Potemkin Putin’s Grand, Desperate Ukrainian Crusade

Is Russia’s Lopsided Export Economy in Trouble?

Russia’s economic growth rate has plummeted from the 7% average annual pace of the last decade to 1.3% last year. Now the brokerage arm of the country’s largest state bank, Sberbank, SBER.MZ -0.23% expects zero growth in 2014.

Sensing trouble, wealthy Russians have been moving money out of the country at one of the fastest rates in two decades—$60 billion a year since 2012—and now foreign investors are pulling out too. The ruble has fallen by 22% against the U.S. dollar since 2011, and the Central Bank of the Russian Federation has been fighting to prevent a ruble collapse since the Crimean crisis began.

The situation is especially revealing because oil—the mainstay of the Russian state—has stayed relatively stable, hovering at $110 per barrel for three years. Yet the Russian economy is stagnating. This suggests deep-seated problems.

… While Russia has a relatively high rate of investment, 26% of GDP, much of the money gets funneled into dubious projects by the state. Now the spare capacity is shrinking, and the old Soviet roads and railways are deteriorating, as any regular visitors to Russia can attest.

The inflation rate now stands at 6.3%, fourth highest among the major emerging markets, and well above the emerging world average of 3.8%. Russia has become a classic weak-investment, high-inflation economy.

Despite his growing reputation as a geostrategic mastermind, Mr. Putin’s economic strategy is increasingly self-defeating, focused on extending Kremlin control.

… the Russian state has few new sources of income outside of oil and gas, at a time when it is taking on more dependents. Demographics are putting a squeeze on public finances, as roughly a million Russians are retiring each year, and too few young people are replacing them in a workforce of about 100 million. The situation leaves fewer taxpayers to fund pensions, after a five-year period in which the Kremlin raised pension payouts by an average of 25% a year.

… Because of slowing growth and deteriorating terms of trade, the non-oil government deficit is now 11% of GDP. The current account is in a similar position: an apparent surplus, dependent on oil. The non-oil current-account deficit is currently running at a whopping 10% of GDP.

To keep its federal budget in balance, Russia requires an oil price of $110 barrel, so it is tiptoeing on the edge. Yet because other commodity prices have fallen, the price of oil, now $107 per barrel, is at a 30-year high compared with industrial metals. This suggests that oil, too, may be poised for a downshift—which would have a crippling impact on the Russian economy. _Wall Street Journal

The real breakeven price of oil to keep the Russian government in clover and all the cronies happy, is around $125 a barrel. Which underlines Putin’s desperation — why he must put on “extravaganzas” such as the Sochi olympics and the Crimean invasion. It plays well to the home crowds, who require constant placating.

Putin has been planning this grand Ukrainian crusade for years.

Former Polish Defense Minister Bogdan Klich wrote: “… what we are seeing is not an unfortunate over-reaction to recent events, but a result of meticulous preparation. Armies do not mobilize 150,000 troops within days, or have vehicles and thousands of uniforms without insignias ready, or hold military exercises in peaceful regions of the world without warning.”

Klich wrote: “Here is a paranoiac who sees an implausible coalition of liberal Russians, Ukrainian fascists, the CIA and Islamist terrorists trying to thwart his preferences, if not topple him, at every turn.” _ Danger of Russian Economy Collapsing

The author of the above piece is almost certainly correct: “No one is likely to stop Russian troops if they invade Ukraine, least of all NATO or other Western forces.” At least no one outside of Ukrainians, and perhaps a few volunteers from a number of former Soviet clients in Eastern Europe.

Russia’s demographic situation is far worse than most western analysts understand, and its economy is in a more precarious position than most outsiders imagine.

Putin worshipers in the western world are making the same mistake that earlier worshipers of Stalin, Hitler, and Mao made. It is human nature to want to back the “strong horse.” It is also human nature to choose the wrong horse when betting. That’s how horse tracks stay in business.

The best approach for outside observers is to back away from choosing sides. There are no “good guys.” Territorial disputes are far older than homo sapiens, and will play out long after modern day humans are gone.

Look to your own society, your own territory. What do you need to do to make it more harmonious, more prosperous, more dangerous to outsiders with bad intent?

Start locally. If you do a good job there, you can consider moving slowly outward to make sound alliances.

It is never too late to have a dangerous childhood.

More: The Hitler Model

Both WWI and WWII were initiated through horrifically poor reasoning and decision-making. It is likely that future historians will say the same about WWIII.

More: Economic sanctions against Russian banks and the economic interests of Putin’s cronies create rare Russian :: Chechen unity:

Mr. Putin on Friday ordered Russia’s central bank to lend support to Bank Rossiya–Russia’s 17th largest financial institution–and said he planned to open an account and have his official salary deposited there starting next week. He said he found the bank had “a very good-sounding and symbolic name.” Later, Chechen strongman, Ramzan Kadyrov, also said he also will open an account at Bank Rossiya and have his salary deposited there. _ WSJ

Putin clearly understands how to spread money around to good effect politically. The problems come when incoming cash flow slows. (see “oil curse“)

Russia's Unbalanced Economy

Russia’s Unbalanced Economy

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4 Responses to Potemkin Putin’s Grand, Desperate Ukrainian Crusade

  1. Matt Musson says:

    Horse tracks stay alive because they skim 14% off the top. They
    don’t care which horse wins.

  2. alfin2101 says:

    Don’t kid yourself. 14% is not nearly enough to grease all the palms and make all the under the table payoffs that have to be made to keep a track in business. 😉

  3. Matt Musson says:

    You point out the Putin’s Russia has economic problems. Historically, that is a big motivator for tyrants to invade their neighbors. And, in this case, Putin can take Crimea then use Crimean gas deposits to pay for the excercise.

    • alfin2101 says:

      Russia has plenty of gas without Crimea. Russia only wants to prevent competing interests from developing their own resources — so they would no longer have to buy from Poot.

      If China and Europe developed their own shale resources, Russia’s government would be in big fiscal trouble for lack of easy money. Remember: The most fervent wish of the Russian peasant is for his neighbor’s cow to die. http://www.durusau.net/publications/russianpeasant.pdf

      Russians seem stuck with an infantile need for strong-man rulers. The Russians who want to grow up and take responsibility for themselves are forced to move away. This leaves a bitter bunch whose greatest wish is to see others become even more miserable than they themselves are.

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