This Is Not A State

Leonid Volkov wrote the following post on Facebook this morning about the trouble with the Russian bureaucracy:

As an IT person, it is particularly annoying for me to hear all these stories about how the country is ruled by registries [the bureaucracy]. When you have deleted from the cadastral database [Defense Minister] Shoigu’s dacha, and then you cut out all data about Lyudmila Putina’s [remarriage].

This is worse than the collapse of the state; even in the Siege [of Leningrad] in Petersburg the damn trams operated and birth (and death) certificates were issued and account books were kept.

I do not know how to explain, but here is this thing that should be prohibited, I feel this way (and I think many feel this way too). Okay, they are stealing, a lot where they steal anyway; okay, there is injustice; okay, there is a lot which is somehow unfair, but then there is the registry — this is a basic thing.

I can imagine a state where everybody steals… but I cannot imagine a state where you cannot trust the registries, where you cannot trust notaries, or others like them. This is not a state. It is something else.

Speaking Volapük

The Russian government made the following announcements on Twitter yesterday:

And shortly thereafter:

Despite the expert advice that has been offered by highly respected Russian economists (Sonin & Kudrin), it seems the Kremlin is determined to go its own way.

In a blog post on the Russian news portal Rosbalt yesterday, columnist Sergei Leskov commented on this phenomenon:

We do not want to admit that the main reason for the [economic] crisis is the systemic flaws in the economy and governance.

In 2008, he writes, the government responded to the economic downturn by pumping money into the banks.

For some reason it is believed that there is nothing more important for the economy than the prosperity of the banks. At the expense of the real sector and industrial development.

The dominance of oligarchic business, monopolies, and state intervention in the economy are the inevitable companions of corruption, he writes. The antidote is small and medium businesses who are invested in civil society, fair elections, and independent courts. But, Leskov says, the current bureaucratic environment is not conducive to such a change.

The share of small and medium business in Russia makes up only 12-15% of the GDP, while in developed economies it is 60-70%.

He then mentions (as I did last week) that the Russian Central Bank is “robbing banks of their licenses”. Everybody involved knows this is happening. The only one who doesn’t is the public prosecutor, Leskov jokes.

We… talk about the curse of oil dependence. In the Soviet Union, with all its inefficiencies, the share of oil exports accounted for 19% [of the economy]. In Russia it is more than 50%.

Who forced us to do this, Leskov asks rhetorically.

We dug a hole for the economy and the national currency with our own hands.

He concludes by observing that the government refuses to listen and at times it seems that they are speaking a different language:

In the 19th century, when the world began to experience the first signs of what was later referred to as globalisation, attempts were made to invent a universal means of communication for everyone. The Catholic priest Johann Schleyer invented the language Volapük. It was first met with enthusiasm, but soon the experiment stalled. Now Volapük is a figurative term for meaningless and incoherent speech. The users of Volapük number now only 30 people. The number of members of our cabinet. When ministers talk about the economy, it seems to me that they speak Volapük.

Kudrin’s Anti-Crisis Measures

I wrote yesterday about economist Konstantin Sonin’s concrete steps for the Kremlin to take to turn the economy around. In RIA Novosti yesterday former Finance Minister Alexei Kudrin had his own advice for the Kremlin. It is not in a numbered format, but more in the form of an interview, so I’ve pulled what I consider to be the more important points.

In contrast to Sonin, Kudrin says that he doesn’t believe short-term measures will help turn around the economic crisis currently facing Russia.

“We should proceed from the understanding of the nature of current events and their long-term [results]. In this context there is an understanding that the main problems of the Russian economy are structural, which includes a high dependence on oil,” Kudrin believes.

“In order to boost growth in the future, we need action that is more systematic, & strategic, which cannot be done in one or two years. Therefore, strictly speaking, we need structural reforms.”

According to Kudrin the need for structural reform is long overdue, but the authorities held off for several reasons, including because they were reluctant to carry out unpopular steps.

Kudrin has long advocated raising the retirement age, and reiterates his advice here. He dismisses fears about the political implications of such a decision, saying that the only people who don’t like the plan are those set to retire in the next 5-10 years.

Other points Kudrin brings up:

  • An anti-crisis plan is needed but should be aimed at promoting the modernisation of enterprises.
  • Kudrin “advises Russians to keep their savings by purchasing federal bonds (OFZs)*, which the Finance Ministry intends to issue. “It will be a reliable tool with favorable interest rates”.
  • Kudrin believes that the sanctions will be lifted by late this year, or early next year.
  • He also suggests that the Government to wait until the middle of next year to try to sell stakes in state-owned companies like Rosneft, Sberbank, and VTB.

*”Last September the Ministry of Finance said that it was considering issuing a special debt instrument for the population. The new government bonds for citizens should be similar to bank deposits, with the possibility of early repayment, the terms of OFZ for individuals amount to three to five years, the head of the ministry’s debt department said last week.”

4 Anti-Crisis Measures

Economist Konstantin Sonin had a long post on his blog yesterday with four anti-crisis measures that the Kremlin could and should take to get the economy back on track.

To me these measures seem to be “necessary”, they are not just “appropriate” in the current situation. I am sure they will have to be implemented at some point. The transition to normal economic development without these measures is difficult to imagine. At the same time they contain nothing “game-changing” or “revolutionary” – on the contrary, it is necessary to take them in order to avoid revolution, fracturing, etc.

Sonin advises:

1. Cancel the counter-sanctions and the trade sanctions against Ukraine and Turkey. These measures cause direct damage to tens of millions of Russian families, raising prices (and so quickly). Particularly strong damage is being done to the “poor half” of the population because for them these products are a big portion of family expenses. Higher prices do not just mean eating less, but also consuming less of other, including vital, products.

He also notes that economic growth without an increase in international trade is “exceptionally rare”.

2. Appoint a Prime Minister who will be able to fully coordinate the world of the office, to make basic economic policy a priority and to formulate a meaningful short-term (“anti-crisis”) program.

Sonin does not advocate one particular candidate, though he says that Moscow Mayor Sergei Sobyanin “is in many ways a more suitable candidate” [than former Finance Minister Alexei Kudrin or than Mikhail Khodorkovsky].

3. Prioritize — cut military and military-related (for example, military science) spending, and increase spending on pensions and health care and education. It is better to do it sooner rather than later so that, as in 1992, it doesn’t become somebody else’s decision and the fiscal crisis has reduced the impossibly high overhead.

The increase in pensions and benefits is, of course, inflationary, but this is the best expenditure of money in the crisis instead of feeding a few owners of weapons producing factories. The Central Bank will cope with inflation…. Unemployment is low [projected to increase officially to 6% this year. -ed], so it is best to close unneeded production now when there is money for benefits than (see above) instead of when there won’t be any money for it.

In addition to dismissing the Prime Minister, Sonin advises:

4. dismiss ministers and officials convicted of corruption and ties to organized crime.

It would seem that the fraudulent dissertations of Ministers Sokolov, Nikiforov and Medinsky has no relation to their ministerial activity. A mere trifle, it would seem.

And maybe the corruption of the Prosecutor General’s son is not related to the work of the Prosecutor General, Sonin writes [you can watch anti-corruption activist Navalny’s investigation on the Chaika family in English here. -ed]. If these revelations had come to light earlier (in 2007 or even in 2011), Sonin says, they would be dismissed as nothing.

But not now. One of the problems for economic development in Russia is pessimism. The pessimism of millions, focused only on basic survival and not setting higher goals for themselves. The pessimism of hundreds of thousands, so that they don’t open new small businesses. The pessimism of tens of thousands not to invest. The pessimism funneling thousands of brains [brain drain]…

Once again, in a normal situation, in a stable development, the dismissal of certain people won’t change anything. But now there are abnormal levels of corruption and abnormal levels of pessimism. The dismissal of each particular con — even for plagiarism of their dissertation — is a signal. Pessimism will begin to dissipate with this series of signals. It will be immediately  obvious — a series of dismissals, change the prime minister and the stock market will rise.

Sonin concludes:

In order not to argue in vain, these four specific measures, or course, have no relation to “long-term development”, and “institution building”. Their advantage is that they can be achieved. And to talk about long-term measures without taking the necessary first steps is a waste of time.

Bailing Out VEB

An article in the Russian business daily Vedomosti today revealed that contrary to rumor, the head of state bank Vnesheconombank (VEB) Vladimir Dmitriev would retain his post. The decision to keep Dmitriev in place had been made early last week at a meeting with President Vladimir Putin.

VEB has apparently been struggling for some time in the midst of the economic downturn. The reasons for this are multiple, but this is perhaps the best explanation:

“The main problem is that the bank is not governed as an independent agency or a business entity,” said Sergey Aleksashenko, a former Russian central banker. “It is governed like a second budget … (ignoring) economic efficiency or economic results.”

In early December, Economy Minister Ulyukaev said “it would be better to liquidate it [VEB]”, but he conceded that this was not actually an option. He also noted that the bank had bad loans totaling more than $15 billion.

Over the holidays, Finance Minister Siluanov informed the public that the government would “cut interest rates on the central bank’s deposits” in VEB:

“We agreed that the interest rate on deposits, placed using NWF [National Welfare Fund] funds, will be cut, significantly cut, to 0.25 percent,” Siluanov said.

“We agreed that VEB will get access to liquidity which the budget has. In other words the treasury will be able to place its liquidity not only in commercial banks, but also in VEB,” the minister said.

“We agreed that the central bank, with its deposits, will implement the same measures to improve VEB’s balance,” Siluanov added.

Today, Vedomosti repeated this information and noted:

 

In December an official familiar with the discussions in the government told “Vedomosti” that VEB could obtain OFZs in the amount of 200 billion robles. This was the figure discussed, the official from the financial and economic bloc confirmed. This is the option considered optimal by the management of VEB, said an employee of the state corporation.

Vedomosti also reports that a discussion on how best to support VEB is scheduled for 3 February. Prime Minister Dmitry Medvedev will be in attendance.

Milov on Peak Crisis

Vladimir Milov posted this on the Democratic Choice blog today, and it was re-published on Ekho Moskvy. I thought it was worth sharing in full:

After some delay Rosstat published its data on the economic indicators for December. As predicted the December figures were much worse than the previous months:

The fall in retail trade turnover in December was negative 15.3%, a record for the year and much worse than in November (negative 13.1%), despite the pre-New Year shopping season! As I said: “December will be even worse than the previous months.” The hopes of the optimists on New Year bonuses and sales growth did not materialize.

The fall in real wages in December was negative 10%, and is also worse than in November (negative 9%).

Falling investment in December was negative 8.7%, and is a serious deterioration compared with October-November (then was a more moderate negative 5%, which gave officials an excuse to talk about “the passing of the bottom of the crisis”).

Falling industry also accelerated: negative 4.5 in December (compared to negative 3.5 in November), including manufacturing — negative 6.1 in December (compared to negative 5.3 in November). This is the worst performance since the summer.

It is clear that the earlier rhetoric of our government about “passing the bottom (peak?) of the crisis was complete bullshit. It is no accident that [Economy Minister] Ulyukayev at the Gaidar Forum [two weeks ago] said that we have to wait until 2030 for the good life.

All this is understood by the population: here’s a look at a fresh chart from Rosstat (from here, showing that after last year’s lulling from the authorities about the fact that “we have already passed the bottom” people have understood perfectly, and the consumer confidence index is now confidently headed for “half of the sixth”.

Consumer price index (2007-2015)
Consumer Price Index

As I see it, the government no longer speaks about the “passing of the bottom [of the crisis]”, but prefers to talk about the fall of the ruble.

There should be no illusions: the year 2016 will only get worse, because there will be less and less money, and the authorities have not come up with an anti-crisis plan (hint: you can read about what measures should be taken to over come the crisis here). The Reserve Fund has fallen below $50 billion for the first time in 4 years — in rubles it is now 3.6 trillion, which the budget deficit this year is planned in the amount of 2.3 trillion, but with an average annual oil price of $50 [a barrel], and if it [oil] will be $35 [a barrel] then the deficit will be more than 4 trillion rubles, otherwise we can expect a further depreciation of the ruble. I for one think that it is time for the Medvedev government to give way to an anti-crisis government of national confidence.

The Ruble is Rubble

I woke up on Wednesday last week and thought that I’d predict that the ruble would close under 80 on Friday. But even as I thought it, the ruble was collapsing into the 80s. According to Bloomberg, it dropped as low as 85.95. However, through a combination of a rise in the oil price to above $30 a barrel, and some creative intervening, the Central Bank managed to close Friday at 78.14.

As the ruble was fluctuating on Wednesday, Russian MP Dmitry Gudkov wrote:

How interesting now, in hindsight, with the dollar at 80, to remember the old predictions of the government and the president about the “ruble”.

No comments:

In February 2015, the director of long-term strategic planning of the Russian Ministry of Finance, Maxim Oreshkin: “the strengthening of the ruble is due to a stronger balance of payments, and so we expect for the year a very strong current account balance of payments, it cannot be excluded that this trend will continue.”

In February 2015, Central Bank chief Elvira Nabiullina: “In the future, we do not expect such a sharp drop in oil prices and the depreciation of the ruble.” (The exchange rate was about 80 to the USD.)

March 2015, the first deputy chairman of the Central Bank Alexei Simanovsky: “There should not be this year any sudden bursts of the ruble relative to the currency.” (He’s still speaking about 2015).

April 2015, the head of VTB24 Mikhail Zadornov, “The ruble has depreciated significantly, and I do not share the position that it must now be further depreciated further from its current level.” (USD – 52 rubles).

April 2015, Prime Minister Dmitry Medvedev: “with the improvement of the economy, I am sure, the ruble will be strengthened.”

August 2015, Vladimir Putin praised the Central Bank for the strengthening of the ruble, “I see how persistently you are going down this path.”

October 2015, Russian Finance Minister Anton Siluanov: “It was not necessary to prevent the strengthening of the ruble. Russia had been ill with the Dutch disease, and is now beginning to recover.”

January 2016, Economic Development Minister Alexei Ulyukaev: “From my point of view, it [the ruble] is more likely to move toward strengthening.”

And my favorite from the Governor of Vladimir Region Svetlana Orlova: “We are a non-oil (producing) region, and (the fall in oil prices) won’t affect us much.”

Wriggling Out

Marat Guelman* speculated yesterday about how the Kremlin will attempt to wriggle out of the corner they’ve back themselves into both economically and politically.

It is a very tragic situation, when the powers that be signal their own impotence, but still want to stay in power. What will they say to you now? How will they wriggle out?

1. firstly and most importantly, they will try to separate politics from economics. Krymnash from the sanctions, self-imposed isolation from the newly expensive products [see my post yesterday about how inflation is impacting Russians at the store -ed], world conflict from the ruble.

2. they will say that it is even worse in Ukraine and the rest of the world. It is impossible to explain this to a person who has a difficult life, but it can be proved that it is even worse nearby. Moreover travel will be less.

3. they will frighten people by saying that after them will come somebody even worse. Kadyrov, Motorola [the nickname of so-called pro-Russian rebel leader, Arseny Pavlov]. Then we must also turn Khodorkovsky and Navalny into bogeymen.

4. and it is clear about [the use of] internal and external enemies. It is difficult to make plausible, but they will attempt it.

5. I believe 100% that they will bring in the Russian Orthodox Church. Think more about the eternal soul, and “poverty as a virtue”. They will talk about the advantages of poverty as well as the advantages of a weak ruble.

6. the new pseudo-opposition leader will gather those who were not effected by the first 5 points, and will convert the voices of the disaffected into a loyal political concoction.

What else?

*Guelman left Russia in January 2015, and now resides in Montenegro.

Asset Stripping

Russia’s Central Bank revoked another banking license late on Wednesday. This one had allegedly been in the works for awhile, but had been put on hold over the holidays. Vneshprombank was ranked 40th in the Russian banking system.

The Central Bank has been revoking licenses regularly for over 4 years now. But it has become particularly obvious in the last year. In 2015 alone, over 150 banks were shut down. This is approximately 1 every other business day. The goal, according to VTB chief Kostin, is to get the number of banks in Russia to below 300.

Last month, Sberbank’s Gref “predicted” that every 10th bank will be shut down this next year.

I’ve already noted that Russia’s reserves are running low. This is nothing more than asset stripping at its most brutal and obvious. Times are truly getting desperate for Russia’s Central Bank.

At The Store

As the ruble continues to slide, the Russian Central Bank’s (and the Kremlin’s) biggest fear is still inflation. That is, how will the so-called “average” Russian be impacted when going to the store. Slon Magazine recently did an experiment to see how Russians are being impacted at the store:

Despite its importance, inflation is quite an abstract indicator. Therefore, Russians, looking at the regular report of Rosstat [the Federal State Statistics Service], which reported an increase in consumer prices of 13% over the past year, can only smile sadly: the feelings of individual families, their consumer basket rose by half to two times.

Slon Magazine decided to take a different route and took as much as possible from one particular store. Using the data, which was provided by the company “MonitorTsen”, we compared the prices of the same goods in January 2016 and January 2014 at the store “Crossroads” on Tishinskaya Square in central Moscow. Our “consumer basket” in does not claim representativeness in any way: for the purity of the experiment we excluded fruits and vegetables.

“Fruits and vegetables are difficult to compare. Potatoes, roughly speaking, can cost anywhere from 5-100 rubles,” said the Director of Development at “MonitorTsen” Sergei Ipatov corresponding with Slon.

I won’t go through every single item on Slon’s list, but in all, their “basket” of goods rose by 1901.80 rubles or by 35%.

As a result, a person capable of traveling back in time to two years ago – to Russia to Crimea, the Olympics, the sanctions, and the collapse in oil prices – could save 1900 rubles from 7409, in which he will manage the food set today. Rising prices of our consumer basket over two years is 35% — this was a fun way to prove close to the Federal State Statistics Service [Rosstat], which averaged 32% increase in food prices over the same period.

Biggest increases: chicken (+100% in 2 years), sugar (+89%), “Doshirak” soluble noodles (+77%), Finn Crisp rye crackers (+77%), herring (71%), buckwheat (71%). Red Bull rose the least (just 7%), and “Riga noble” bread even fell slightly (-2%).

You can also compare Slon’s research to what Ilya Varlamov found at his local supermarket back in August.