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Rhetoric about it being “Nigeria with snow,” “Zaire with permafrost,” “Upper Volta with missiles,” “gas station masquerading as a country,” etc., regardless, the fact of the matter is that Russia does have a respectable manufacturing base.

This should be pretty obvious just from a quick perusal of the sorts of manufactures Russia produces:

  • A vast military-industrial complex that produces (and exports) on a scale and versatility exceeded only in the US.
  • Rosatom is building an amazing 40% of all the nuclear power plants currently under construction in the world. 10% of the world’s power turbines are made at the Leningrad Metallurgical Factory.
  • More prosaic but also more generally indicative, Russia produces about 2 million cars annually, which is about the same as in the UK and France, and thrice more than in Italy. This satisfies around 70% of its total domestic sales – virtually the exact same percentage as in the US and UK

This is not, of course, to make Russia out to be some kind of manufacturing behemoth like Germany, Japan, or Korea. It is however on approximately the same level as the European economic Middle Powers of France, Italy, and the UK, as well as that of fellow BRIC members Brazil (which has a 35% larger population) and India (which has eight times its population). In other words, it is broadly what you would expect based on its GDP and status as an upper middle income country.

This is pretty elementary stuff any other journalist or pundit can discover for himself through a quick glance through the various economics statistical databases on the Internet. The figures below were derived from the World Bank’s data on nominal GDP and the share of manufacturing in the economy for 2013.

Country Manufacturing Output in 2013
China $2,923bn
USA $2,081bn
Japan $912bn
Germany $829bn
Korea $404bn
Italy $327bn
India $321bn
France $318bn
Russia $308bn
Brazil $276bn
UK $259bn

And here is a historical graph showing Russia’s manufacturing sector on a global perspective (log scale) since the early 2000s.

world-manufacturing-1990-2014

To be sure, yes, Russia exports very little of this. As mentioned, its manufacturing base is to a very large extent domestically orientated. Instead, its exports are dominated by oil, natural gas, and metals, of which it has a cornucopia.

Why? Because comparative advantage, otherwise known as Economics 101. A concept that in Russia’s case the Western media consistently has trouble with.

Cue the famous graph of Russia’s exports structure that supposedly makes it a gas station:

russia-exports

… which if so would then make Australia, a well educated nation and one of the richest in the world, nothing but a coaling station.

australia-exports

Incidentally, what makes the “Nigeria with snow” rhetoric so convenient is that it can be – and is – wielded against Russia regardless of what actually happens to the oil price. If it goes up, emphasis can be put on the increasing dependence of the Russian budget, exports, and overall economy on hydrocarbons. If it goes down, you can instead focus on the imminent fiscal collapse – no matter that Russia has almost $400 billion socked away and that its current budget deficit is close to non-existent. Regardless of what happens with the oil price, doom is always preordained. And there is nothing that Russia can do about this “oil dependence” in anything but the very longterm short of nuking all its oilfields.

I would write more but Ben Aris writing in February 2014 in response to a typical hackneyed Economic editorial on how Russia is hopelessly addicted to oil and about to collapse any moment now has made any such effort redundant, so I will instead save myself some work and quote him in extenso:

“this achievement was founded almost entirely on oil and gas prices, which have climbed fivefold since 1999.”

So now we launch into the core of the attach, the increasingly hackneyed argument that “all Russia’s prosperity is due to its gift of oil and the government has done nothing else to make life better.”

This argument is becoming extremely tiring and moreover as time passes it is demonstrably not true. Oil remains very important but a lot has changed in Russia in the last decade, which is being willfully ignored.

Firstly oil prices didn’t take off until about 2005. Prior to that the long-term average was $25/barrel. And yet Russia put in 10% GDP growth in 2000 and continued to grow at least 4-5% until 2005. And only then did oil prices take off lifting growth to 6-8%.

So if Putin is so rubbish and all the good stuff depends on oil, how did he manage to get all that growth in the years when he had the same oil prices as Yeltsin had??? Could it be that something else happened? Could it be that the devaluation of the ruble had a positive effect? Could it be that oil companies invested more in themselves in 2000 than in all the 1990s. Could it be this started off a virtuous circle of growth, investment and rising wages that lead to other companies appearing to take advantage of this new money? And if not, where did all those consumers come from that have been driving Russian growth in last five crisis years? Just askin’… because according to the Economist analysis it appears that oil pours directly into Russians pockets which they then go out and spend in the shops.

“Dependence on energy exports is greater even than under the Soviet Union: they now account for 75% of the total, against 67% in 1980.”

Journalism 101: “when citing statistics, you need to attribute them to the valid source so they can be checked.”

This number is flat out wrong, or made up, or I don’t know as the author doesn’t say where it comes from. The last number I have is from the Russian customs service and is 49.4% export revenues for oil and 11.7% for gas in 2013 – a total of 61.1% of export revenues which is LESS than the “Soviet number” (where ever that is from).

No one is denying that oil and gas play do provide funds to pay for lots of other things the government wants to do – and so impede reforms because the government is so actively throwing money at problems. But the statistic that everyone who makes this argument always skips over is that oil and gas only account for about 15% of GDP in terms of value created according to Rosstat; the service sector made up just over 50% of GDP in value terms last year. Russia is not just a black and white petroeconomy.

Oil is of course even more important than that as it has direct knock on effects to other industries. A paper from the highly respected Bank of Finland economic analysis team (BOFIT) tried to assess exactly how important oil and gas are to the Russian economy. It adjusted the number up to about 25% of GDP and made this conclusion: “When adjusted to reflect the oil and gas sector’s actual contribution to GDP, Russia is on par with Norway (Table 2). This is much less than traditional oil states such as Saudi Arabia, which generates about half of its GDP directly from the oil and gas sector.”

Lets just pause for a moment and take that in: Russia’s dependence on oil and gas is the same as that of NORWAY…. not a true petro-economy like Saudi Arabia.

“Ten years ago the Russian budget balanced if oil was around $20 a barrel; today it needs to be around $103.”

Yeah, and ten years ago you could buy a coffee in London for 50p and not the £5 a cup it costs now. This “balance-the-budget” price of oil is another myth.

What you need to look at is the non-oil budget deficit (the federal budget deficit Russia would have if you magic all the oil and its revenue away). In the boom years of 2006-2008 Russia was running a health budget surplus, but it as also running a non-oil budget surplus of about 1%. In other words it had broken its addiction to oil as the real economy was producing enough tax revenue to finance everything before a dollar of oil tax money was received. That changed in 2008 when the non-oil deficit when down to 14% and the state poured rescue money into the economy, but has recovered somewhat since and the plan is to take the non-oil deficit back to about 4-5%. In other words the government was to modest subside the budget with oil money. It is actually an extremely reasonable plan and how the budget was run in the first half of the last decade.

However, in the 90s the non-oil deficit was over 25% of GDP. In other words under Putin the fiscal oil dependence has steadily decline as that service sector and other industries increase their share of the economy, but the crisis was a big set back – and thank god for that oil as it is the cushion that has given Russia a soft landing.

Bear this in mind whenever you encounter the next loud proclamation about how Russia is [insert banana country]-with snow that doesn’t produce anything.

 
• Category: Economics • Tags: Manufacturing, Oil, Russian economy, RussPol 
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For those who missed this affair, the aptly urled Russian website bs-life.ru (Business Life) published a secret Kremlin directive to compensate the relatives of 2,000 Russian military KIA and 3,200 WIA .

Alarm bells should have rung from the start.

Looks like the very epitome of a serious professional website dedicated to investigative journalism.

Looks like the very epitome of a serious professional website dedicated to investigative journalism.

Start with the website. The design runs on a free, mass-use Joomla magazine template. I daresay most functional one-author blogs look nicer. WHOIS lists no contacts, the owner being identified as a “private person.” Until it became “famous” in the past few days, it did not register in Alexa’s top 100,000 global websites (for comparison, Unz.com is 53,764 on the list, and Russia Insider, launched less than a year ago, is at 27,585). That a site built in one day for $10 sometime in 2011 would be the one to acquire a leak of such seminal importance seems unlikely to say the least.

The figures also don’t pass the face validity test. Both UAF and NAF casualties are estimated around 2,500 to date, though they are likely substantial underestimates. Even so this would imply that the actual Russian Army accounted for a substantal portion, perhaps the majority, of the Novorossiyan military deaths. Considering its massive preponderance in training and equipment over Ukraine such ratios would be implausible even if it was doing the regular fighting. In actuality, the only time that we can be reasonably sure it got involved was in the Ilovaysk battle, in which the Ukrainian forces suffered a crushing defeat. The 2:3 ratio of killed to wounded is also utterly implausible for any modern army. That’s the kind of ratios you had in pre-antibiotics wars. In WW2, the ratio was 1:3. In modern wars, it’s at least 1:5.

These are some basic investigative and logical questions that any journalist writing about this should have been asking.

In their defense, though, Novy Region, the Ukrainian news site that first republished the story, is engaged in a propaganda war against Russia, as is 90%+ of the Ukrainian media. That is understandable.

And in their defense, neither Paul Goble nor Paul Roderick Gregory, the two Anglosphere pundits who did most to “break” this story in the West, can be considered legitimate journalists. Both are glorified bloggers, much like myself.

Goble’s primary schtick consists in recycling stories from marginal anti-Kremlin commentators and “laundering” them for mass citation in the Western MSM. This is a role for which he is eminently qualified by his long years of service in the CIA, RFERL, the State Department, and various democracy promoting NGOs (quadruple-sic!). As I wrote in an expose on him five years ago: “If one fine day some random Tatar blogger on LiveJournal decides to restore the Qasim Khanate, we’ll certainly hear about it on his blog… and guess what, we do!” His piece “uncovering” Russia’s military casualties for Euromaidan Press, his latest gig, is just his latest and unusually successful laundry day.

I don’t really know much about Gregory, apart from him being an economist who loves the 1%, blogs for Forbes, and really, really dislikes Putin and Russia (including up to and beyond the point of conspiracy theories). I suspect he got the story from Paul Goble since his post was published 11 hours after Goble’s and it is unlikely that they were both monitoring Novy Region, let alone BS-Life.

The real question is how come a whole range of Western media outlets reprinted these claims more or less unquestioningly, including: NBC, The Times, The Independent, IB Times.

Incidentally, The Independent is (was?) considered to be a pro-Russian paper, on account of it being owned by a Russian oligarch (as if Russian oligarchs ever cared about anything beyond their wallets). It’s coverage was singularly incompetent (see bolded), not a surprise perhaps considering the author also writes for VICE and BuzzFeed. And for some reason the Indy expects people to pay for its wisdom.

Whilst Russia continues to deny that its troops are fighting in the ongoing Ukrainian conflict, a respected news site in Russia seemingly inadvertently published secret figures that detail deaths and causalities of forces on the ground.

In fairness, some journalists were properly skeptical of this from the start, such as Leonid Bershidsky, who is likely the best (i.e. least ideological, most fact based) anti-Putin journalist writing at a high profile venue today.

A couple days later, this rumor was taken apart by RT, by revealing the elementary fact that there was no such publication as Business Life. Then the whole affair was comprehensively debunked by Ruslan Leviev (in Russian and translation), a liberal Russian journalist who has actively hunted for traces of Russian military involvement in Donbass. He uncovered that the site was a simple phone number phishing website whose owner went so far as to use stolen identities to keep the scam going.

And some Western journalists such as the AFP’s Dmitry Zaks were very, very sad to see the truth come out.

I said they needn’t worry too much. As is all too typical in this conflict, it is the sensationalist, headlines-generating news items that make the biggest impact. Reddit is probably the single biggest political discussion forum in the West, where upvotes are directly linked to visibility.

Let’s do a quick quantification using the number of upvotes at /r/WorldNews as a proxy:

BS + Reality +
Paul Goble 1129 RT 2
Forbes 374 Ruslan Leviev 0
NBC 219
Independent 28
TOTAL 1750 TOTAL 2

What can one say?

Well, first… Kremlin bots! Olgino trolls! Where the hell are you?!?

Second – the rather mundane observation the vast majority of people who only read the articles on /r/WorldNews – without delving into the comments, which at least in this case strip away the BS quite effectively – would come away reinforced in their impression that Russia is directly involved militarily in Ukraine on a large scale, is getting its ass kicked, and that popular opinion will turn against Putin sooner or later at which point the usual color revolution textbook would be pulled out. This is not an isolated case. It’s just the banal reality of information war. The people who “ordered” this story and then laundered it into the MSM don’t care that it was quickly exposed and that it thus has a short shelf life. It still dominated the Ukraine headlines for a couple of days, so it’s mission accomplished so far as they’re concerned. Only a tiny percentage will maintain interest long enough to see it debunked. So far as the rest are concerned the only effect is to reinforce the dominant narrative and the audience for that is primarily Western.

This is all rather obvious, of course, but even – especially – obvious truths still have to be repeated every so often.

 
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Nearly every other day brings another scary headline about Russia’s economic apocalypse. Inflation is robbing Russians of buying power and Putin propagandists are denying it. The “wheels are coming off” the regime according to our friends at the RFERL, the end of the regime is nigh according to Bill Browder, and Putin’s days are numbered, at least in the creative imagination of Ukrainian nationalist academic Alexander Motyl.

Masha Gessen’s friends can no longer get their little Gruyères, the “legendary” (primarily for losing his clients’ money) Moscow investor Slava Rabinovich is predicting food shortages, and things are only about to get worse with oil falling to $25 per barrel and the ruble to 125/$1, at least according to the Khodorkovsky-funded Interpret Mag’s Paul Goble, who has made something of a professional career forecasting Russia’s takeover by Muslims and the Chinese.

Ambrose Evans-Pritchard, the guy who has predicted all twelve of China’s past zero recessions amongst other forecasting accomplishments, says that Russia is “in a full-blown depression.”

One would think from all the noise that we are looking at some sort of Greece-like depression, or an imminent rerun of the collapse of the post-Soviet economy in the 1990s.

Now for the rather banal reality. Real GDP is expected to contract by around 2.7% this year according to the World Bank, but then recover to 0.7% in 2016 and 2.5% in 2017.

The reasons behind this are likewise pretty banal. They don’t have a great deal to do with Western sanctions, which hurt the ability of Russian companies to raise capital but otherwise have had little bite, and they have even less to do with any particular feature of Russia’s political system/kleptocracy/lack of economic freedoms that both anti-Russian establishment pundits like Ariel Cohen and pro-Western liberals in Russia like former Finance Minister Alexey Kudrin like to claim as dooming it to economic stagnation. If they were right, then East-Central Europe – most of which is rated as a lot economically freer and less corrupt than Russia on the various indices that proclaim to measure such – would not also have been stuck in a relative economic rut since around 2007.

No, the reason for Russia’s recession is quite simple and boils down to the sharp collapse in oil prices from ~$100 in 2014 to ~$50 this year.

Though the Russian economy is about far more than just oil – natural resource rents are 18% of GDP – it is true that oil is the key component of Russia’s export basket. So when oil prices collapse, in the absence of massive and unsustainable interventions, the ruble devalues. This is indeed what happened. Imports went down, goods became more expensive, and inflation rose. The Central Bank jacked up interest rates in order to prevent runaway inflation, but at the price of a decline in aggregate demand and consequently a short-run decrease in the GDP. If one is really searching for a comparison, the correct one would be not to Greece (which is locked in a monetary straitjacket by the ECB) nor to the late Soviet Union (wholly irrelevant) but to the Volcker recession in the early 1980s US.

Sergey Zhuravlev's permanent oil shock model. Steady growth line represents $100 oil scenario; trough and recovery line represents $50 oil scenario.

Sergey Zhuravlev’s permanent oil shock model (click to enlarge). Steady growth line represents $100 oil scenario; trough and recovery line represents $50 oil scenario.

There is now a very substantial output gap. Dependence on Western credit is now much reduced relative to 2013, to say nothing of 2007. Meanwhile, there are active and serious efforts to develop Russia’s own financial system, which remains woefully underdeveloped for an economy of its size and scope.

Finally, even if oil prices drop permanently to $50 – which is entirely possible, given the removal of the Iran sanctions, this would not mean the Russian economy would be necessarily doomed to years of stagnation. To the contrary, econometric modeling by Russian economist Sergey Zhuravlev indicates that it would result in a ~1.5 year recession (which began in mid-2013, versus 2012 in his model; but otherwise it remains very relevant) followed by accelerated GDP growth thanks to exports.

Otherwise, macroeconomic indicators remain unremarkable. Corporate debt repayments scheduled for the second half of the year are twice lower than in the first half. The budget deficit is forecast to be 3-4% of GDP for the year and overall state debt levels continue to be very low. (Incidentally, this figure is 20% for Saudi Arabia. Which should put the nail in the coffin of the idiotic conspiracy theory that the fall in oil prices has been orchestrated by them and the US to undermine Russia).

russia-unemployment-rate

Unemployment in Russia (Trading Economics).

Unemployment has barely budged, not even reaching 6% at its peak. In comparison, it was at 10% throughout much of the 1990s. This is almost entirely an output recession.

Now inevitably when recessions occur, living standards tend to fall, and people have to live more frugally. Reading the Western media, one would think that the recession has led to a tsunami in worker protests, criminality, and elite intrigues against Putin.

But in statistical terms, the real impacts of the downturn have been modest. According to Levada opinion polls, the percentage of people having difficulty buying food and clothing increased to 32% this year from 21% in 2014, but this is still lower than the figure for (pre-crisis) 2012, when it was at 33%, to say nothing of the early 2000s (higher than 50%) or the 1990s (around 80%). The percentage of Russians who spend either “almost all” or “two thirds” of their incomes on food, another measure of poverty, is 26% this year, completely unchanged from 2014, and actually lower than in 2013 (33%) or the 2000s in general (40%-50%), to again say nothing of the 1990s (consistently around 80%). These numbers have been confirmed credible by observers such as Russia Insider’s Gilbert Doctorow and Alexander Mercouris, who have personally assessed the situation on the ground, in stark contrast to the New York Times’ Masha Gessen’s reliance on her “Je suis fromage” liberal Russian friend.

Index of "protest potential" based on percentage of Russians saying they'd be willing to partake in protests.

Index of “protest potential” based on percentage of Russians saying they’d be willing to partake in protests.

It is deeply unfashionable to say this but Russian living standards have improved astronomically in the 15 years of Putin’s rule – more so than the headline GDP figures. As such, even a recession like the current one only kicks living standards back by one or two years.

As such, it is not surprising – if deeply disappointing to the Western elites who want to stir up a color revolution in Russia – that Russia’s level of “protest potential” (the percentage of Russians saying they would be willing to participate in protests, or rating the likelihood of protests as being high) is currently near record lows.

Naturally, any such attempts to put the effects of an ultimately modest ~3% drop in GDP into statistical perspective will be met with accusations of callous indifferent to the plight of the Russian people, and the work of Olgino trolls to boot. I have seen this replayed numerous times on the Internet, even when the people making such arguments were Russians living in Russians, whose only sin was to recount their own (generally modest) experiences and impressions of the recession.

Make no mistake – there is a well coordinated media effort in the West to leverage any Russian economic problems to destabilize the Kremlin. Note the chorus of condemnation around the destruction of food illegally imported from the EU in contravention of Russian sanctions, even though the destruction of excess food is routine under the EU’s Common Agricultural Policy.

Naturally, this is driven by their altruistic and heartfelt commitment to the wellbeing of the Russian people. Though isn’t it just a wee bit strange that those journalists and “activists” who tend to shout loudest about the burning of European food also tended to be the ones who maintained the thickest silence about the burning of Russian people in Odessa in the new European Ukraine.

 
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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.