008 and global funds flew to safety, there occurred a sharp drop in demand and investment in Russia.

Not only did this not happen to the Western developed economies, but they also pursued a drastic monetary loosening (while Russia tightened), which may explain why the GDP declines in countries like the US or UK were much more modest than in Russia (despite their much larger stocks of debt relative to GDP).

On the positive side, Russia’s inflation rate has sunk to a record low level of just 6% in its post-Soviet history.

5. Russia’s fiscal position remains strong, as according to Ministry of Finance estimates “the consolidated budget had a surplus of 2.5 percent of GDP” in Q1 2010 (this should be compared to deficits of 10%+ in the US and UK). On the downside, the World Bank notes that the tremors emanating from Club Med may torpedo oil prices yet again, thus widening Russia’s deficit in a few months.

6. Big Russian stimulus spending on social measures such as wages and pensions greatly alleviated the humanitarian impact of the crisis. They are now being phased out.

“The focus on people’s incomes has helped mitigate the social impact of the crisis, but at the expense of greater rigidity in the expenditure structure and infrastructure expenditures”. The World Bank points out that it might have been wiser to direct some of that spending towards addressing “acute infrastructure bottlenecks, [which] could have much larger fiscal multipliers”.

Despite the withdrawal of most stimulus measures, it is predicted that a planned 46% pensions hike by end 2010 will cause the federal budget to remain well in the red at -5.4% of GDP, but slightly lower than the -5.8% of 2009. The downside is that infrastructure spending, especially on roads, is to get deferred again.

The Report has a one page spread on the state of Russia’s infrastructure, which isn’t anything to write home about. Nonetheless, as I argued here, it almost certainly isn’t infrastructure constraints that are going to constrain Russia’s future growth… and in any case it is not clear why spending a lot of money on improving roads at this point in history (of peak oil, climate change, etc) is a great idea.

7. So what will happen if Europe goes haywire? Encouragingly, unlike in the last crisis, the costs of ensuring Russian debt hasn’t been spiking. This may not be a high bar to overcome, but it would be apt to point out that Russia is no longer assumed to be a weak link in the chain like Greece or Spain by global investors. (Indeed as Ben Aris argues in Rerating Russia its credit-worthiness is now higher than most of the developed world’s).

8. What the World Bank thinks will happen in the next two years:

Summary: The debt crisis in Western Europe has sharpened downside risks to global recovery and oil prices. But the impact on Russia is likely to be limited because of Russia’s better fiscal and debt positions and limited trade and financial linkages with the affected countries. Taking into account global developments and assuming no default/restructuring and no broader contagion in Europe, Russia is likely to grow by 4.5 percent in 2010, followed by 4.8 percent in 2011 as domestic demand expands in line with gradual improvements in the labor and credit markets. Employment situation is expected to improve only gradually with attendant reductions in poverty.

Below is a table showing projected growth for different regions.

9. Despite the World Bank’s concerns that Russia may be becoming too free with its wallet – which may put it into a dangerous situation if oil prices collapse and remain depressed for a long time (but which they are unlikely to do because of peak oil) – as things stand Russia is in an enviable fiscal position relative to practically all developed countries.

[Note that Japan, with a debt to GDP ratio of about 220%, is literally off the graph].

Funny, isn’t it, how it is almost all Western countries that are in a fiscal pickle. In contrast, the Russia (of kleptocrats), the China (of bad loans) and Venezuela (of spendthrift populism) are facing a sovereign debt apocalypse really well off comparatively speaking!

10. The World Bank’s Russia forecasts for this year:

Consumption, particularly household consumption, will be the main driver of economic growth in 2010, especially toward the year’s end. A modest contribution to growth is likely to come from inventory restocking in Q2 2010. At the same time, we do not expect large increases in fixed capital investment in 2010 given the excess production capacity and limited credit. So an increase in investment in Q2 will be due mainly to inventory restocking… But the positive contribution of net exports to aggregate growth from 2009 is likely to turn negative in by the end of 2010, as import volume picks up in line with economic recovery…

Below is a graph showing the composition of Russia’s GDP growth drivers.

The World Bank projects a deterioration in the current account as imports pick up and a rise in the capital account “if the European debt crisis has no significant contagion effect”. Furthermore, “an increase in fiscal revenues due to higher oil prices is likely to be partly offset by new expenditure pressures from additional social spending and increases in pensions”. As a result, “we project the fiscal deficit at 4.6 percent of GDP in 2010 and at 3.8 percent in 2011, taking into account additional pensions expenditures.” Inflation will be at 7-8% and “large banks and corporations should be able to finance or roll over their debt obligations in 2010″.

11. I already pointed out that the humanitarian impact of the 1998 crisis was much larger than of the current one: “While the percentage of the population barely making ends meet went up from 29% in July 1998 to 40% in December 1998, this figure remained stable at around 10% throughout the recent crisis”. This is reflected in Russia’s official poverty stats, whose non-rise was “a reflection of the unemployment increasing less than initially feared and likely also due to increased transfers to the population”.

12. The Report concludes with a discussion of how to solve or mitigate Russia’s monotown problem:

Summary: Monotowns present complex challenges for diversification and social and enterprise restructuring in the postcrisis period. Money alone will not solve them. Multipronged market-driven approaches, including active partnerships between the monotown and the private sector, based on good international practice, stand a better chance of success.

The case of the East German Bund–Länder-Program, Pittsburgh USA and Glasgow UK are offered as examples of how to revive ailing post-industrial towns.

13. A compendium of Russia economic stats since 2006.

14. Further thoughts. I do think that the European debt crisis will spill over and that there are already numerous signs of a second dip in the Great Recession – this time centered around sovereigns (1, 2, 3). According to quite a few leading indicators, this will probably occur within a few months, i.e. by this September or November.

Meanwhile, more dynamic and decoupled economies in the World of the Rest – especially China – are rapidly taking over industrial share from the indebted and aging developed world. They still have plenty of room left to grow so I think they will keep oil prices relatively buoyant (especially considering that global oil production is now falling or stagnating).

Russia seems to be in a stronger position than it was in 2008. Though still dependent on foreign debt intermediation, it is now to a lesser degree than two years back, and besides its comparatively excellent fiscal balances will probably mean that global credit flows will not desert it as fully or suddenly as before. The state will remain strong and solvent. Nonetheless, growth will probably slow to stagnation in late 2010-2011 should the events of 2008 be repeated.

One possible consequence is that Russia’s leadership will become disillusioned by the multi-year, post-2008 failure to lift Russia’s GDP any higher than that which prevailed at the peak of Soviet output, and the end result – within a few years – could be an all-out shift to the “mobilization model” proposed by Gregory Khanin, with the state taking a far more prominent role in forcing modernization from above than is the case even today.

Update July 8: It’s worth pointing out that newly released figures indicate that Russian consumer confidence has largely returned to near pre-crisis levels in Q2 2010. This may reinforce the evidence that the recovery accelerated during the period.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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