Economic Storm Clouds Over Russia
In an article for Forbes magazine Dr. Vladimir Kvint, the president of the International Academy of Emerging Markets, a U.S. Fulbright Scholar and the chair of the Department of Financial Strategy at the Moscow School of Economics, points to the menacing economic storm clouds that hover above Russia these days. First, he notes "the steady rise in prices of consumer goods and food, a very dangerous development." He writes:
The consumer price index surged 12%, but the price of certain foods has risen at a much faster pace--vegetable oil increasing by 150%, butter by 40%, milk by 30%, and grains and bread by 25%. This is not the result of a worldwide increase in food prices--Russian food prices are growing faster than world prices, even faster than in neighboring emerging market economies like China and India.Some have claimed that Russia is only being victimized by a worldwide trend, which would be bad enough since Russia is ill-equipped to absorb it, but Kvint dispels that illusion. In fact, the problem is worse in Russia than it is in other countries, and getting worse all time. The Kremlin has been forced to set up a special emergency commission to deal with the crisis; Reuters reports that "the consumer price index rose 1.8 percent in the first three weeks of January, against an expectation of 1.8 percent for the whole month and compared to 1.7 percent in January last year."
Then there's the stock market. Kvint's article came out on January 8th, just a bit too early to catch Russia's market take a nosedive. Stock market analyst James Beadle wrote on January 24th: "The benchmark RTS index has dropped 16 percent since peaking at 2339.79 on Jan. 14. This sudden loss of around $160 billion in market value stands in sharp contrast to consensus expectations, which predicted around a 25 percent upside and decisive decoupling from the slowing U.S. economy this year."
Kvint continues, observing the the purchasing power of the ruble has plummeted:
The rise in consumer prices is a result of increases in salaries, pensions, stipends and other social spending at a pace much higher than what economic growth allowed. This puts more rubles in the hands of Russians, but decreases the purchasing power of the currency. During the last 11 months of 2007, the ruble supply increased by 30%. As a result, taking into consideration the high speed with which money circulates in Russia, the purchasing power of the ruble fell by 20% to 25%, according to my calculations.The expanding money supply will mean particularly drastic jumps in gas prices, he says:
Indeed, the increase of rubles in circulation has grown four times faster than the growth rate of the national economy. This trend also resulted in an increase in gas prices. The government implemented many limitations to slow the consumer cost compared with the cost of production. This means that this compressed "price spring" will expand in 2008, resulting in a sharp increase in gas prices for consumers, as well as prices of first necessity goods.Turning to the trade balance, Kvint finds more horror:
Despite growing prices for natural resources and raw materials, Russia's positive trade balance has shrunk, because imports are increasing faster than exports--which may be a dangerous trend, and likely to continue in this year. It seems that Russia is incapable of substantially increasing the production, and consequently, the volume, of exports of natural resources.And he notes that Russia is willfully driving resources away from the service of the population's needs and towards cold war expenditures, just as was the case in Soviet times:
Another trend in 2007 that is likely to continue this year is the visible rate of growth of military expenses, which is pushing Russia toward a militarized economy, though it is still too early to judge the scope of this trend.Turning to yet another area of potential disaster, Kvint recognizes Russia's looming credit crunch:
There has been fast growth in the amount of debt accumulated by Russian consumers. It is interesting that ruble debt has grown twice as fast as debt in foreign currency, which has not been the case in previous years. Taking into consideration Russians' general lack of experience with credit obligations, the possibility exists for a wave of bankruptcies in 2008.Finally, Kvint offers a laundry list of other disasters:
- The diversification of natural gas supplies to Europe, which is mostly a result of the new role of Turkmenistan. This will have a direct impact on Russian influence in certain European countries.
- The failure of Russia to become a member of the World Trade Organization, despite expectations to the contrary
- The failure of Russia's amnesty of capital program, which was not surprising--it was, in fact, practically inevitable. Russia was the only country in the world to make tax collections the focus of its amnesty of capital program. Most of these programs seek to repatriate capital to create new jobs. The tax rate on repatriated capital is typically between zero and 5%, but Russia's program taxed repatriated capital at 13%. In Italy, 61 billion euros worth of capital was repatriated in only six months of 2002. Russia's program was not economic amnesty, it was bookkeeping amnesty, and was a total failure.
Looking for bright spots in the Putin economy actually proves quite difficult. Kvint notes that "cumulative foreign direct investment increased by 55%" but then he points out that "the outflow of foreign direct investment has decreased, this trend began to reverse over the last six months. This is a direct response to the economic policies of Putin's government beginning to worry investors."
He states that "foreign investment surged by a factor of 2.5 in 2007. None of the world's 15 leading national economies can compete with this achievement. Some $100 billion was invested in Russia from abroad over the last 12 months." But here he makes a serious error. Perhaps other nations cannot match the percentage increase Russia generated in 2007, but the dollar amount of foreign investment in Russia is puny compared to that of America, which in 2007 was over $400 billion. It's a common mistake to neglect Russia's tiny economic base when considering its growth levels, and he makes this mistake again when he notes that economic stability "has resulted in job creation and stimulated economic growth, which is now approaching 8%." Russia's economic base is 1/12 the size of America's, which means its rate of economic growth has to be divided by 12 before being compared to America's. Doing so produces a rate of growth of just 0.7% in Russia compared to over 3% for America. In other words, the dollar value of Russian economic growth in 2007 was more than four times less than that in America. That's not very impressive, is it? And though Kvint speaks of "job creation," it notable that he makes no effort whatsoever to quantify his statement -- a good indication that he is only speculating. And, in the end, Russia's problem is not unemployment but lack of quality employment, with an average wage of less than $4/ hour and an average male lifespan of less than 60 (not in the world's top 100 countries).
We report below on analysis that shows Vladimir Putin's plans to make Russia an energy superpower have backfired in classic Russian style. Instead of using the country's good fortune on the oil markets to improve the lives of its citizens, Putin has chosen instead to spend Russia's income just the way the USSR did, in a profligate attempt to do political battle with the West. As Russian ruler have always done, he grinds the nation to dust under his feet so he will have something soft to tread upon.
If you can believe it, the shameless idiotic propagandists at Russia Blog actually republished Kvint's article, because they thought it reported good news for Russia. They were probably misled by the headline "Russia's Surging Economy" that Forbes put on the piece, failing to have sufficiently developed thought capability to realize that this might be a teaser. It's clear that they only read the first couple of paragraphs, where Kvint tries to find some hope for Russia before laying waste to it, and that they didn't think at all about his positive comments. This is the laughable style of the Soviet propagandist, and would indeed be very funny if so many people's lives did not hang in the balance. It's exactly this kind of "thinking" and "analysis" that brought the USSR to its knees, and Russians first and foremost should be outraged by it. As we've said before, Russia Blog needs to be put down. Anybody who reads it uncritically is being played for a sucker. It's an embarrassment to the blogosphere.