Latynina on Putin’s Sham Economy

Hero journalist Yulia Latynina, writing in the Moscow Times:

Two stories came out in the media at the same time in late March. The first reported that First Deputy Prime Minister Igor Sechin had initiated a review of Norilsk Nickel deals. Simultaneously, Vneshekonombank, VTB and the Audit Chamber started paying close attention to the company as well.

In a surprising coincidence, the State Council of China met in Beijing the next day to appoint Syao Yatsin, the former head of the Aluminum Corporation of China, as assistant secretary of the council. Yatsin’s task in his new post will be to manage the acquisition of shares in foreign raw materials firms for the benefit of China’s state-owned companies.

These two stories illustrate a big difference in how the Russian and Chinese governments operate. In the first story, Russian officials use the crisis to leech off a company’s profits and to seize its assets. In the second, Chinese authorities use the crisis as an opportunity to gain an even more dominant position in the global economy.

Why are the assets of Russian companies so cheap and their debts so expensive? The high debt prices reflect the companies’ desire to reach an agreement with the banks, and the low asset prices demonstrate that private property in Russia is practically worthless.

Why did Russian companies run up such high debts? One goal: They wanted to take out cheap Western loans to pay their Russian taxes. Did they use the loans to develop Russia’s own manufacturing base? No. A significant portion of this debt was used to buy assets in the West for the simple reason that they knew that Russian-based assets are always at risk of becoming the subject of one of Sechin’s arbitrary government inspections, whereas the Western assets are well beyond Sechin’s reach.

The Russian economy survived the 1998 default in large part because Russia’s oligarchs made a fundamental change in their strategy: They stopped acting as bankers and became industrialists.

Now, not a single industrial group in Russia is changing its tactics. Oleg Deripaska is a perfect example. He has about $30 billion in debts, but he is not about to part willingly with a single asset. His whole strategy consists of dragging out negotiations in the hope that the dollar drops in value, making his dollar-dominated debts more affordable.

The overall volume of Russia’s assets has shrunk, even while its debt obligations remain unchanged. The only way of “solving” the disproportion of debts to assets is barter, and this means that even well-managed companies won’t be able to operate normally.

Imagine, for example, that you own a gold mining company that happens to be the only business left in Russia with no debts. Obviously, if every other company has resorted to the barter system for paying its bills, you wouldn’t be foolish enough to continue using cash.

What does that mean in terms of social unrest? It won’t be anything like the mass protests that our leaders fear so much. In Russia, the main form of social protest in response to worsening conditions is more often than not self-degradation. The average unemployed factory worker will not start up his own business or take to the streets. He will most likely grab a bottle of vodka and quietly drink himself into oblivion for the next couple of years. This is his best anti-crisis program.

Russian authorities became accustomed to making bad decisions when money was in abundance, and the relative cost of their mistakes was negligible. Now the cost of making bad decisions has increased exponentially.

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One response to “Latynina on Putin’s Sham Economy

  1. “What does that mean in terms of social unrest? It won’t be anything like the mass protests that our leaders fear so much. In Russia, the main form of social protest in response to worsening conditions is more often than not self-degradation. The average unemployed factory worker will not start up his own business or take to the streets. He will most likely grab a bottle of vodka and quietly drink himself into oblivion for the next couple of years. This is his best anti-crisis program.”

    So much for Ivan Sixpack leading the revolution. There you have it, folks.

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