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Thursday, August 09, 2007

Annals of Russian Snake Oil

A snake charmer greeting wealthy Russians this year at a party for the opening
of a Jean Paul Gaultier store in Moscow.

We've said before that the vaunted New York Times is largely clueless where Russia is concerned, and it's also got a pro-Putin bias because of its extreme left-wing, anti-capitalism ideology. For instance, the Times has a special web-page devoted to Russia on the web called the Russia Navigator, and if you visit it you will find out that there is only one significant blog about Russia and it's called "Laughter in the Darkness." If you click the link the Times gives you for that blog, you get nowhere fast. It's a dead link. That's about as much total incompetence as you can get.

The editors of the Times have a vested stake in making Putin look good because they told the world it should tolerate him as a "necessary transition" to democracy. It said that because, all through the Cold War, it claimed Russia was a nation of decent, democratic-minded people being abused by a few bad eggs in Moscow and, especially, Washington DC. Then suddenly the Russians elected a proud KGB spy as their president. The Times had egg on its face. It had to rationalize.

Coverage of Russia in the Times' "World Business" section is especially shoddy; that section is not taken seriously by anyone interested in business, who would quite naturally get their news from the Wall Street Journal (if you don't believe us, just ask any business person). Instead, it's basically just a bunch of silly fluff for the amusement of lay people with nothing better to do. The following story from World Business, with our running commentary (in red), is a good example.

The Almighty Ruble

The ruble got no respect. During the cold war, it symbolized the backward Soviet economy. After the U.S.S.R. collapsed, it was an avatar of instability. Even plumbers in Moscow often preferred to be paid in bottles of vodka rather than rubles — the bottles did not lose their value. No more. Lifted by high oil prices and a wave of foreign investment, the once humble ruble is showing its muscle, and fueling a consumer boom.

That's nice dramatic rhetoric there. Must have been as slow day for news. Now go try to buy some rubles at an exchange station in an airport abroad before arriving in Russia, they way you can do with euros or rupees or yen and many other currencies. Actually, better still, try to think of something you would want to buy that was made in Russia with such rubles, if you could get them, which you can't.

After gaining 20 percent in value against the dollar in the last few years, the ruble is even starting to displace the greenback as Russians’ currency of choice for both saving and spending. As the ruble increases in value — not just against the dollar, but against brawnier currencies, too, like the euro — imported goods are becoming cheaper for Russian consumers. Now ruble notes, once handed over by the fistful for a loaf of bread, are being used to purchase Mercedeses, flat-screen televisions and European beach vacations.

But at the same time, goods made in Russia are becoming more expensive, meaning that Russian manufacturers are being priced out of the market and Russians are losing their jobs or having their wages cut from the already horrifying average of $3 per month. But as long as a few millionaires can get cheaper Mercedeses, all is right with the world? Do you notice that the Times gives absolutely no data about the extent to which the ruble is "displacing " the dollar?

Of course, the party could be short-lived. Russia takes in roughly $530 million a day from oil, its most lucrative export. If the price of oil declines, so will the ruble. And even if the price of oil does not fall, an oil-fueled boom brings dangers of its own. In many countries, an over-reliance on petrodollars has led to underinvestment in businesses outside oil and gas, and a subsequent withering of other domestic industries. To deal with such downsides of the ruble’s rise, Russia is salting away oil money in a rainy day fund, called the Stabilization Fund, which holds more than $120 billion. In January, Moscow will split it into two funds: the Reserve Fund and the Fund of National Prosperity, the latter intended for state investments. Together with the Central Bank of Russia’s foreign reserves, Russian authorities have a currency reserve of $413 billion, the largest per capita foreign currency reserve of any major economy, including China’s. In an oil downturn, authorities could spend that reserve to protect the ruble. In the meantime, the reserve adds an aura of stability to the economy for investors. “Excluding a couple of oil countries where the money belongs to the local ruling family, which is something different, Russia has surpassed all the newly industrializing Asian countries,” in foreign currency reserves, Kenneth S. Rogoff, an economics professor at Harvard, said in a telephone interview.

It's worthy of special note that even this puff piece, which reads like a commercial for the Kremlin, can't avoid touching on the obviously threadbare nature of the Russian economy. What if the downturn continued after the fund had been spent? And what happens to Russia in the meantime, as that money is hoarded rather than spent on increasing the adult male lifespan above 60 or raising the average wage of $3 per hour? What about the fact that Russia is massively increasing its military budget, which would in all likelihood have first crack at reserves to maintain current levels, at the expense of ordinary people?

Analysts say Russia’s underlying fundamentals are good, too. First, oil exports are not the sole source of the ruble’s rise. That was the case before 2007, but now foreign investment has become a significant factor. Private capital flows into Russia increased roughly 360 percent in the first six months of this year, compared with the same period last year. Only about 30 percent is attributable to oil and other extractive industries, according to the State Statistics Committee.

Simply amazing. The Times takes at face value the statement of the Kremlin itself, with no corroborating data from any source. Is it suggesting that the regime of a proud KGB spy wouldn't lie? That would be journalistic malpractice, pure and simple. Do you notice how it doesn't give the dollar value of this investment, but reports it only in percentage terms? That's another absurdity, because Russia's foreign investment has been so low in the past that any investment would register as a major increase.

Analysts also point to what they call Russia’s sound macroeconomics. President Vladimir V. Putin’s government has managed inflation, though certainly not eliminated it. And through its tight control over politics and society, the regime has kept demands for social spending in check — a leadership approach reminiscent of the authoritarian “Asian model” of economic development. But economists also say a long-term cycle of economic depression and recovery is bolstering the ruble, at least for now. Starting in 1990, the year the Soviet Union collapsed, Russia’s economy contracted by as much as 40 percent. This year, for the first time since, Russia’s gross domestic product returned to 1990 levels: factories, oil pipelines, roads, ports and other facilities that once were idled are operating near full capacity.

Here the Times doesn't even try to argue that Russia's GDP increase isn't overwhelmingly due to the accidental rise in the price of oil, the way it does for the ruble, yet it still touts GDP growth as if it was a substantive Russian accomplishment. No data of any kind is given to indicate the growth level of the Russian economy outside the oil sector, not even anecdotally, nor does the Times reveal the pathetic living standard experienced by most Russians, including a $3/hour average wage and a sub-60-year male lifespan.This is grossly unprofessional, biased journalism.

In the decade from January 1993 to Dec. 31, 2002, the ruble’s lowest point, the dollar appreciated 7,664 percent against the ruble, rising to 31.96 rubles to the dollar. On Tuesday, one dollar bought 25.47 rubles, a 20 percent appreciation for the ruble. Even more important, as measured by purchasing power parity, a gauge of a currency’s value based on the goods it can buy, a dollar should buy roughly 15 rubles today, according to a report Merrill Lynch issued in July. By that measure, the ruble remains the world’s second-most undervalued major currency, behind only the Chinese yuan, whose value has given policy makers in Washington headaches. Indeed, the ruble would be even more valuable today if not for the Russian central bank intervening to keep it from rising more. Through much of the 1990s, Russia suffered the opposite problem. Then the ruble, shunned by locals and tourists alike, was propped up by Western lending. It collapsed in 1998, on the heels of the Asian economic crisis. Russians’ life savings evaporated and poverty became widespread. In just one example, the theft of manhole covers became a major problem. Russians were stealing them to sell for scrap metal.

Let's see if we understand: It's bad for the ruble to be "propped up" artificially by foreign lending, but it's just fine for it to be propped up artificially by the price of oil? No wonder foreigners have such a dim view of American intelligence. If to judge by the "paper of record" we're a nation of idiots.

All that is different now. The current consumer boom has sparked renewed interest in Russia from companies like Wal-Mart and Starbucks. Indeed, shares in grocery stores, electronic retailers and other consumer-sector companies are outperforming Russian oil companies on the Moscow stock exchange.

Let's see if we understand: The best proof that Russia is doing well economically is that Wal-mart and Starbucks want to go there (but haven't yet)? McDonalds went to the Soviet Union. Apparently that meant it was doing great. Oh yeah, it collapsed didn't it? Well, so much for that theory.

Russian banks offer accounts in rubles, dollars or euros. Of the three, ruble accounts are attracting the most funds. Ruble-denominated personal savings accounts rose 6.8 percent in the first quarter of 2007, while foreign currency accounts were level, according to a report by Goldman Sachs. That has led to some, perhaps predictable, gloating. Recently, a pro-Kremlin youth group staged a mock panhandling to benefit the United States currency. They held out hats for passers-by to make donations — “raising money for the dollar’s ticket back home,” their signs read.

Nashi is just a "pro-Kremlin youth group"? Who wrote this article, the Kremlin itself? Notice how they don't give the dollar value of savings in rubles or foreign currency, so no real comparison is possible? Could they be hiding something?

But there are limits as to how far a currency can carry a country. Real economic growth, economists say, will depend on continuing foreign investment. Without it, Russian consumption of imported goods will outpace earnings from oil by 2010, according to Russia’s finance minister, Aleksei L. Kudrin. If that happens, Russia’s economy will depend on foreign investment to maintain the strong ruble and the rising living standards associated with it — much as the United States does, but without the same record of stability.

So Russian growth depends on foreigners? Gosh, Russia is really doing wonderfully well then, because it's sure getting nothing but favorable press in foreign countries these days. No wonder Putin is going out of his way to avoid offending anyone! What a wise ruler!

Last summer, authorities eliminated all restrictions on ruble trading, making the currency fully convertible and easing the way for the capital inflow needed to meet the demand. In the first six months of this year, net private capital inflow into Russia was $67.1 billion — more than during the entire first decade after the collapse of the Soviet Union. In the same period last year, capital inflow was $14.5 billion. While threats of nationalization persist in the oil sector, investors have largely decided that they are acceptable considering the money to be made.

Apparently, the Times is again choosing to rely on Kremlin data -- although this time it doesn't even care to name its source. $67 billion is $3 per Russian per day. It changes nothing in the life of the ordinary Russian person. What's more, there is no evidence of this money going anywhere but the gambling casino that is the Russian oil industry, money that can be (and has been) seized by the Kremlin at any time. Russia is documented to operate one of the most corrupt civil societies on the planet, something of which the Times is apparently unaware. A civilized society can't be based on a gambling casino.

In another recent sign of the ruble’s strength, a particularly Russian enterprise has just become more expensive. Russia has raised the price for a tourist flight to the International Space Station aboard a Russian rocket. What cost Dennis A. Tito, the first space tourist, $20 million in 2001, this year cost the former Microsoft executive Charles Simonyi $25 million. Citing the strong ruble, Russian space agency officials say they will increase that fee to $30 million.

In this entire article, not one single benefit of the ruble's rise in value for an average Russian person has been referenced. The only benefit is that rich people can buy more expensive foreign goods and can laugh at the fact that foreigners are unable to pay for more expensive Russian goods. If Russia is happy with that situation, it's on a pathway to utter annihilation.


Anonymous said...

Actually, you can't use German Marks or French Francs anymore. They are on the Euro, but point taken.

Dr. Michel Bouchard said...

The term "net capital inflow" has a nice ring to it, sounds like investment, but in reality can mean borrowing a lot of money that will have to be repaid with interest

There is a telling article from entitled "The Rush to Invest in Russia" that was published January 20, 2006 that spells out the dangers of this "inflow". According to the author: "So where is all the money going? The Central Bank's data show that loans to Russian companies accounted for the bulk of the inflows. These were worth some $39.4 billion, up from $16.2 billion in 2004. Russian banks, too, were active in borrowing abroad, raising some $18 billion, or $5.3 billion more than they invested overseas. In comparison, portfolio investment amounted to just $3.1 billion -- still a big improvement from $800 million in 2004. An impressive wave of IPOs by Russian companies abroad was one factor behind the rise.

The growing share of loans could be grounds for caution, though. Although a healthy sign of bankers' confidence in Russian borrowers, bank lending generally brings fewer benefits to a recipient country than other forms of investment, and may even be risky if debts get out of hand. "There's a lot of debt being taken on which wouldn't be taken on in less-good times," says Breach. What's more, notes MDM's Westin, the surge in foreign borrowing partly reflects the weaknesses of Russia's own underdeveloped banking and financial systems.

More worrying than the build up of debt is that much of the new loans are going to state companies rather than to the private sector. For example, last year Russian gas concern Gazprom took out a mammoth $13.1 billion loan from a consortium of Western banks in order to finance its acquisition of the previously private Sibneft oil company. Likewise, state oil company Rosneft borrowed $6 billion from state banks, indirectly financed from abroad, to fund its controversial purchase of Yukos' main production unit.

STRENGTHENING GOVERNMENT. . That's why not all Russians are impressed by the healthy balance-of-payments data. Skeptical local newspapers argue that foreign borrowing is being used to finance creeping renationalization of the Russian economy -- a worrisome trend. Russia's finance ministry has also criticized the growing appetite of state companies for foreign loans. Last year finance minister Alexei Kudrin called for caps on the amount that state companies could borrow abroad."

In other words, the "inflow" can be a very negative thing depending on where the money is being spent and on what. The "inflow" can be a good thing if it is an investment that will allow you to generate more wealth in the future. An "inflow" is bad if it will leave you with a whole lot of debt and nothing to show for it. If anything, the Russian inflow seems to fall into the second caterogy as opposed to the first.