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Friday, March 07, 2008

EDITORIAL: Paying the Piperski


Paying the Piperski

The Kremlin's own data admits that Russia has incurred 3.5 overall consumer price inflation in the first two months of this year, putting it on pace for 21% inflation by the end of the year.

These figures are horrifying by themselves, but we'll mince no words in saying that we don't believe them. The idea that the Kremlin would forthrightly tell the world if the figures were much worse is one that could only be accepted by an intellectual invalid. We assume Russia could easily be under-reporting this type of negative performance data by 50% or more.

And that's not the end of it. Because, as we've said many times before, in an economy like Russia's with such a vast hoard of desperately poor people (Russian men don't live to see their 60th year on average), the overall inflation rate (which would include big-ticket items like cars and plasma TVs) is totally meaningless. The figure that's important is the one that applies to the basket of goods and services normal Russian people can actually afford -- and that figure is always much higher than the overall rate where Russia is concerned. Most recently, food prices have been shockingly burdensome, leading the Kremlin to take the breathtaking step of imposing Soviet-style price controls. Even if the Kremlin's data is correct, the inflation rate on this basket of affordable items could easily be above 30%.

Meanwhile, Moody's warned that "a gradually shrinking current account surplus coupled with the rising debt of state-controlled corporations pose challenges for Russia" and noted that Russia's current account surplus fell nearly 20% in 2007 to $77 billion from a record $94 billion in 2006 "due to rapidly rising imports." Moody's observed: "Russia's total external private sector debt amounts to $378 billion. Debt payments are becoming a larger and larger negative on the current account."

What's happening is simple: the income Russia is deriving from the spike in world oil prices is being used to drive up consumer prices within Russia generally and specifically to buy products from abroad that Russia can't make itself. And, it's being used to buy weapons, sow dissent and tumult in the Middle East (to further prop up oil prices) and provoke a new cold war, with an attendant arms race that will ultimately bankrupt the country.

What it's not being used for is to deliver social services the people of Russia need, most especially investment in infrastructure and domestic manufacturing, so that Russians could buy their own products and create their own jobs rather than buying foreign products and creating foreign jobs.

Why, you may ask, should this be so. The reason is quite simple: Because if the Kremlin used Russia's oil proceeds to support the population, that population would become stronger and more independent. Such a population would be harder to govern, more likely to challenge authority, more likely to demand a new form of government not tied to the failed totalitarian policies of the Soviet past. Such a population would be the very last thing the malignant little trolls who govern Russia would wish to have.

But this isn't to say that this outrageous policy is mostly the fault of those in the Kremlin. It surely isn't. The Russian people themselves are mostly to blame, because they've willingly empowered their regime and turned a blind eye both to its clear policy failures and its outrageous crackdown on civil society. They deserve to suffer.

And suffer they will. Because, remember, Russia is now riding a long period of growth, it is at the very apex of the business cycle, a cycle from which Russia is no more immune than any other country, regardless of the price of oil. When that cycle starts downward, the problems we see now will only be magnified and expanded to the point where they threaten the nation's survival. Russia is totally lacking in the sort of basic economic fundamentals that could insulate it from the worst ravages of the business cycle.

And despite all this, there was no demand from the people of Russia for debate over economic policy in the presidential elections. No serious attempts were made to criticize Putin's policy of pouring money into a new cold war, or indeed to question whether any economic policy he has followed (remember, he doesn't have a single shred of legitimate economic credentials) was the correct one.

Do you dare to imagine what would happen to Russia if a natural downstroke in the national business cycle were to be accompanied by a drop in the price of crude oil, seriously depleting the Kremlin's cash flow? Can you imagine the havoc that would be wrought on the Russian economy or the extent of the Stalinesque crackdown that would be required to keep the lid on popular dissent?

Sooner or later, and undoubtedly sooner rather than later, Russia will pay the piperski for the obscene and malignant tune to which is has been so recklessly dancing lo these many years. The immutable laws of economics decree that it is so, just as they tolled the bell for the USSR. Little time remains, and less opportunity, for the people of Russia to head themselves away from that abyss.


Anonymous said...

It is not true that current regime is supported by Russian general public. Current regime is mistrusted and threatening.
But it is more threatening to see militarist and imperialist policies of United States in Iraq, it's attempt to setup marionette governments in Georgia, Ukraine, Baltic Nations, extremely scary russophobic statements by Senator McCain. That is a major threat that unites Russian population. Even though I generally agree that current economic and foreign policy of mr. Putin is a complete incompetence and disaster.

Concerned Citizen said...

Anonymous: There is no better way to ensure that all of your neighbors hate you and want to be as far away from you as possible than to accuse them of being "marionettes of the West" every time they do something you don't like. But you are quite correct to summarize this as the heart of Putin's policy toward your "near abroad".

But now let's consider the implications of this for Western leaders. First, the longer Putin stays in power, cursing all his neighbors as "marionettes of the West", the harder Russia's neighbors will try to join everything in the West (especially NATO), and the more eagerly they will do whatever the West tells them they need to do in order to join. So really, the last thing Western leaders should want to do is undermine Putin. Far better to lock in some long-term gains with his disaffected neighbors, who will then be in a better position themselves to help Russia when it finally collapses. Maybe object to him just enough to hide our true intentions. Maybe also to encourage him and other Russians to keep spewing their self-destructive venom. It's like Sun Tzu counseled: "If your enemy is irascible, tease him."

Basically, Putin is no better with foreign policy than he is with domestic policy, probably even worse. This is a chess game, and he is playing it like a hyperactive seven-year-old. Most Russians, like you, are just too foolish and easily manipulated to see it.