EDITORIAL: The Russian Economy is Collapsing

EDITORIAL

The Russian Economy is Collapsing

In 2008, nearly $130 billion flew out of Russia, erasing the modicum of inflows registered in 2006 and 2007. For its size, Russia as an investment destination pales in comparison to South Korea. Total equity portfolio inflow into Russia in 2009 was just $3.4 billion, according to World Bank data, making it the lowest of the big emerging markets by far. India, China and Brazil all registered inflows over $20 billion. A recent opinion poll by the Levada Centre shows that 22% of Russia’s adult population would like to leave the country for good, up from 7% in 2007. It is the highest figure since the collapse of the Soviet Union, when only 18% said they wanted to get out. Over 50% of Russian entrepreneurs said that they wanted leave the country. “From a macro perspective, I don’t want to be in Russia,” says Justin Leverenz, emerging markets portfolio manager at Oppenheimer Funds in New York. “From an investor’s point of view, Russian politics are far beyond what I’m able to analyze.”

Believe it or not, those words appear in a recent article in which the author is trying to put a positive spin on Russia.  Can you imagine what Russia’s economic critics are saying these days?

Putin Fails, then Sticks Head in Sand

Pavel Baev, writing on the Jamestown Foundation website:

The volatile turbulence that battered the world economy last week should have passed Russia by, but it did not. Indeed, Russia is not burdened by a massive debt, is spared political feuds about budget cuts and is not even exposed to the looming Greek default; nevertheless, its stock exchange fell deeper than most. The Dow Jones index, for that matter, opens this Monday on about the same level where it was a week ago, while the RTS slipped from the plateau of about 11,600 to a low of 9,600 and barely bounced to 9,900 on Friday (Kommersant, August 13). Certainly, the speculative games are only a symptom, and not necessarily a reliable one, of the real economic trends, but statistics suggest that Russia’s economic growth slowed down in the second quarter, and experts argue that the country is entering into the new phase of turmoil, for which it is not any better prepared than it was in mid-2008 (www.newsru.com, August 10; Nezavisimaya Gazeta, August 12).

EDITORIAL: The Dog Days of August for the Russian Stock Market

EDITORIAL

The Dog Days of August for the Russian Stock Market

The Dog Days of Russian August put the Bite on the Russian Stock Market

August is historically a nasty month for Russia.  And true to form, in the first ten days of the month this year, the Russian stock market lost a truly breathtaking 20% of its value, plunging from 2000 to 1600 on the dollar-denominated RTS index.  The losses were actually far worse than they appeared, because the Kremlin had been feverishly pumping Russia’s precious reserves into the market to artificially inflate demand and limit the damage.

But even worse than the numbers was the reason for them.  Julian Rimmer, a broker in Russian shares at CF Global Trading in London, explained:  “Russia is entirely hostage to external factors. The only thing which can arrest the decline would be some form of concerted — and simultaneous — central bank policy response. The perceived lethargy and lack of unanimity is extremely damaging.”

“Entirely hostage.”  Ouch.  “Lethargy.”  Double ouch. Nice work there, Mr. Putin!

EDITORIAL: Russia’s Retirement Paradox

EDITORIAL

Russia’s Retirement Paradox

A Russian man on average lives to the age of 61.8 years while a Russian woman reaches 72.6 years of age.  This places Russia a shocking #135 on a list of 194 world nations when ranked for overall average life expectancy (65 years — Russians perish right at the time most Westerners are just starting retirement).

The stunning gap of more than a decade in average lifespan between Russian men and Russian women is matched by virtually no other country on the planet. Even in Japan, the country with the longest-lived women in the world, the gap between men and women is well under a decade.

But what is even more bizarre is Russia’s pension system, which awards retirement to women at 55 and to men 60.  This means that the average Russian man would only enjoy a pension for 1.8 years, while the average woman would get one for 17.6 years. Simply by virtue of being born female, a woman would get nearly ten times more pension benefits.

Shocking, isn’t it?

Russia Cannot Innovate, Doomed to Fail

Vladimir Terletsky writing on Rus Business News:

Russia will be unable to become an innovation-driven country in the near term, as, despite its tremendous area, there is no demand for innovative developments. Large companies prefer to purchase off-the-shelf technologies in other countries; talented scientists, in their turn, leave Russia, finding no comfort in living and working at home. Experts see monopolists as the main hindrance to progress, as being the closest to government money. The “RusBusinessNews” columnist is sure that only transnational corporations can make them move; however, the authorities show no haste to allow them access to the Russian market.

Young Entrepreneurs Flee Russia

Time magazine reports (for those who read Russian, a new ZheZhe blog has been created for expatriate Russians to lay out their reasons for fleeing the nightmare that is Putin’s Russia):

When he was 17 years old, Alexei Terentev, then a bookish high school student in Moscow, created what the Russian government has been desperately trying to engineer — a start-up with some of that Silicon Valley–style magic. It was innovative, cleverly marketed and could be run out of his parents’ apartment. By June of last year, when Terentev got his diploma from one of Moscow’s elite universities, his company was on its way to making him a millionaire. But it was also getting big enough, he says, “to get the wrong kind of attention from officials.” So Terentev, now 22, took no chances. One day after graduation, he packed up his laptop and emigrated to the Czech Republic, taking his company with him. He doubts he will ever return.

The reasons for his move, as well as his haste, are the typical worries of the young entrepreneurs Russia is currently hemorrhaging: corruption and bureaucracy, the forces that are driving the biggest exodus since the fall of the Soviet Union.

The Bank of Moscow, Running Dry

Hero journalist Yulia Latynina, writing in the Moscow Times:

While watching the Bank of Moscow scandal unfold, two questions come to mind. First, the Bank of Moscow held the accounts of Moscow’s city budget, and the deficit of the bank is now $14 billion. In essence this means that the city’s funds have been stolen from the bank. How did this happen?

The second question is whether VTB will file a lawsuit in London courts against former Bank of Moscow president Andrei Borodin. It appears that the goal is not to extradite him back to Russia but to put him behind bars in Britain.

Borodin somehow received 20 percent of the shares of the bank, but it is difficult to say whether he was an actual or nominal shareholder.

EDITORIAL: Inflation Devastates Putin’s Russia

EDITORIAL

Inflation Devastates Putin’s Russia

By far the most important economic story where Vladimir Putin’s Russia is concerned remains inflation.  Raging out of control like wildfire, consumer price inflation is hollowing out the Russian economy even faster than the virulent corruption which Putin has likewise failed to control.

And the most important inflation story is how the government is hiding the truth about it.

EDITORIAL: The Failure of Putinomics

EDITORIAL

The Failure of Putinomics

Last year, Russia experienced nearly $40 billion in capital flight.  Money flowed out of Putin’s Russia at a rate of $3.2 billion per month.  Russians voted with their wallets, and they voted that Putin could not be trusted and that a future ruled by him was bleak indeed.

So far this year, despite a crude oil prices above $100/barrel (and a stock market up one-fifth compared to last year),  money is leaving Russia at a rate more than double that of last year.  Already, in just the first four months of this year, Russia has hemorrhaged a stunning $26.3 billion — more than half the total it lost in all of 2010.  The landslide vote against Putin in 2010 has turned into an absolute rout in 2011.

Nikolai Maximov and Russia’s Steel “Business”

John Helmer reports:

In European folklore, will-o’-the-wisps are lambent flames seen flickering over bogs and fens, and known by many different names and stories. Usually explicable as methane igniting, in some Baltic mythologies the will-o’-the-wisp is believed to signal buried treasure. In others, the ignition is believed to be the trick of a mendacious imp intent on leading unwary travellers to misfortune.

In the history of the Russian steel business since 1990, just two men have gone bankrupt while trying to create steelmill empires, and including them, four groups have collapsed. Considering how small their indebtedness was compared to the likes of the steel majors – Evraz, Severstal, Mechel – they might think of themselves as plucky, but unlucky.

EDITORIAL: Non-Competitive Russia

EDITORIAL

Non-Competitive Russia

China #27

India #51

Brazil #58

Russia #63

Once again, the World Economic Forum has found Russia to be bringing up the rear when surveyed for economic competitiveness and compared to the other nations in the so-called BRIC group.  At #63, Russia’s rating remained totally unchanged from last year, no increase in competitiveness whatsoever. Well outside even the top 50 world nations, Russia is languishing in a backwater that gives it absolutely no basis for inclusion in lofty assemblages like the G-8 and the Security Council.

Russia’s growth rate in the first quarter of 2011 was half that of India and China, and it has the highest corruption perception rating of any BRIC nation.

EDITORIAL: Vampire Moscow

EDITORIAL

Vampire Moscow

Recently revealed facts about life in the city of Moscow are truly shocking.

A report by Cushman & Wakefield reveals that retail spending by residents of Moscow is more than twice as high as for the rest of the country and fifty percent higher than the national average for Germany or Great Britain.

The reason is simple:  Like a vampire, Moscow is slurping the nation’s blood at an alarming rate.  Moscow has a stunning concentration of billionaires who spend their wealth at an obscene rate because they know it can be taken away at a moment’s notice by the neo-Soviet regime.

EDITORIAL: Plumbing the Depths of Russian Poverty

EDITORIAL

Plumbing the Depths of Russian Poverty

For our money, the most under-appreciated Russia journalist working today is Galina Stolyarova of the St. Petersburg Times.  In our issue today, we republish not one but two of Stolyarova’s recent reports exposing the true horror of poverty in Vladimir Putin’s Russia. No thinking, feeling human being can read these reports and conclude anything other than that the Putin economy is a not just a total failure, but a total sham.

Putin to People: Drop Dead!

Galina Stolyarova, writing in the St. Petersburg Times:

In an old Soviet joke, three elderly women go to the doctor. All have exactly the same health condition but they enjoy very different incomes. When the first woman — the wealthiest — tells her story, the doctor asks what her income is, and then suggests eating plenty of fruit and vitamins and recommends a trip to a seaside sanatorium. The next one, who has an average salary, is recommended to cut meat, sweets, and fatty foods from her diet. When the doctor examines the last one, who survives on a tiny pension, all he can prescribe is plenty of fresh air.

It is an open secret that the cynicism of the Russian authorities today is no less than that of the doctor in the joke. And a 17-year-old Yekaterinburg high school student, Vitaly Nikishin, embarked on a crusade last month to expose this cynicism to the entire world. He launched a popular blog in which he recounted his attempt to survive for a month on 2,632 rubles, or $88 — the sum calculated by his regional government as the cost of the monthly “minimum consumer basket.”

A Very Russian Story

Galina Stolyarova, writing on Transitions Online:

Toward the end of March, Nina Martynova, a 70-year-old retiree from Voronezh, paid for a loaf of bread and a carton of milk at her local grocery and then walked toward the door. She had taken only a few steps when she was stopped by security guards and ordered to follow them.

She was ushered into a small storeroom and searched. In Martynova’s pocket, the guards found two small chocolate bars. She hadn’t paid for them.

It seems the guards had ample evidence to detain her. A recording by the shop’s security cameras, part of which has been posted online, showed the elderly woman sneaking the bars into her pocket.

On the tape, Martynova seemed so shocked that she slowly fainted when the items from her pockets were laid on the table in front of her.

She at once went into cardiac arrest. An ambulance was called, but by the time it arrived she was dead.

EDITORIAL: The Russian Hallucination

EDITORIAL

The Russian Hallucination

Russia’s most valuable company, Gazprom, has a market capitalization about $150 billion.  That seems impressive, until you know that Exxon, America’s most valuable company, has a market capitalization more than double that of Gazprom.

Flip your perspective, and you see something even more amazing. Gazprom’s value constitutes more than ten percent of the total gross domestic product of Russia.  Exxon’s value? It’s less than two percent of America’s GDP.

In other words, because the American economy is ten times larger than Russia’s, Exxon can fail and America will go merrily on, almost oblivious. But if Gazprom fails, Russia crashes into poverty and absolute collapse. And competing head to head in Russia’s area of greatest strength, America still wins hands down, in dominating fashion.

How is it, then, that Russians dare to continue to adopt such a provocative and hostile attitude towards the USA?

The Doomed Russian Economy

Foreign investment in Russia fell a whopping 13% last year and is now half what it was four years ago.  Vladislav Inozemtsev, professor of economics, director of the Moscow-based Center for Post-Industrial Studies and editor-in-chief of Svobodnaya Mysl, writing in the Moscow Times, explains why:

President Dmitry Medvedev publicly acknowledged last week what everyone has known for two decades: The investment climate in Russia is bad. While the measures Medvedev proposed to improve the investment climate are generally sound, there are several reasons why they won’t work.

In 2010, fixed capital investment in Russia totaled 8.35 trillion rubles in constant 2008 prices ($310 billion), the same as it was in 2007. In China, however, investment in 2010 was 14.4 trillion yuan ($2.16 trillion). One of the main reasons China’s investment level is so high is its high domestic savings. But the higher the level of savings, the lower the level of consumption.

In Putin’s Russia, the Poor get Poorer

Paul Goble reports:

The real incomes of the two least-well-off quintiles of the Russian population have fallen since 1991 while those of that two best-off have risen significantly, dramatically increasing income differentiation and potentially exacerbating class-based tensions, according to two studies by the Higher School of Economics.

“If one considers the overall figures concerning how Russia lived in 1990 and 2009,” Andrey Polunin of  Svobodnaya Pressa says in reporting on these studies, “it turns out that citizens have only won as a result of reforms. Thus, consumption has gone up overall 1.45 times. But this is like an average temperature in a hospital”.

That is the trend Moscow and its supporters normally report, but if one unpacks the figures as the Higher School of Economics experts do in two reports (“The Level and Way of Life of the Population in 1989-2009” and “A Comparative Analysis of Consumption and Expenditures”), Polunin says, the picture is far more complicated and less positive.

Russia, Land of Hypocrites

Streetwise Professor reports:

It’s amazing the things Russophobes will say.  Like this:

“Right now [Russia’s] investment climate is so bad that it won’t be affected” [by the imminent failure of the BP-Rosneft deal].

What slander.  Must be some retrograde, Cold War fossil.

Check that.  It was Arkady Dvorkovich, Medvedev’s top economic aide.

EDITORIAL: The Horrifying Fangs of Russian Poverty

EDITORIAL

The Horrifying Fangs of Russian Poverty

Imagine having to live on $6.93 per day or less.

That’s all you’ve got to buy food and put a roof over your head, and to pay for transportation to and from your work, which pays you roughly $1.30 per hour. For medical expenses, entertainment, the whole shooting match.  You’ve got $0.42 per hour of each day to survive on.

Think you could do it?

If so, would you care to try it in Vladimir Putin’s Russia, where food prices jumped by 17.5 percent between June 2010 and February 2011? No? We didn’t think so.

EDITORIAL: Russia, Drowning

EDITORIAL

Russia, Drowning

Last week the world heard yet another truly appalling bit of bad economic news about Putin’s Russia.  In January alone, Russia saw a shocking $13 billion in capital flight.  For some context, that figure was almost equal to the amount Russia lost in the first three months of 2010, and it was more than one third of the total amount Russia lost in all of 2010.

This news makes mincemeat of any claims that Russia is on the path to economic recovery. Anyone with a clue knows full well that, just as in 2008, the fact that the Russian stock market is surging carries with it no good news about Russia’s real economy. The stock market is only concerned about one thing, the price of crude oil, because the fact that Russia has oil is the economy’s only bright spot.

Intelligent people understand that Russia’s dependence on oil is a bad thing, not a good one, and they are voting with their wallets on whether Russia has a future.  The vote is a landslide:  Russia’ doesn’t.

EDITORIAL: The Foundering Putin Economy

EDITORIAL

The Foundering Putin Economy

Last week saw another epic tidal wave of bad economic news sweep over the helpless shores of Vladimir Putin’s Russia.

It was announced that Russia had lost a whopping $30 billion in capital flight last year, a stunning four times more than the Kremlin had predicted would occur.  The bloodletting continued in shocking fashion this year, when capital outflow in January alone reached $13 billion despite a rising oil prices that should have redirected foreign money towards Russian assets.  At this rate, capital flight in 2011 will be even higher than it was last year.

Then the world learned that Russia has the lowest foreign investment rate of any emerging economy on the planet. Major retailers like Wal-mart and Carrefour have rejected the Russian market entirely, while others like Ikea have ceased further investment.  Foreign banks too, it was reported, are fleeing the Russian market, lest their capital be stolen by the so-called “government” they find there.

EDITORIAL: The Coming Russian Depression

EDITORIAL

The Coming Russian Depression

Even by Russian standards, the economic news last week was exceedingly grim.

A new report released by Standard & Poors revealed that as Russia’s population crashes to near 115 million by 2050, a loss of well over 15% from today’s level, and as it ages while younger workers disappear, the country can expect national debt to soar to stratospheric levels nearly six times what Russia produces in value in a given year.  Russia will produce less and less value with fewer and fewer productive workers (Russian workers are already among the world’s least productive and most corrupt), yet it will be called upon to pay out more and more to unproductive, aging workers.

S&P’s conclusion was stark indeed: “By 2035, we expect that Russia’s fiscal indicators will have weakened such that they would be more in line with sovereigns currently rated in the speculative-grade category, because, in our view, the projected improvement in GDP per capita would not be able to offset the potential fiscal deterioration.”

Ouch.

EDITORIAL: Russia vs. China, the Smackdown

EDITORIAL

Russia vs. China, the Smackdown

China is a Communist country.  Russia is supposedly capitalist.  Suppose a major business publication were to undertake a study of the two countries to decide which one presents a more horrific environment for foreigners to do business in:  Which country do you think would come out on top – that is, on the bottom?

Did you guess Russia?  You’re right!  The study’s authors explain:  “We applied a concept called the Capital Receptivity Index (CRI) that measures an EE using 23 specific factors — distributed among the four elements listed above. Countries are scored on each factor from 1 (world’s worst) to 5 (world’s best), which makes the maximum possible score 115. Tallied as a percentage, the CRI of the U.S. is 82% (94/115), Russia’s is 38% (44/115) and China’s is 46% (53/115).”

Here is the data breakdown (with each country’s score out of the total possible score):

The Putin Economy, on the Verge of Collapse

Anders Aslund, writing in the Moscow Times:

When Russian leaders review the country’s economic development in 2010, they can only be disappointed. There were no great economic disasters, but Russia has clearly underperformed its peers.

Until 2008, the favorite Russian measuring mark was other BRIC countries, but that is no longer so. In 2009, Russia did worse than all other Group of 20 countries with gross domestic product plunging 7.9 percent. This year, growth will be about 4 percent, less than half of India’s and China’s.

Two years ago, Russia’s GDP per capita at current exchange rates was four times as large as China’s, but now it is only twice as large. From Moscow’s horizon, China looks increasingly like a threat rather than a peer.