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March 24, 2010

LQD: What’s really wrong with Russia?

Filed under: Politics: Russia — poemless @ 1:16 PM
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[Note the invisible “w” in front of the word Russia.]

Ben Aris has an article in Business News Europe titled, “What’s really wrong with Russia.”

I spend some effort exposing terrible journalists and good journalists’ mistakes. I don’t actually have anything against the traditional media, I just have high expectations of them. I should point out the good with the bad. Aris’ piece is not brilliant, nor do I agree with every assertion made in it. But it is refreshingly sober. Earlier today I witnessed two people writing about Russia go at it. Both had valid points, but the tone became hysterical and weirdly personal. I wanted to scream “Stop! Neither of you are helping yourselves and you certainly are not helping your readers…” Then I read this BNE article and thought, yes, this is what I’d like to see more of. Well organized, impersonal, full of data while not painfully wonkish, entertaining while not substituting entertainment for analysis. Sadly this is what passes for exceptional journalism these days…

The article begins with a quintessentially Russian little anecdote about a couple who breeds rabbits in their garden and desire to open a little corner store and sell rabbit meat, fur and livers. There is no law against this, but corrupt local bureaucrats keep thwarting their dreams of becoming bunny-mongers. What a great story! For the bunnies, anyway.

Aris points out that corruption is a serious issue in Russia, but this problem is not unique, esp. among emerging markets. He also notes that Russia per-capita income has doubled in the last five years, performing much better than some of her less corrupt neighbors. So he poses the question, “Once you start digging into the detail, the picture becomes quite confusing, begging the question: what is really wrong with Russia and are things getting better or worse?” He proceeds to take a look at some of the issues commonly cited in answer to, “What’s wrong with wRussia?”

On Infrastructure:

“Russia’s most obvious problem is that its Soviet-era infrastructure is crumbling and won’t be serviceable for much longer. A massive amount of investment is needed into pretty much everything. The hot spots are power and transport.

Before the crisis knocked the economy onto its back, the demand for electricity matched the country’s ability to generate it. Any further economic growth was going to result in blackouts, which in turn would become a major drag on growth. The crisis has brought the Kremlin some time, but the problem will resurface in the next few years as the economy recovers.

Happily, the Kremlin is well aware of this problem and has already done much of the groundwork.[…]

The big omission here on the Kremlin’s part is that while they are spending on power and trains, they have ignored badly needed investment into social infrastructure. The president’s modernisation programme is doomed to fail unless the state spends equally heavily on education. Likewise, the World Health Organisation released a study a few years ago that concluded the very best returns on investment for the economy were investments into the health system: not only does a healthy population work harder for longer and retire later, but the savings made from not having to care for sick pensioners for decades is incalculable.

And the Kremlin’s botched pension reform must be fixed. The Kremlin has just hiked pensions by 50%. However, there is a hole in the pension fund that already accounts for a quarter of this year’s deficit. As the demographic window closes, caused by the aging population, the pension system must be made to pay for itself or this problem will only get worse.

Behold! One can acknowledge both the Kremlin’s accomplishments AND failures, without poof! turning into a gremlin. Hell, even suggesting they’re giving any thought to their problems is considered radical in some circles…

On Oil addiction:

“…Russia’s economic growth is closely tied to the price of oil.

However, the state has actually been pretty prudent when dealing with oil revenues. Oil is heavily taxed, with the state taking 90 cents on every dollar when prices for oil are over $27. The extra revenue has been used to subsidise income and profit taxes (13% and 24% respectively) in an effort to boost economic diversification. Even this largesse can’t soak up all the petrodollars, so the excess cash is siphoned off into the “lockbox” of the Stabilisation Fund and kept out of the reach of free-spending MPs by Finance Minister Alexei Kudrin. It is hard to see what else the Kremlin could have done to minimize the impact of Dutch disease on Russia. Indeed, even with oil prices at $150 a barrel the government still managed to bring inflation down into single digits at the start of 2008. (Ukraine let its inflation rate soar to 25% in the same year, the highest in the world.)

Still, Russia’s economy already has a bad case of Dutch disease. Russia has some the best scientists and engineers in the world, but yet it doesn’t export anything of note other than oil and arms. Everything in Russia is now expensive. Choosing one example at random: according to Moscow’s real estate consultants, the cost of building a distribution centre in Moscow is 34% higher than building the same thing in London, which is crazy.”

Moscow recently fell down the list of most expensive cities. Though I am sure “to live in” and “to do business in” look at different criteria.

On Diversification and top-down reform:

Katinka Barysch, deputy director of the Centre for European Reform, spoke for many recently in a recent paper when she wrote: ‘A genuine modernisation alliance would have to be bottom-up and driven by the private sector. The Russian leadership is pursuing a model of modernisation that is state-centric and top-down. It throws money at new institutes to foster research, it nationalises big industries, it tells state-owned banks which sectors to lend to. It does not do the things that would be required for genuine economic diversification.’ […]

Barysch assumes there is a foundation of business that will flourish if the shackles of government are removed, but the Kremlin is facing an economy where rafts of products and services are simply missing and can’t get started.

State spending is inherently wasteful, but as Russia has the money thanks to oil, the issue at hand is not the efficiency of state spending, but rather its effectiveness: can the spending create sectors that don’t exist now or upgrade those that can’t compete now? ‘As there is no vibrant [small and medium-sized enterprise] sector, the only option left is heavy state spending. The Kremlin is doing this not because they want bigger versions of the existing state-owned behemoths, but because how else are they going to change the nature of the Russia economy?’ says Plamen Monovski, a veteran investor into emerging Europe and CIO-designate at Renaissance Asset Management.”

This is something I rarely hear and frequently think: Why do we commonly assume that the Kremlin’s strategies are always ideologically motivated, and not often simply reflections of a lack of alternatives or short-term practical solutions?

On Corruption and bureaucracy:

“When he was president, Vladimir Putin called for something to be done about corruption in every one of his State of the Nation speeches – and absolutely nothing happened. But since Dmitry Medvedev took over as president in 2009, the new president has launched Russia’s first ever concerted attack on graft. […]

You can question the size of the official numbers, but clearly the government has gone on the offensive. However, the actual numbers prosecuted are still tiny compared to the million-plus strong army of bureaucrats. This is no anti-graft pogrom, like in Georgia where Mikheil Saakashvili sacked the entire police force (which worked beautifully). Rather, the strategy currently seems to be to fire a warning shot over the bows of government to say: ‘Change is coming, mend your ways.’ But it will take years, if not decades, to make a real dent in the problem.”

I think I remember Putin had a few people fired and put in jail… But he was less Mighty Mouse about it.

On Political risk:

“Conventional wisdom has it that Putin is a virtual dictator, but bne’s sources in diplomatic, business and government circles say that Putin is visibly under an increasing amount of strain, frustrated by the government machinery’s failure to implement his plans. On top of this, bringing in Medvedev has considerably weakened his position. ‘Two camps have formed around Medvedev and Putin. The first wants to see Medvedev go further with the liberalisation of the economy and politics, whereas the people close to Putin want to keep things as they were prior to the crisis – where they were making money,’ says an economist who has been advising the government at a top level. ‘Putin is visibly stressed, as some people are starting to ignore him and others are openly calling for him to leave.’

Putin’s big gift to Russia was political stability. As a lone figure at the top of the political tree, he was able to balance all the interests of the various factions. But the arrival of Medvedev has upset that balance, as now there is an alternative power centre.”

Aris ends with a a joke his top secret sources say is making its way around the Kremlin:
“There are two camps that belong to Vladimir Vladimirovich and Dmitry Anatolevich. The only question is: which camp does Dmitry Anatolevich belong to?”

Bad duh bum!

Since I’ve quoted quite liberally, you are now required to go click through and apply for a subscription to BNE. Seriously, these LQD’s are probably copyright infringements, all 30 of you having read for free here what you technically should have had to read for free at BNE, and the outlet could probably use the money to buy sources with better access to jokes.

Anyway, discussion is open.

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