Saturday, May 22, 2004

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Whither Russia, or when print beats the Internet

The Economist has a survey of Russia this week. Its core thesis:

He [Vladimir Putin] wants Russia to be a strong country: economically powerful, politically stable and internationally respected. What is in dispute is what those goals mean to him, the methods he uses to achieve them, and whether he is as powerful as he seems.

This survey looks back at Mr Putin's first term and forward to the second. It tries to reconcile the optimistic and pessimistic views by showing that both contain much truth, and both are necessary to understand today's Russia. Economic liberalism and political illiberalism are complementary parts of Mr Putin's strategy, but his contribution to both is often exaggerated. Russia's new-found prosperity is fragile and will require deep and difficult reforms to sustain. At the same time the shrinkage of freedoms is less clear-cut than it seems, and not always the result of orders from the top.

What is clear is that an open economy and a closed political system make uneasy bedfellows. The overweening bureaucracy is harming business, and not just that of power-hungry magnates like Mr Khodorkovsky, but of the little people building the foundations of Russia's new economy. Encouragingly, business is fighting back, and citizens, increasingly deprived of a political voice at the top, are beginning to build democracy from the bottom up.

Now, if you read this survey on the Internet, you come away with a cautiously optimistic picture of the country.

However, there is the rare moment with looking at something in print provides greater information than reading it on the Internet. This is one of those times, and that information suggests that Russia is worse off than the survey's author, Gideon Lichfield, suggests.

Why? In the print edition of the Economist, most country surveys like these are filled with advertisements from either large companies indigenous to the country in question, or large multinationals with significant amounts of foreign direct investment. Generally speaking, the number of ads is a rough indicator of the economic dynamism of the surveyed country. In February, for example, a survey of India had five full ad pages.

For this 16-page survey, there was only one half-page advertisement -- and that came from the state-owned export-import bank.

In contrast, when Ukraine had a survey a decade ago, it was a basket case of hyperinflation and ethnic tensions -- but there were at least two ads.

Russia's economy is more fragile than the Economist believes.

posted by Dan on 05.22.04 at 08:38 PM


If Russian democracy and its new economy were being built "from the bottom up," as The Economist claims, wouldn't it be less likely that large business interests whether domestic or foreign would be driving the process?

Now The Economist's claim may be wrong in any event. But even the part of its Russia survey that Dan quotes says clearly, "Russia's new-found prosperity is fragile and will require deep and difficult reforms to sustain." Is Russia's prosperity even more fragile than The Economist thinks? Could be, but I don't know that who buys ads in The Economist would be the first datum I would pick to support that conclusion.

posted by: Zathras on 05.22.04 at 08:38 PM [permalink]

“Could be, but I don't know that who buys ads in The Economist would be the first datum I would pick to support that conclusion.”

On the contrary, I think it is very significant. Running an ad in the Economist is deemed as standard operating procedure by many companies. That they chose not to do so in this particular instance is worrying. At the minimum, it prompts one to ask further questions.

posted by: David Thomson on 05.22.04 at 08:38 PM [permalink]

Nice piece of work, Dan.

posted by: Barry on 05.22.04 at 08:38 PM [permalink]

Great observation. I'm impressed.

posted by: Bubba on 05.22.04 at 08:38 PM [permalink]

Russia is still suffering from the free market "shock therapy" and asset-stripping and organized crime growing "deregulation" binge that happened in the 90's - under a Democratic watch. It was a bitter thing to see the Russian market get flooded with cheap import chicken, the meltdown of the Russian stock market, the consolidation by oligarchs of state-owned assets in what ammounted to hostile take-over and liquidation operations with rampant corruption. That things hit a bottom and stabilized and even started creeping up is just a tiny mercy compared to the carnage.

It's widely acknowledged that under Yeltsin and Clinton that the standard of living for Russians dropped precipitiously because of inflation, GDP reduction, etc. One of the reasons why Putin has such large lattitude putting away politically dissident Russian oligarchs is that the people of Russia loathe the oligarchs for looting and sacking their nation. The words "carpet-baggers" should conjure up a decent American analog.

The case of Russia's "free market reforms" have become a case study in exactly how not to move a centrally planned economy into a capitalist free-market economy. Whenever for instance China's and India's leaders hear about us Westerners bleating for more deregulation, they think about Russia and go "Yeah right buddy. That's what you told the Russians too!"

It's a shame that the Russians themselves didn't have the sense to not listen to the bad advice they were given.

posted by: Oldman on 05.22.04 at 08:38 PM [permalink]

Except the advice they should have been given was advice they did not want to listen to: the way to build a prosperous free economy is from the ground up, starting with the private ownership of land. In other words, full and unqualified repudiation of the central tenet of Soviet Communism.

Russians did not want to hear this, the people in power found it easier and more profitable to privatize from the top down, and Western governments and business interests decided that this was better than nothing. Put that way, they may have been right, and at the time abandonment of the ideological struggle to destroy Communism at the roots avoided ruffling many feathers. In the long run, though, it carried a heavy price.

Incidentally, I doubt how influential the Russian experience has been in China or India. China appears to have clear development priorities and started following these years before the Soviet government fell; India's legacy of socialism inherited from the British is without doubt a more important source of resistance to deregulation than anything that happened in Russia -- apart from which the example of China and other East Asian countries appears to have made a much greater impression in India.

posted by: Zathras on 05.22.04 at 08:38 PM [permalink]

Like so much western coverage of Russia, the Economist article misses the point, which is that Russia is not capitalist.

The name of the game in Russia, as always, is arbitraging the state: buy low from state suppliers-- be it oil or government debt or any number of goods-- and then sell high on world markets.

The core reason for this bastard economy is the absence of a banking sector. There is no way to properly attach collateral, no real means of assessing risk, no effective mechanism for channeling savings into productive investment. Hence the ridiculous national pastime of rube goldberg schemes for enterprise cash management and the other national pastime of squirreling away dollars under mattresses.

The effects of this cash-oriented economy are that

1) consumer spending is much higher than expected (note that Mercedes does more business in Moscow than almost any city in the world, and that the Russian lingerie retailer Dikhaya Orkhideya has over 100 outlets and does 3x the $ volume per square foot than Victoria's Secret...)

2) business investment is much lower than expected. Most Russian industrial concerns, including the oil companies, are nothing more than cash cows for thieving directors who transport their loot to Geneva, the Costa del Sol and the Cote d'Azur.

So life in Russia is brighter (esp in Moscow) than you would expect, and Russia's long-term prospects are worse than the Economist expects.

The net of this is that until Russia develops a real banking sector, and of course the legal and judicial infrastructure to support the same, we should think of Russia as an oil-rich primitive economy along the lines of Nigeria or Venezuela.

posted by: thibaud on 05.22.04 at 08:38 PM [permalink]

Oldman doesn't know what he's talking about. Instead of recycling partisan cliches, he should go to Russia and get a sense of the core, structural reasons for that country's condition. Hint: about 90% due to the legacy of the command economy and its destruction of civil society (eg see notes about the absence of a real banking system, above), maybe 10% due to the ill effects of ongoing government-aided corruption.

And if you think the stealing began or ended with Yeltsin, then you clearly know nothing about Russia or its Soviet institutions.

No matter: everything's really just a reflection of US politics, right?

posted by: thibaud on 05.22.04 at 08:38 PM [permalink]

"russia's economy is more fragile than the Economist believes"

This is so obvious that I can't see why the western press keeps getting it wrong. Russia's current economic growth is entirely dependent on $40-a-barrel oil.

Each $1 increase in the oil price adds $1B to Russia's reserves. When oil crashes to earth, Russia will again default, devalue and destroy the lifetime savings of millions of its citizens.

posted by: thibaud on 05.22.04 at 08:38 PM [permalink]

Thank you, I just wanted to give a greeting and tell you I like your blog very much.


posted by: オンラインカジノ on 05.22.04 at 08:38 PM [permalink]

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