MONDAY NOVEMBER 3 CONTENTS
(1) Another Original LR Translation: Milov on the Crisis
(2) EDITORIAL: What about that Economy, Mr. Putin?
(3) Essel on Russian Corruption
(4) Russia’s Self-Contradictory Foreign Policy
(5) Putin’s New Clothes
(6) The Putin Economic Ship, Foundering
NOTE: The evidence of the total failure of the economic policy of Vladimir Putin that we offer today, ranging from an original translation to a column by Dave Essel to our editorial to a host of reporting from a wide variety of third-party sources, is utterly convincing and irrefutable. Will the people of Russia ever rise up from their coma of sloth and cowardice to demand that their country be turned back from the abyss before it is too late?
A word from the translator: Having translated both Milov/Nemtsov white papers, I have developed a respect for Milov’s way of thinking and am always on the look-out for more from him. This exposition of his appeared in Novaya Gazeta last week and is, as always, interesting and self-evidently right. The sad thing, of course, is that what is self-evidently right to LR readers and anyone with an inkling of good sense, is a тёмный лес (dark wood) to most Russians. It seems to me that if we could discover the reason why this is the case, we would be able to “cure” Russia instantly. Dream on.
We Will Be Last In Line
Why Russia will not be able to rise up from its knees
without help from Western capital
by Vladimir Milov
October 31, 2008
Translated from the Russian by Dave Essel
It is quite evident that the growth model followed by Russia in recent years has now collapsed and that there is nothing around that can take its place, at least in the foreseeable future. Because the 7-8% GDP growth of the last four years derived exclusively from the inflow of foreign capital.
Bear in mind that, unlike the three other countries forming the BRIC [Brazil, Russia, India, China], where capital inflow consisted in the main of direct foreign investment, the money that came into Russia was mostly in the form of foreign loans. These were the engine of our development to an even greater extent that oil and gas were. And these loans were not ‘our money’ coming back home, as some assert, but real foreign money. And then, this money was not spent on modernising the country in any way but was instead mostly frittered away: for example, most of the borrowing by the Russian companies which held IPOs in the last few years was spent on buying shares and real estate while only 20-30% went into the implementation of genuine development projects.
What about that Economy, Mr. Putin?
If Vladimir Putin were brave enough to be interviewed by the editors of this blog — he’s certainly not, preferring to hobnob with brown-nosed idiots like Larry King and bought-and-paid for stooges at the Valdai convention — the first question we’d ask him would be:
Why, after nearly ten years of ruling Russia, have you not freed your national budget from dependence on the price of crude oil as established by foreign markets?
Putin’s own deputy finance minister admits that if crude oil prices do not average $60/barrel in 2009 — and they currently stand at $56.80 — then Russia’s budget for 2010 will not be balanced and will have to be “reconsidered.” And there is no “fat” to cut in that budget. Russians live in squalid poverty and don’t rank in the top 100 nations of the world for male adult lifespan. So the Kremlin will either go into massive .
The bad news rolls in like a tsunami. Russia had a shocking $140 billion in capital flight in just August and September of this year (that’s a stunning $1,000 for every man, woman and child in the country, equivalent to a full month’s average wages for each one) and the Kremlin itself now admits it expects consumer price inflation to ring in at a whopping 13% by year’s end, nearly 20% higher than the Kremlin had predicted. Russia’s foreign reserves have plunged below $500 billion, down $31 billion in just the third week of October as the government flushed away the national savings propping up the stock market and the ruble. Large firms are imposing massive layoffs. Russia is even moving to take the draconian step of criminalizing non-payment of debt, a measure civilized nations abandoned centuries ago. And this catastrophe was caused mostly by the fact that the price of crude oil plummeted over the space of a few months by more than half in price, and because the Putin administration has totally failed to build anything remotely like a real economy that could insulate the country from the random choices of world petroleum markets.
Corruption: Don’t We All Just Love Greasing the Wheels?
by Dave Essel
In a recent translation of mine published in LR, Russia was referred to as a swamp. The following news item is descriptive of one aspect of this swamp. Corruption is a strange thing, enmiring as it does both the corrupt official and the bribe giver, for both of whom it is a convenience. For the bribe-giver it is also a burden, but by the nature of the transaction a lesser burden than the alternative. I don’t really see how it can be stopped except by radical surgery, like amputation to prevent the spread of gangrene.
Consider this story from Novaya Gazeta sourced from Ekho Moskvy radio:
Slawomir Debski, director of the Polish Institute of International Affairs, writing in the International Herald Tribune:
Russia no longer disguises the fact that it wants to recover its sphere of influence. The paradox is that Russia can only achieve this through the use of force, as the model of development it proposes is unattractive to east European societies. And the more Russia resorts to force, the less the chances that it will achieve its sphere of influence.
It is a pity that the meeting last month between Russian President Dmitri Medvedev and Western political scientists did not get greater notice. Medvedev not only declared Russia’s desire to have its own sphere of influence, but he also defined the term.
“Our neighbors are close to us in many respects, and are a traditional area of interest for the Russian nation,” he said. “We are so close to each other, it would be impossible to tear us apart, to say Russia has to embark on one path, and our neighbors on another.”
Such words are telling – they indicate that Russia claims the right to co-determine the foreign policy of the former Soviet republics and the direction of their internal development.
British Economist Robert Skidelsky, writing in the Financial Times:
The official view is that Russia is an outstandingly successful economy temporarily derailed by a financial shock of foreign origin. Its annual economic growth in real terms averaged 7 per cent in the years during which Vladimir Putin was president (2000-08), annual real wages rose by almost 15 per cent, the federal budget was continually in surplus. Mr Putin, now prime minister, was quick to blame America for the downturn. Before the crisis hit home Dmitry Medvedev, Russia’s president, boasted in June that Russia was not part of the problem but part of the solution. Its cash-rich companies would invest abroad, Moscow would become a world financial centre, the rouble would become a reserve currency and so on.
All this turned out to be fantasy. The Russian stock market has lost 70 per cent of its value this year. The commodity prices that spearheaded its boom are now falling. The easy credit money from the west that fuelled it has now fled. Russia has failed to diversify its economy and its politics have long made investors nervous. A confrontation with reality is long overdue.
The U.S. Dollar, Soaring in Putinic Russia
Standard & Poor’s rating service lowered Russian long-term sovereign credit rating outlook to negative Oct. 23 because of projections that Moscow will need to inject more credit into the faltering Russian banking sector. A credit rating indicates the agency’s estimation of a state’s ability to maintain debt payments, so in this case S&P believes that ongoing efforts to address the financial crisis could overtax the Russian government. The cut in debt rating comes as the yield on Russian government 20-year bonds has increased eight basis points (a 0.08 percent rise in yield) to 10.94 percent, indicating that the foreign appetite for Russian bonds is quickly dropping as credit becomes scarce and investors seek investments they feel are more secure. The bond yield of Russia’s largest company, natural gas behemoth Gazprom — which is also the single greatest source of Russian total external debt — has thus skyrocketed, and it now stands at almost 700 basis points above emerging sovereign debt. Meanwhile, the Russian stock exchange closed below 550 on Oct. 24, wrapping up a precipitous fall that has destroyed 80 percent of its value since May.
A comprehensive flight of investor capital is occurring in Russia for a number of reasons. This situation is placing great pressure on the Kremlin to use its capital reserves — the third largest in the world — to prop up the Russian banking sector and the main engines of the Russian economy: the energy and mineral sectors. In the short run, Moscow’s massive capital reserves will allow it to weather the global liquidity crisis and increase government control over all sectors of the economy. In the long run, however, Russia might face a dearth of capital as it drains its coffers trying to pump cash into the system, putting vital capital expenditure projects (such as improving infrastructure, improving oil and natural gas field development, and military spending) on hold to the detriment of its ability to face off with the West. The result will be an economy that has far more in common with the Soviet Union than with post-Soviet Russia — even post-Soviet Russia under Vladimir Putin. And that will affect Russia’s bid to reassert itself globally.