Impressions of the Saint-Petersburg International Economic Forum

This in about Economy, and tagged , was written by on May 23, 2014 . 122 Comments

I am currently in St. Petersburg where I have attended the St. Petersburg International Economic Forum. Before saying anything further I wish to thank Peter Lavelle of RT TV for very kindly and very generously arranging my invitation to the Forum.

At the Forum I attended three roundtables:

(1) On the InfoWars brilliantly hosted and moderated by Peter Lavelle. I was a participant in this roundtable an edited version of which RT will broadcast and which will be shown in full on RT’s YouTube channel. Since I participated in this roundtable I feel it would be inappropriate for me to say more about it now save (1) that I am very grateful to Peter Lavelle for inviting me (2) that the discussion was outstanding and I would strongly urge everyone to see it either on RT or on YouTube and (3) that I was lucky enough to be befriended by other members of the panel including Pepe Escobar, John Laughland and Ben Aris who I have long known from their writings but whom I never expected to meet. I intend to save any further comments about this roundtable until others have had a chance to see it on RT and YouTube.

(2) On investment strategies in Russia on the part of sovereign wealth funds. The roundtable was hosted and moderated by Alexei Kudrin. Ding Xuedong, Chairman and Chief Executive of China Investment Corporation participated.

(3) On incentives to stimulate domestic Russian capital flows into the Russian economy. Elvira Nabiullina the Governor of the Central Bank was a participant.

I also attended the Forum’s plenary with Putin himself where he gave a lengthy speech, which was followed by an interview that was broadcast on television.

Here are my initial observations of the Forum (save for the roundtable with Peter Lavelle):

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“Everything is Annihilated”: The Economic Split of Ukraine

This , in about Economy, and tagged , , , was written by on February 2, 2014 . 87 Comments

The attention of political analysts around the world is focused on the events in Ukraine. But at a certain moment, the fires die out and the riots subside – what will remain are the dry statistics.

Translator’s notes: This is a translation of a post on the weblog “Sputnik and Pogrom”, the authors can be described as Russian Nationalists. But that does not make it any less true, the reason that I translated this is that you will never read something like this in the Western Media, Russian Nationalists do not fit the narrative.

Original post by Kyrill Ksenovontov, 28th of January 2014

Translation: Nils van der Vegte

everythingisannihilated

Ukraine showed itself and the world in 2013 that the country is not important: instead of the planned 3.4% economic growth, it achieved something close to zero. 2013 was a negative year for almost all its economic sectors, except for agriculture (industry decreased by -4.7%). Most experts expect no more than 1% GDP growth in 2014. The irony is that the final fall into the abyss of economic crisis was prevented only by trade with Russia. But in 2014 even trade with Russia will do nothing to prevent that: The budget deficit for 2014 is 4.3% of GDP. The worst thing is that, economically speaking, the two halves of the country vary even more than the Czech Republic and Slovakia once did.

For example, the share of the Donetsk and Dnepropetrovsk regions of total Ukrainian exports  is 35% , whilst the 7 most western regions (some of which have a serious historical bonus), make up for just 1/14 of Ukrainian exports. Regionally speaking, the highest number of people living below the poverty line can be found in the north-western and south-central regions (in the Lvov region, 30% of the people live around the poverty line).

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The Russian Aerospace Industry is Rapidly Recovering

This in about Economy, and tagged , , was written by on September 2, 2013 . 9 Comments

More info against the Department of Russia Only Produces Oil and Vodka: Here are some graphs of Russian aerospace manufacturing courtesy of the Reality vs. Myths blog. (2013 figures are projections).

russia-helicopter-construction-gloriaputina

Total helicopter construction has now basically converged with the levels of the late RSFSR.

russia-aircraft-construction-gloriaputina

Aircraft construction is only halfway there, but its state is nonetheless leagues better than it was in the depths of the post-Soviet freefall. As the blogger points out, its poorer performance via-a-vis helicopters can be explained by the fact that the technologies used in Soviet civil aircraft was outdated, so the Russian industry essentially had to start over from scratch. Nonetheless, it seems to have reached the point of a rapid further up-trend, presumably driven by the Sukhoi SuperJet 100 as it enters mass production. The United Aircraft Corporation, the holding company into which independent Russian aircraft companies were consolidated in 2006, projects production increasing to 160 units by 2020.

Russia Overtakes Germany To Become Europe’s Largest Economy

This in about Economy, and tagged , , , was written by on July 12, 2013 . 38 Comments

See data. For real, this time.

russian-gdp-overtakes-germany

While it is perhaps a big strange to start thinking of Russia as a high-income economy, it’s not so surprising when looking at concrete statistics such as vehicle consumption, Internet penetration, etc. – all of which are now at typical South European and advanced East-Central European levels (even if there’s still some way to go to converge with the likes of France or the US).

In per capita terms, this means that the average Russian is now about as rich in terms of real goods he can buy on domestic markets as a typical citizen of Portugal, Greece, Estonia, Poland, or Hungary (though with the caveat that most of the latter places have a lot less income inequality). Below is a table showing the GDP per capita, PPP (current international $) of Russia and comparable countries:

  2008 2009 2010 2011 2012
Czech Republic 25,885 25,645 25,300 26,209 26,426
Portugal 24,939 24,892 25,547 25,586 25,305
Slovak Republic 23,210 22,546 23,149 24,112 24,896
Greece 29,604 29,201 27,539 25,859 24,667
Russian Federation 20,276 19,227 20,770 22,408 23,549
Lithuania 19,559 16,948 18,120 21,554 23,487
Estonia 22,065 19,470 20,092 21,996 23,024
Chile 16,435 16,190 18,607 21,001 22,655
Poland 18,021 18,796 20,036 21,133 21,903
Hungary 20,432 20,249 20,734 21,455 21,570
Latvia 18,090 15,928 15,944 19,103 21,005
Croatia 20,215 19,158 18,546 19,817 20,532
Turkey 15,178 14,578 15,965 17,242 17,651
Brazil 10,393 10,357 11,187 11,634 11,909
China 6,202 6,798 7,569 8,408 9,233
Ukraine 7,311 6,312 6,691 7,215 7,418

Furthermore, it’s looking as if Russia might have a real chance of overtaking Portugal next year. Just as Putin promised in 2003! (Double GDP; overtake Portugal in 10 years). But even if that fails, at least overtaking Greece is all but assured, so even if Russia misses out on Portugal it will still get to say it is no longer the poorest “proper” European country.

Russia’s Economic “Stagnation” In Global Perspective: Continued

This in about Economy, and tagged , , was written by on July 3, 2013 . 30 Comments

It is now a staple of “common wisdom” to such an extent that there is little point in digging up specific news items. Bound up in red tape and crushed by the weight of state regulations, the argument goes, the Russian economy is doomed to years of renewed Brezhnevite stagnation – with the government increasing repressions and anti-Western rhetoric to divert attention away from its failure to raise living standards.

But is this actually a valid viewpoint? Russia’s rate of GDP growth has plummeted relative to 2010, when it was emerging out of a deep recession. In 2010 and 2011, it was typically at around 4% to 5%; by Q1 2013, it was just 1.6%.

russia-gdp-growth-to-2013

Now yes, that looks pretty bad – even though its far from being an outright recession (aka two consecutive quarters of negative growth, crudely defined). But one could credibly make the argument that a middle-income economy that still has much room for productivity increases, like Russia, should be growing considerably faster. But while that is true enough, it should nonetheless be pointed out that to the extent that Russia is in stagnation – so is the entire world, bar China.

global-gdp-growth-to-2013

See the similarities between the two graphs? Now imagine China were removed from the second one. In that case, they would virtually be mirrors of each other. Or how about simply comparing Russia’s growth rate to comparable CEE countries that are widely considered to be much “freer” and less corrupt:

russia-cee-gdp-growth-2010-2013-compared

The rather banal reality is that Russia is far from alone in experiencing a big slowdown among its middle-income peers: Especially in comparison to many of the Central-East European countries, some of which are in outright recession, but also fellow BRICS members Brazil and South Africa – not to mention Mexico, South Korea, Turkey, Argentina, and most other emerging markets – which have likewise seen slowdowns to the low single digits in the past few months or year.

As such, the question isn’t so much “Why is the Russian economy stagnating?” but more like “Why are pretty much all developed countries and emerging markets, except China, stagnating if not in outright recession?”

Translation: Russia’s Growth Rate may Plummet in the Next Decade

This in about Economy, and tagged , , was written by on May 24, 2013 . Leave a Comment

According to several experts, Russia may be facing a period of protracted low growth rates now that its GDP per capita has recently exceeded $16,000. Vedomosti’s Olga Kuvshinova has the details.

Russia may Experience Minimal Growth in the Next 10 Years

A variety of reasons are brought up to explain the Russian economy’s slowdown to 1.6% growth in the first quarter by experts and officials: A stalling in investment, private consumption, weak external demand. But there is a one factor that is more critical, according to Ivan Chakarov of Renaissance Capital. It is, in fact, quite typical for quickly growing economies to slow down once they exhaust their “advantage of backwardness” – that is, the possibility of obtaining high profits thanks to low costs. After this, countries collide against barriers to growth, falling into a so-called “middle-income trap.” This is precisely what is occurring in Russia now, according to him.

This trap is typical set off when a country’s GDP per capita approaches $16,000. This year, according to Chakarov’s calculations, it will constitute $16,016.

The countries of Western Europe slowed down in a big way in the 1970s, South Korea – in 1995, Singapore and Hong Kong – at the start of the 1980s, Taiwan – at the end of the 1990s. All of these cases, according to Chakarov, were simultaneous with the crossing of the $16,000 per capita mark (in 2005 prices).

Russia is the first of the BRICs to fall into this trap, notes Chakarov. China will hit this problem in 2020, Brazil – in 2024, and India – in 2038.

Countries that fall into this trap typically lose almost two thirds of their previous levels of yearly growth, says Chakarov, citing research from the National Bureau of Economic Research (NBER) in the US. As regards Russia, this could mean that our previous rate of growth of approximately 4.5% (adjusting for the recession in 2009) may fall to 1.6% – that is, exactly the same as the figure for the first quarter.

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

This in , about Economy, and tagged , , , , was written by on April 11, 2013 . 10 Comments

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.

Explaining Russia’s Economic Slowdown

This in about Economy, and tagged , , was written by on April 1, 2013 . 15 Comments

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.

Russia Moving Into The Fastlane

This in about Economy, and tagged , , was written by on March 29, 2013 . 1 Comment

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).

Russians Produce 7 Cars For Every 10 They Buy

This in about Economy, and tagged , , , was written by on March 28, 2013 . 3 Comments

One common trope about the Russian economy is that it has virtually no manufacturing to speak of and lives off “oil rents” that can collapse any day.

Whiles there is a small nugget of truth to this assertion, but by and large it is simply false. It is true that a great chunk of Russian exports do accrue to hydrocarbons and metals, because that is its comparative advantage in trade. That said, there are plenty of Russian products on the domestic market. The automobile industry is a good and representative example of this because they it’s a stalwart of many national economies and there exist reliable and easily accessible statistics on it.

Car Production Car Sales Autos self-sufficiency
Czech Rep. 1,178,938 193,795 608%
Mexico 3,001,974 987,747 304%
South Korea 4,557,738 1,530,585 298%
Poland 647,803 328,532 197%
Japan 9,942,711 5,369,721 185%
Germany 5,649,269 3,394,002 166%
Turkey 1,072,339 817,620 131%
China 19,271,808 19,306,435 100%
Argentina 764,495 832,026 92%
Brazil 3,342,617 3,802,071 88%
South Africa 539,424 623,921 86%
France 1,967,765 2,331,731 84%
Russia 2,231,737 3,141,551 71%
USA 10,328,884 14,785,936 70%
UK 1,576,945 2,333,763 68%
Sweden 162,814 326,441 50%
Italy 671,768 1,534,889 44%
Ukraine 76,281 263,604 29%
Australia 209,730 1,112,132 19%

As such, I decided to compile a representative list of countries, with data on production and sales for 2012 drawn from OICA, in order of the ratio of their auto production to new auto sales – that is, their degree of self-sufficiency in cars.As we can see above, while Russia is perhaps rather lower than average, its domestic auto manufacturing industry nonetheless manages to satiate 71% of demand for new cars.

This is quite comparable to France, the US, and the UK, and is vastly higher than a similarly resource-dependent rich country, Australia. Quite a lot of other resource-heavy countries like Saudi Arabia, Venezuela, and Norway don’t produce cars at all. Mexico is a huge exception, but the reason for that is that it borders the US and the US has outsourced quite a lot of its auto industry south of the border to take advantage of lower labor costs – a situation analogous to the Germans’ outsourcing of car production to Spain in the 1980’s, and Central-East European countries like the Czech Republic, Slovakia, Hungary, and Poland in the 2000’s.