Category Archives: Guest

Explaining Russia’s Economic Slowdown

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The Russian economy is steadily converging on stagnation in the past few months. For real, this time. Businesses are becoming more pessimistic, and industrial production in the first two months of this year is 1.5% lower than for the corresponding period last year. What explains this? Alexander Mercouris explains:

Might this not be a good moment to discuss economic questions? … The reason growth has been so subdued is because monetary and fiscal policy is so tight.  This in turn is because ever since Russia came out of the post financial crash slump the Russian government and the Central Bank have been prioritising inflation reduction over growth.

Basically what was happening before the crisis was that the government focused on getting its own financial house

in order and building up its reserves whilst leaving businesses to sort out and fund their investment plans often by borrowing on the international money markets.  The financial crisis showed the danger of this approach so the priority since the crisis has been to strengthen the domestic financial system to the point where it is possible for it to sustain a long term investment programme by drawing on its own resources.  This is only possible in a low inflation environment.

Though the inflation has roughly halved from what it was before the crisis, there was a significant inflation spike last year, which has forced the Central Bank to raise interest rates and to take further measures to restrict monetary growth.  That inflationary spike was in turn caused by three factors (1) the poor harvest, with its effect on food prices  (2) the over rapid credit growth at the start of 2012 and (3) the delay in the annual tariff increases to mid year and the way in which these were staggered throughout the autumn and winter.

Of these three factors (2) and (3) were surely a consequence of the political needs of the election period.  It is a commonplace that governments seeking re election loosen the purse strings to create a “feelgood” factor with the bills being paid once the election is out of the way.  Russia has just seen a very pale example of this.

Anyway the result is that Russia not only has real interest rates, which by international standards are extraordinarily high (in most of the developed world interest rates are currently in negative territory) but, adding to the downward pressure, the government is also tightening fiscal policy by introducing its budget rule.

The result is that demand and investment and therefore growth are being choked off.  Not surprisingly the policy has its critics (Deripaska is being particularly outspoken) but it is a standard trade off that historically all advanced economies make.  Japan during its glory days in the 1950s and 1960s repeatedly experienced growth pauses as the Finance Ministry and the Central Bank regularly tightened fiscal and monetary policy to deal with periods of surging inflation.  Like Russia, Japanese policy in the 1950s and 1960s was haunted by recent memories of hyperinflation in the 1940s and early 1950s and of national dependence on foreign lenders.  Of course an even more famous example of tight monetary policies being used to choke off inflation at the expense of growth (in that case even at the price of outright recession) was the Volcker Shock in the US in the early 1980s.

I don’t think there is any serious possibility of Russia going through a contraction anything like as severe.  My own view is that with monetary and fiscal policy as tight as they are, all other things being equal, inflation should fall in the second half of the year.  The Central Bank has given itself a medium range target of 5-6% but with policy this tight I would not be surprised if it overshoots it. One way or the other, if inflation falls, interest rates will come down, monetary policy will loosen and growth will resume though this time in a much more subdued inflationary environment.  This ought over time to make it possible for businesses to borrow in order to invest and for banks to lend for the long term without concerns at both ends that the value of loans will be eroded.  It should also encourage saving fostering capital formation through deposit growth.

In other words far from being an indicator of weakness the growth pause shows that the economy is being intelligently and responsibly managed and is not being sacrificed to reckless notions of growth at all costs.  Without pointing any fingers, it is an altogether more responsible policy than what one sees in some other places.

I would finish by saying that this policy also makes a great deal of political sense.   Though the policy comes in for noisy criticism from the likes of Deripaska (who as an industrialist has an obvious interest in getting the cost of borrowing brought down) Mark Adomanis has posted a useful graph from Levada on his blog that shows that inflation is far and away the most serious issue of concern for Russians.

Anyway that is my take of the present position.  I’d be interested to know if anyone disagrees or thinks differently and of what those who actually live in Russia and who have more direct experience of the economic situation there think of all this.

Alex Mercouris On The Cyprus Deal

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As a Greek with contacts in Cyprus, his opinion is one of the most valuable ones out there. Here it is:

We have now the latest bailout plan and contrary to the spin in parts of the western media it is COMPLETELY DIFFERENT from the plan we saw last week.

What was utterly outrageous about last week’s plan was its seizure of money from deposits held in every account in every bank across the entire island of Cyprus. This offends against every principle of banking, the rule of law and of private property I know of. By what logic, if solvent debtor A owes me money, am I required to lose money to bail out insolvent debtor B with whom I have no connection at all? The Cypriot government and the Troika compounded the outrage by extending it even to deposits that held less than 100,000 euros. This was blatantly illegal since it violated the EU’s own deposit insurance scheme. As I said, what all this managed to do was transform a problem of two Cypriot banks into a systemic problem of the entire Cypriot banking system.

Though you would not know it from the way it is being reported by the western media this morning, the entire calamitous idea of a deposit raid has been entirely dropped. There will be no raid on deposits whether above or below 100,000 euros. What is happening instead is what should have happened last week. The two insolvent banks, Laiki and Bank of Cyprus, are being merged and restructured. Since they will not be bailed out and since Laiki is being effectively liquidated, the bondholders of Laiki (one of whom is a Russian businessman) will be completely wiped out. The big deposit holders in both Laiki and Bank of Cyprus will also take a big loss. This is not because their deposits in Laiki and Bank of Cyprus are being raided as was proposed last week. It is because they will suffer a commercial loss (or “haircut” if you prefer) as creditors of debtors who have become insolvent.

What proves that the Cypriot authorities and the Troika were at all times aware of the blatant illegality of last week’s proposals, is that the statement setting out this week’s agreement that has been issued by the the eurogroup specifically says that deposits below 100,000 euros (including those in Laiki and Bank of Cyprus) will be fully protected in accordance with the EU’s deposit insurance scheme. What is that if not an admission that last week’s proposed raid on those deposits was illegal?

We now therefore have a bailout agreement that at least conforms with the law. What are its further implications?

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Major Misconceptions About The Dima Yakovlev Law

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1. For Russian orphans life is much more dangerous in Russia than in America. Let’s agree to disregard the hidden subtext which implies that any country ought to give over its orphans to foreign nationals should it be ranked safer for children. Let’s first examine if the claim that Russia is 39 times more dangerous for adoptees than the US is even true.

This number most prominently featured in a March 2012 article at the liberal website Ttolk, perhaps (probably?) it originated there. It then spread to the rest of the Internet via Yulia “Pinochet” Latynina at the Moscow Times…

According to official government statistics, a child adopted by Russian parents is 39 times more likely to die than one adopted by parents in the West.

… and Victor Davidoff at the St. Petersburg Times.

It is also well-known that the chances a child will die after being adopted by a family in Russia are almost 40 times higher than if adopted by a family in the West.

While it’s no great secret that Western countries are safer than Russia, the differential struck me as absurdly high. Especially when I checked mortality rates, according to which on average Russian children have approximately twice the risk of death as do their American counterparts (or the same as the US in 1980). This is pretty much as to be expected, as Russian healthcare despite intensive modernization in the past decade still lags developed country standards.

So we have a paradox: While Russian children are on average are “only” 2x as likely to die as American ones, adoptees in particular are supposedly 39x more at risk. The differential between the two groups is simply too high to be credible.

Thankfully one gelievna had already done most of the work. Here is what the article in Ttolk wrote:

Already for several years semi-official documents cite the following number: Since 1991 to 2006, i.e. over 15 years, there died 1,220 children who had been adopted by Russian citizens. Of them 12 were killed by their own adopters.

During this same period, from 1991 to 2006, there died 18 Russian children in adopting families in the West. Knowing the number of adoptees there and in Russia (92,000 and 158,000, respectively) we can calculate the relative danger of adoption in these two worlds. It turns out that there is one dead child per 5,103 foreign families, whereas in Russian families this ratio is at one dead child to every 130 families. This means that adoptees in Russian families are in 39 times more danger than in foreign ones.

Well isn’t that shocking? Surely a humanitarian intervention is called for to rescue Russia’s children and place them in American homes. The only problem is that the 1,220 figure doesn’t refer to deaths at all. Here is what the original source, a 2005 report, actually said:

In 2005, the Ministry of Education and Science gathered preliminary statistics for the past 5 years on cases of death and incidences of ill treatment of orphans, adopted by Russians or taken into guardianship or a foster family, according to which:

Out of 1220 children, 12 died by the fault of the adopters and guardians;

Out of 116 children, whose health was for various causes subjected to heavy harm, 23 suffered by the fault of the adopters and guardians

So the article at Ttolk is basically comparing apples and oranges, i.e. the numbers of Russian adoptees who died in foreign countries vs. the numbers of Russian adoptees that were ill treated in Russia. Of course the latter figure is always going to be much, much higher.

What concrete findings we have (assuming the rest of the article is accurate) is that 18 Russian adoptees died in foreign countries (of those we know! there is no systemic tracking) during 1991-2006 vs. 12 Russian adoptees died by the fault of their foster parents specifically during 1999-2004 or so.

So while an exact comparison remains elusive we can know be fairly certain that in fact the risk of murder is broadly similar for a Russian adoptee in both Russia and the US. Basically it is (thankfully) extremely rare in both countries. I would also point out that this is far from a “Russophile” or “Russian chauvinist” conclusion, knowing that a lot of Russians harp on about the supposedly everyday shooting rampages in schools all over America. In reality this is just the usual anti-guns hysteria mixed in with Americanophobia, American schools are actually extremely safe with only 1-1.5% of all violent deaths of children occurring on school premises in any single year. (Even a very “catastrophic” event like the Newtown shooting would only raise this by about one percentage point).

This whole episode strongly reminds me of similar cases in the past when some wild figure was misquoted, spread in Russian liberal circles, and then transferred to the West. E.g. an imaginary spike of abortions in the wake of the economic crisis. Or the wild exaggeration of Russian emigration figures.

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kovane On Russia’s WTO Accession

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By far the best and most comprehensive article I read on the subject: Russia at the WTO Gate: Locking the Status of a Raw-Materials Supplier, or Striding Toward a Modern Economy?

I really recommend you read it all, but here is the conclusion.

The optimistic scenario, hailed by liberal economists, proclaims almost immediate benefits for everyone. Consumer will get lower prices on a wide range of goods, businesses will become more integrated into the world economy, and the WTO will improve Russia’s law system and investment climate. The World Bank’s research forecasts a gain of 3.3% of GDP in the medium term, inflow of FDI and the reduced cost of business services. Moreover, according to the report, 99.9 percent of the households will gain from 2 percent to 25 percent of their household income, poor households slightly more than rich ones. The influence of the WTO on particular industries is presented here.

This scenario also stirs questions. The experience of Ukraine and Georgia shows that any expectation of significant price reduction is somewhat inflated. As a consequence, the described gain of households will be significantly lower. The inflow of FDI due to the lowered administrative barriers is also a very bold assumption. The WTO accession is no magic elixir to such deeply-entrenched ills of the Russian economy. And Russia is certainly not the first choice of foreign investors. But the hope for improvement in the law system is not baseless, and Russia certainly could use it, especially in the customs code and accounting.

The WTO entry is a necessary step for any country aspiring to develop a modern economy, however the timing and conditions leave much to be desired. The problems encountered by Ukraine highlight the dangers of a rash decision to seek membership in the WTO no matter the cost and an inconsistent economic policy. But the Russian government has all means to deal with the challenges of a more open economy. And the way it will carry out the complete revamping of the economic policy will be a litmus test for the ability of Putin’s Administration to modernize the economy. However, the price of error here is very high, and all that remains for the common voter is to wait and watch.

Mystery Within An Enigma

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mls13 writes:

“Anything goes,” eh? Okay, here’s an admittedly-asinine question for everyone: how is the Medvedev-back-to-Putin transition being addressed by Russia’s makers of political matryoshki? Are they doing Putin on the outside, then Medvedev, then Putin again and then Yeltsin, Gorbachev etc.; or are they being untrue to history by doing Putin-Medvedev-Yeltsin-Gorbachev…, or are they just cutting to the chase and omitting Medvedev all together? Personally, I can’t believe how they’ve managed to screw-up one of Russia’s premier products in the international-tchotchke industry! ;)

That is actually a very intriguing question. I suppose there’s a reason Matryoshka dolls weren’t invented in Italy!

Alexander Mercouris – Legal Analysis Of The Pussy Riot Case

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Alex Mercouris has penned a long and extremely erudite analysis of the case against Pussy Riot. I cannot recommend it highly enough. Go, read.

There are just a few things I would add:

(1) I think one of the closest historical analogues to this case in Anglo world is the 2 month imprisonment of Nicolas Walter for indecency at a Labour Party church service in Brighton for heckling Harold Wilson in 1966 for his support of the Vietnam War. (Imagine swapping those words for “United Russia church service in Sochi”…). Needless to say that “performance” was inestimably more directly political than than that of Pussy Riot.

(2) Re-Mercouris’ question on the precise wording of Article 213 on hooliganism, and whether using weapons is an integral part of it. Here is the text of the law along with my literal translation of the relevant part:

“Hooliganism… committed with: a) the usage of weapons, or objects used as weapons; b) on motives of political, ideological, racial, national, or religious hatred or enmity, or on motives of hatred or enmity towards some social group, – is punished by…”

I do not know if (a) and (b) here have an AND relation, or an OR relation to each other. As a lawyer however I hope Mercouris can furnish the answer to his own question now.

Edit 8/11: This question has been conclusively answered. It’s an “OR.”

Alexander Mercouris – The Guardian And Putin

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Two months ago I wrote an article in which I used data and statistics to show that Russian journalists today under Putin are, contrary to extravagant claims in the Western media, far safer than in several acknowledged democracies such as India or Brazil; far safer than ordinary Russians; and indeed, far safer than they were under Yeltsin. Why then does one get the exact opposite impression from reading the Western media on this subject? Mainly that is because they lean on rhetoric and hyperbole over fact; they deny the utility of comparative perspective; and in some cases, they outright lie or make things up. The Guardian is an example par excellence of all this. On reading a certain Guardian editorial, longtime DR commentator Alex Mercouris noticed that its figure of 200 journalist deaths under Putin clashed irrevocably with ALL estimates from reputed press freedoms watchdogs, most of which converged on a figure of 40 deaths or less. Did The Guardian just make up its own facts? Unable to rest without an answer to this question, Mercouris embarked on an investigation to find out the origins of this massively over-inflated figure… and why The Guardian left it up on their site unchanged for SIX MONTHS after having become aware of their mistake. I am happy to present:

The Guardian and Putin

Alexander Mercouris

As readers of the British newspaper the Guardian know, the Guardian has conducted for many years a fierce campaign against Vladimir Putin.  This began almost from the moment of Putin’s appointment by Boris Yeltsin as Prime Minister in 1999.  I still remember an editorial the Guardian published at the time which called on Yeltsin to sack Putin just a few weeks after he had appointed him.

On 18th December 2011 the Guardian published another in its long line of anti Putin editorials under the provocative title “Truth is being murdered in Putin’s bloody Russia.” The language used in this editorial was extreme even by the Guardian’s standards.  I was particularly shocked by the final sentence, which referred to the Russian state as “slack, slimy and savage”.  Such language seems to me completely inappropriate in an editorial in a serious newspaper with an international readership.

The editorial appeared in print form in the Guardian’s Sunday supplement the Observer and online in the Guardian’s website on “Comment is Free”.  The timing of the editorial on 18th December 2011 is important.  Parliamentary elections took place in Russia on 4th December 2011 over the course of which the pro Putin party United Russia suffered a substantial loss of support, triggering protests amidst allegations of vote rigging.  An unauthorised protest took place in central Moscow on 5th December 2011, which turned violent.  A much bigger peaceful protest took place in Moscow on Bolotnaya Square within sight of the Kremlin on 10th December 2011.  This was followed by a further big protest in Moscow on Sakharov Avenue on 24th December 2011.  The editorial therefore appeared at a tense time in Russia, when the protest movement in Moscow against Putin was at its height and when the Russian and international news media were buzzing with speculation that Putin might be on his way out with rumours circulating of troop movements in Moscow and of a violent crackdown being planned against the protest movement.

The editorial was supposedly written in connection with the murder in Russia’s southern republic of Dagestan in the northern Caucasus of a journalist called Khadzimurad Kamalov.  In emotional and angry language the editorial condemned Kamalov’s murder, which it linked to the murder of what it said were “around 200” other journalists who had supposedly been killed in Russia since Putin came to power.  Amongst the murdered journalists named in the editorial was the famous journalist Anna Politkovskaya who was killed outside her apartment in 2006.  The editorial accused Putin and his government of complicity in these murders as part of a “bloody” campaign to “murder the truth”.

In other words at a time when Putin was facing a challenge in Moscow from the protest movement and at a time when speculation of a violent crackdown on the protest movement in Moscow was rife the Guardian published an editorial that accused Putin and the Russian government of complicity in the murder of “around 200” journalists and which referred to Russia as a “slack, slimy and savage” state.

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Last Word On Jews In Russia

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At least until the issue arises again. Over to Alex Mercouris:

… I do not agree that the two big revolutionary parties in tsarist Russia, the Socialist Revolutionaries and the Social Democrats were under Jewish ideological influence. I do not know what “Jewish ideology” is. Anyway the Socialist Revolutionaries had their origins in the far left Russian terrorist groups and movements of the 1860s and 1870s such as the People’s Will which were emphatically Russian and not Jewish (a disproportionate number of their members were the children of Orthodox priests). As for the Social Democrats the influence here was German not Jewish and the first important Russian Marxist and the founder of the Russian Social Democrats, Georgy Plekhanov, was emphatically a Russian not a Jew.

There was a disproportionately large number of Jews amongst the senior leaders of the Russian Social Democrats (less so amongst the Socialist Revolutionaries), a fact by the way that strongly refutes the view of widespread anti semitism amongst the Russian lower classes, but the Social Democrats were never a Jewish dominated party and as is well know the Jewish socialist party in tsarist Russia known as the Jewish Bund was refused admission into the Social Democrats when it insisted on maintaining its independent organisation and identity.

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Russia’s Gastronomic Revolution?

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Following the precedent I set with Alex Mercouris – why should I write a post on something myself, when one of the commentators has already done something better? – I present this article on Russia’s recent gastronomic revolution by Ivan Golov:

I can assure you that Russia has been going through a mass gastronomic and retail revolution in the last 5 years, and of course I am not just talking about Moscow, but even cities which one might call isolated and remote. Your expectations seem somewhat unrealistic, because you cannot develop an advanced consumer and food-quality sentitive culture over a short time period and especially in a society that is still recovering from the soviet restrictions in this regard. It is more than evident that Russia is very quickly learning to appreciate good food and service at an affordable price.

Just a quick note – I am a repatriated Russian living in Izhevsk (not my home city, and not the first choice for most who come back to Russia seeking a place to settle). I have watched the impressive transformation of the local retail and food landscape during my frequent visits to the city over the last 7 years. I have been living here for almost a year now. What you mention about the quality food and price of wines seems very bizzare. I am not ruling out that Moscow is very different, but if that is the case then you are totally out of touch with the rest of the country and should not generalize here on behalf of Russians living elsewhere.

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Ernst & Young: Russian Corruption Is Rather Banal By World Standards, And Improving

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When I cited TI figures showing that Russian everyday corruption is middling by global standards (percentage paying bribes: 26%, compared to 15% in Latvia, 18% in Greece, 24% in Hungary, 28% in Romania) – as opposed to being on the same plank with Zimbabwe or Liberia – one of the most common counter-arguments was that corruption in Russia is especially concentrated in the upper commercial/political social crust.

However, as Vedomosti recently covered (h/t Nils), the acceptability of corruption in Russia has basically converged to global averages. According to the table below from the original study by Ernst & Young, Russia in fact now appears to perform slightly better than the global average (and vastly better than  low-income countries like India, Indonesia, and Vietnam, all of which are nonetheless ranked higher than Russia in the Corruption Perceptions Index).

Furthermore, the last year has seen significant improvements, e.g. whereas now only 16% see cash payments as acceptable to win or retain business, this figure was 39% in 2010. This is practically equal to the global average of 15%, which unlike Russia rose from 9% in 2010.

Power summary: Russia is a normal country in the sense that its level of corruption, as reported by ordinary citizens and businesspeople, is what you would expect of a middle-income country. However, it is near rock bottom as perceived by various self-appointed experts. I wonder who’s more reliable.