Category Archives: Convergence

The West Made Its Bed, Now Russia Will Lie In China’s

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The latest US-Russia.org Experts Panel discussion was about Russia’s burgeoning partnership with China. I especially recommend Mercouris’ contribution which – although unfortunately titled by VoR’s editorial staff)) – is otherwise quite brilliant. My own effort follows below:

First of all, let me preface that I’m one of the biggest China bulls around. Its economy in real terms will overtake that of the US by the mid-2010’s, if it hasn’t already. It’s already bigger in a range of industries, from traditional heavy industry (steel, coal) to consumption (car sales, e-commerce). Its manufacturing wages have caught up with Mexico’s, which is a quintessential middle-income country. If the average Chinese is now about as prosperous as the average Mexican, then the PRC’s total GDP – taking into account its vast population – is now well ahead of America’s.

Nor is it a house build on sand, as many Sino pessimists would have you believe, but on solid, steel-reinforced concrete. Its economic growth is NOT dependent on cheap exports. And fantasies about its “exploited” cheap labor force, which will become increasingly uncompetitive as it develops, belie the fact that the average Chinese now scores higher in international standardized tests than the OECD rich country average. Given the centrality of human capital to economic growth, China’s rise to the top tables of world power is all but assured.

It would be very worrying if China’s ascent was accompanied by the bellicose rhetoric and militaristic posturing adopted by other rising Powers of the past, like the Kaiser’s Germany. But “yellow peril”-type hysteria aside, this does not seem to be the case. China spends a mere 2% of its GDP on its military, i.e. about twice less in proportional terms than both Russia and the US. This is a most fortunate confluence of events, especially for Russia, as competing with China is unrealistic in the long-term – not when its economy is an order of magnitude bigger. On the other hand, deep engagement with China hold out a number of benefits.

First, China gets access to Russian energy resources, bypassing the vulnerable routes past the Strait of Malacca (either overland via Siberia, or across the top of the world via the thawing Northern Sea Route), while Russia gets access to Chinese capital and technologies – much of the latter purloined from the West, true, but so what? Second, both countries secure their frontiers, allowing them to focus on more troubling security threats: The Islamic south and possibly NATO in Russia’s case, and disputes with Vietnam, Japan, and a USA that is “pivoting” to the Pacific in China’s case. Third, resources can be pooled to invest in Central Asia and root out Islamist militants and the drug trade – an issue that will assume greater pertinence as the US withdraws from Afghanistan.

Frankly, the West is too late to the party. It had an excellent chance to draw Russia into the Western economic and security orbit in the 1990’s, but instead it chose the road of alienation by pointedly welcoming in only the so-called “captive” nations of East-Central Europe. Putin’s reward for his post-9/11 outreach to the US was a series of foreign-sponsored “colored revolutions” in his own backyard. While in rhetoric both he and Medvedev continue to affirm that Russia is a European country, in practice attitudes towards them have come to be based on practicalities, not lofty “values” that they don’t even share. So it is only natural that with time Russia came to be more interested in pursuing a relation with the BRICS (“The Rest”) in general, and China in particular.

The West’s response hasn’t been enthusiastic. The BRICS are written off as a bunch of corrupt posers with divergent geopolitical ambitions that will stymie their ability to act as a coherent bloc. Russia and China come in for special opprobrium. While there’s a nugget of truth in this, it misses the main point: The BRICS might be poorer but by the same token they are growing faster and converging with the West, or at least China and Russia are; and while they don’t see eye to eye on all things, they agree on some fundamentals like multi-polarity, a greater say for developing nations in the IMF and World Bank, and the primacy of state sovereignty.

Here is a telling anecdote from an online acquaintance of his recent experiences with the European news channel, Euronews: “A feature of this site is that there’s a world map with happy and sad smileys on it to indicate good news and bad news. And there on Moscow I spotted a sad smiley, so I focused on it, thinking there would be a report on the already day-old and forecast to last another day blizzard that is raging right now across the Ukraine and European Russia… And the “bad news” that I read? The meeting between the Russian president and his Chinese counterpart together with a report and an analysis of the increase in trade between those two states. That’s really bad news, it seems, for some folk.”

And this is not so much an isolated incident, but a metaphor for the general state of West – Russia relations: While the former expects a certain degree of respect and even submission from the latter, it doesn’t tend to make reciprocal gestures, and then acts like a jilted lover when Russia gives up and goes to someone else’s bed. But that’s the reality of a globalized world, in which the West isn’t the be all and end all, and countries have choices. It is high time that the West mustered the humility to finally accept that it has been dumped.

Russia Moving Into The Fastlane

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One of the most reliable indicators of influence is access to cars. They are the standard symbol of affluence and middle-class status the world over. They are also far more understandable at the everyday level than things like the PPP GDP per capita, or the number of burgers your national McWage will buy.

Following on my last post, which focused on production, let’s now examine another indicator: The number of cars bought in any given year per 1,000 people.

auto-sales-russia-cee

As we can see from the graph above, Russians (22/1,000 as of 2012) are now buying more new cars per person than any other Central-East European country. Now, this is NOT to say that they are richer than the Czechs (18/1,000), or even the Poles (9/1,000) and Estonians (18/1,000). The latter countries’ markets are already substantially saturated and close to Western levels of auto ownership, while Russia still has some catching up to do; furthermore, they don’t have tariffs on imported second-hand cars, whereas Russia’s are quite substantial. It is also probably true that on average Czechs buy higher quality and more expensive cars than Russians. Nonetheless, the difference between Russia and countries like post-crisis Latvia (7/1,000) and Hungary (7/1,000) are now so wide that it’s hard to argue that the latter are still substantially more prosperous.

auto-sales-russia-and-other-countries

The difference is of a similar magnitude to today’s Greece (6/1,000), in the wake of its economic depression – and has also gained on other countries that were part of developed Europe but hard-hit by the crisis like Spain (17/1,000), Portugal (11/1,000), Ireland (20/1,000), and Italy (26/1,000). In a very real sense, the fact that ordinary Russians can now more readily afford relatively big-ticket items like automobiles than citizens of some countries long considered to be past of the developed world is quite a momentous affair. In fact, not only are they being overtaken by Russia, but by Brazilians (20/1,000) and the Chinese (14/1,000) too, even if the last BRICS member India (3/1,000) continues to be mediocre. That said, there is still a very considerable gap between Russia and the truly front-tier countries like Germany (41/1,000) and the US (47/1,000).

Russian Is The Internet’s Second Most Popular Language

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In the wake of Russia’s Internet penetration breaking the 50% mark (now – 55%) and overtaking Germany in total number of users last year, we now have news that Russian overtook German as its second most popular language. It is used on 5.9% of all the world’s websites. It is projected that Russia will maintain this position for a few years. Also .ru has become the world’s most popular country-level domain.

internet-most-popular-languages

This is quite a remarkable achievement considering Russia’s limited number of Internet users relative to the much more populous Spanish and Chinese speaking worlds (even if Internet penetration in the latter regions is a bit lower). I wonder why that could be the case? One theory is that Latin Americans simply don’t read much, while creating websites in China may be trickier than in the West because of greater controls over the Internet. (Also hanzi are much more space-economical than alphabet-based writing systems, so what might take a few pages in English may only require one page in Chinese; that is another possible explanation). That would also explain why the world’s less than 100 million native German speakers are also far ahead of those far more numerous nationalities. Alternatively, maybe there’s simply more spam blogs or pages hosting copied content in Russian.

Here is a trends graph. As of March 27 (the date of this article), Russian has clearly at 5.9% edged past German which is now at 5.7%.

A Values Chasm That Can’t Be Bridged… At Least For Now

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My latest for VoR and US-Russia.org on Russia’s recent Foreign Policy Concept:

The new foreign-policy concept is a long-overdue adjustment to international realities. There can be no meaningful “strategic partnership” between Russia and the US or indeed Russia and the West in general, when their respective core values have diverged from each other so much.

Ironically, this divergence has occurred at a period in history when Russia has retreated from ideology; it now embraces a doctrine of national sovereignty and moderate social conservatism that a generation ago would have made it part of the European mainstream. But today it has been “left behind” as the West has moved on to democracy fetishism and pushing concepts such as gender feminism and criticisms of “heteronormativity” that sound alien to most Russians. Hence the disconnect between Russia and the West on a whole host of issues, from the Arab Spring to the Pussy Riot affair.

So even as Russia converged with Western civilization of the 1970′s, the West – in particular its Anglo-Saxon, Scandinavian, and Gallic constituent parts – has “transcended” itself, and we are again left with a gulf of mutual incomprehension as deep as in Soviet times. As such, the best that can be realistically hoped for, at least in the medium term, is mutually beneficial economic relations (i.e., oil and gas in exchange for machines and modernization). Anything “deeper” or more heart-felt will require cultural concessions on the part of either Russia or the West, and it is unclear how that could be made to happen even were it to be acknowledged as desirable in and of itself.

Given these cultural clashes, it is probably a good thing for relations to become more defined by markets, which peace theorists believe have a moderating effect on animosity and inter-state conflict. Fortunately, prospects in this sphere are good, the specter of the Great Recession notwithstanding. Russia’s GDP per capita in purchasing power parity (PPP) terms is now well above half the EU average and close to convergence with the likes of Portugal and Greece. Russia has joined the WTO, and will probably join the OECD in another year or two. De Gaulle’s vision of a unified space – at least in the economic sphere – from Lisbon to Vladivostok has a real chance of coming into being within the next decade.

China doesn’t see eye to eye with the West either culturally or geo-politically, but it too is rapidly converging with the developed world; wages in its manufacturing sector have recently surpassed Mexico’s. It is now for all intents and purposes a middle-income country, and its GDP in terms of PPP may already have overtaken America’s. Opting for a closer relation with China is a wise play on Russia’s part. Its economic dominance in one or two more decades is all but assured, and with an (economistic, non-ideological) exploitation of high-speed trains and the melting Northern Sea Route, Russia can make a fair bit of money by being a “bridge” to the Orient.

Russia Now Produces As Many Cars As The USSR Did At Its Peak

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As I write the book, I create a lot of graphs. Here is one of them.

russia-automobile-production

So in manufacturing terms, as far as cars are concerned, the “deindustrialization” era is decidedly over.

Of course it’s also important to note that in 1985 they were producing this whereas today they are producing this as well as various foreign brands. Plus for every two cars produced and sold in Russia today, one is imported, for total yearly sales of 2.9 million in 2012 (about the same as in Brazil – 3.6 million, Germany – 3.3 million, and India – 2.7 million).

Andrew Ryvkin’s Strange Ideas About The Russian Economy

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By the usual standards of Guardian reporting on Russia, this one by GQ Russia editor Andrew Ryvkin is… well, about par for the course.

Citing a recent PwC report that Russia will overtake Germany to become Europe’s biggest economy in 2030, he asks, “Should we believe them?“

Well, the PwC is just repeating predictions made almost a decade earlier by Goldman Sachs, which has thus far proved very accurate on the growing prominence of the BRICs in general, and of Russia in particular (regardless of repeated attempts to kick it out of that grouping, against the judgment of Jim O’Neill, the inventor of the BRICs concept himself).

So in effect Ryvkin is asking us whether we should trust a range of organizations with a great predictive record on the issue to the uninformed ravings of a Guardian hack.

Forget Russia’s very reasonable and respectable growth rates compared to the other Central-East European countries. According to Ryvkin, Russia’s downfall will be because it is “politics”, and not “strict economic policies”, that “rule these wintry lands.” What is the primary example he uses to demonstrate this?

One should also have sedatives close to hand while reviewing the figures. Russia has become one of the most corrupt countries in the world, and is barely making an effort to hide it. For instance, one of the Sochi 2014 Olympic projects – a 50 km road – costs nearly $8bn.

This meme was popularized by Julio Ioffe in the Western press on Russia back in 2010. It has also long since been long debunked, including on this very blog – although it continues to float around as a cliche among Russian liberal and journalist circles.

The only problem with looking at Russia through this failed state prism, without bothering to corroborate sources, is that in no sense can the Adler-Krasnaya Polyana route be described as just a “roadway”. Intended to be completed within 3 years in an area with a poorly developed infrastructure, this so-called “road” also includes a high-speed railway, more than 50 bridges, and 27km of tunnels over mountainous, ecologically-fragile terrain!

Then there’s this bizarre statement: “Germany, is currently associated with its policy of austerity, Russia is known for precisely the opposite.” That’s certainly news to me, as Russia has run balanced budgets for the past 2 years* – in stark contrast to, well, pretty much the rest of the developed world (including Germany for that matter).

And here you’re inevitably faced with a question: how would the Russian government act if it became a leading European economy and faced a crisis like the one in we have now in the eurozone, considering that this government has allowed the construction of a $160m/km road?

That is an extraordinarily remote possibility, seeing as Russia has fiscal unity and no significant sovereign debt (i.e. the lack of which define the European crisis). The very question is not only based on a faulty premise (the so-called “caviar road”) but essentially meaningless.

After some of the usual moralizing and content-free platitudes about the absence of Russian democracy, as well as the further extremely bizarre idea that the Chinese economy is not politicized like Russia’s**, Ryvkin wanders back on track with the usual spiel about how Russia is Nigeria with snow.

Here’s a question: who would want a Russian-made car, when even Russians don’t want them? Another one: who wants to fly Russian aeroplanes, when even in Russia people choose to fly on a Boeing or Airbus? But these huge industries still exist, resembling Frankenstein’s monsters of Soviet industrial might, brought to life by heavy injections of oil money and created by businesses that ultimately cannot produce a competitive product.

It goes against almost every aspect of economic, market-oriented logic, but it has nothing to do with the economy, because it aims to keep the workforce loyal to the government and project an image of a neo-Soviet industrial power. So is securing votes at the cost of your country’s economic development today a strategy worthy of someone who is going to lead the European economy in seventeen years? Is the strategy even smart?

Back in the world of hard facts and statistics, Russian car production was at 2.0 million units in 2011 (increasing by a further 15% in 2012) compared to 1.2 million units in 2000. Many foreign automakers have moved manufacturing into Russia, but that one presupposes is a good thing; that indigenous Russian brands haven’t done as well doesn’t mean much (which British brands are doing well apart from Rolls Royce?). There are few countries in which automobiles are a major export staple – incidentally, China with which Ryvkin incessantly compares Russia with isn’t one of them – and there is no good reason to expect Russia to become a major exporter of cars under any government, be it Putin’s or “even [a 10-year-old] (as long as he was smart enough not to stop the flow of oil and gas).”

That is because hydrocarbons are Russia’s comparative advantage, a concept which likewise explains why say Australia and Norway do not export much manufactured goods either. Ironically, the surest way to solve this “resource dependency” would be to get Ryvkin’s 10 year old President to ACTUALLY stop the flow of oil and gas.

That is also the reason why Ryvkin doesn’t work as an analyst at PwC but writes articles for the Guardian.

* Actually latest estimates show that 2012 had a deficit of 0.02% of GDP, but that’s of course basically a rounding error.

** Where to even begin here? For a start, consider the fact that the HQ’s of all the major Chinese companies have a “red machine” with a telephone link to Party functionaries

Russia Is Now An Internet Society

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One of the most common arguments made to explain why Russians don’t finally overthrow the evil Putin in a bloody bunt is that they are brainwashed by the regime’s TV propaganda stations.

This isn’t actually very accurate at all. Russian TV isn’t any more propagandistic than in the West, and on some issues, less so; but that is for another time.

The more relevant issue that is presupposes that there few Russians have means of accessing the “free information on the Internet, which even Western propagandists acknowledge is not controlled in Russia. But today this is no longer actual, as revealed by this history of polls on Internet penetration from FOM.

As you can see, Internet penetration in Russia as of Spring 2012 went over the 50% mark. Those people can read all the Navalny, Snob and Echo of Moscow they want to.

Continue reading →

Russia Overtaking USSR, Converging With West, On Food, Housing Consumption

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Just to hammer down the myth of Russian impoverishment one more time (with the help of graphs from Sergey Zhuravlev’s blog)…

In the past few years, in terms of basic necessities (food, clothing, housing) Russia has basically (re)converged to where the Soviet Union left off. Here is a graph of food consumption via Zhuravlev. At the bottom, the dark blue line is represents meat; the yellow, milk; the blue line, vegetables; the pink line, fish; the cyan line, fruits and berries; and azure line, sugar and sweets. At the top, the purple line are bread products, and the dark blue/green line are potatoes.

Meat consumption has essentially recovered to late Soviet levels, although it still lags considerably behind Poland, Germany, and other more prosperous carnivorous cultures. Milk fell and hasn’t recovered, but that is surely because it was displaced in part by fruit juices and soft drinks (which isn’t to say that’s a good thing – but not indicative of poverty either), and the fall in sugar consumption is surely a reflection of the near doubling of fruit consumption. We also see that bread and potato consumption peaked in the 1990′s, especially in the two periods of greatest crisis – the early 1990′s, and 1998. This is what we might expect of inferior goods like bread and potatoes.

There is a broadly similar story in housing construction. The chart left shows the annual area (in m2) constructed by 1,000 people. As we can see, after holding steady from the mid 1950′s to the late 1980′s, it more than halved by the late 1990′s; since then, however, construction has recovered almost to Soviet levels, the recent crisis barely making a dint.

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Russian Wages Are Fast Converging To Western Levels

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Via The Economist, I’ve come across some fascinating research by Orley Ashenfelter and Stepan Jurajda (Comparing Real Wage Rates, 2012) showing how real wages can be meaningfully compared across different regions by taking notes on prices and wages in McDonald’s restaurants.

The methodology seems solid. Big Macs are a very standardized product, hence they are already used in the so-called Big Mac Index to assess international price differences (and whether currencies are undervalued or overvalued) and REAL wage rates (prices tend to be lower in poorer countries, mitigating the effects of lower nominal wages). By combining these two measures, you can derive the quantity of Big Mac a McDonald’s worker can buy through one hour of his labor (BMPH). This in turn is a good proxy for real median wages, i.e. the life of the average Joe and Ivan in comparative perspective. While we might not want to people to buy too many Big Macs it’s a positive thing if they can actually afford to.

The results for Russia are stunning, and no doubt go a very long way why Putin has retained 70% approval ratings since 2000. Russia’s BMPH increased by 152% (!) from 2000 to 2007, and a further 43% through to 2011, leaving all other economic regions in the dust, even despite a sharp recession in the latter period. The only major region with a comparable performance is China. In contrast, the BMPH has stagnated throughout the developed world since 2000; and Not So Shining India joined them from 2007.

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More Russians Vacationing Abroad

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According to a recent Levada poll, more Russians are starting to go to fun places on vacation. The total numbers of those going to the Black Sea or the Far Abroad rises to 16% in 2012, compared with 9% in 2006, 5% in 2000, and 4% in 1997. The percentage of those saying they won’t vacation at all has halved from 31% in 1997 to 15% today. The biggest increase, albeit from a very low base, has been in the percentage of those saying they will go to the Far Abroad, which rose to 5%; the total for all foreign countries, including in the Near Abroad and Crimea, is 8%. This is still significantly below developed country levels like the US (20%) or the UK (34%) but again in this, as in cars, Internet penetration, and GDP per capita, convergence is undeniable.

  1997 2000 2003 2006 2007 2008 2009 2010 2011 2012
Dacha 23 25 27 22 21 22 24 25 24 24
Black Sea (Russia) 3 4 4 6 7 7 6 7 7 9
Crimea - - 1 2 1 1 2 2 2 2
Baltics <1 <1 <1 <1 1 1 <1 1 2 1
Other Russian place 7 5 5 6 6 5 5 4 5 6
Other ex-USSR place 1 2 1 3 1 2 2 3 2 1
Far Abroad 1 1 1 1 2 2 2 3 3 5
Remain at home 33 45 40 34 34 33 31 29 28 30
Won’t go on vacation 31 23 17 17 20 22 20 16 18 15
Not yet decided 10 6 8 11 11 15 13 18 14 15