Comment on the Economist editorial entitled “The triumph of Vladimir Putin” (JRL 2014-#21)

Subject: Comment on the Economist editorial entitled “The triumph of Vladimir Putin” (JRL 2014-#21)
Date: Sat, 1 Feb 2014
From: Ben Aris <editor@bne.eu> [Editor, Business New Europe]

I have to comment on the Economist editorial entitled “The triumph of Vladimir Putin” (JRL 2014-#22) as it is a classic example of Russian bashing that is full of mistakes, half-truths, omissions and blatant fact twisting.

Personally I am becoming increasingly worried by rising number of this sort of piece, as it is dangerous. Russia is far from perfect and is facing a gamut of really nasty problems, but the atmosphere of hate and ridicule that has crept into most of the “reporting” on these issues can only generate more misunderstanding in a situation where relations with the west are already strained.

This process has already gone a long way. The Russians are now committed to rapidly expanding their military capacity, partly, I would argue, thanks to the constant haranguing it receives from the bulk of the western press. Russia’s new media tsar Dmitry Kiselyov is right when he told his staff at Ria Novosti this month “Objectivity is dead!” as it applies as much to most of the Russia coverage in the western press as it does to the Russian media.

This editorial is a classic example of the genre. The argument of the piece is: despite Russia’s rising international political and economic clout, which has been widely acknowledged last year, actually the country remains “weak” – a castle in the air held up by oil – and will inevitably collapse.

Let’s dive in.

The Winter Olympic start next week in Sochi, “an unsuitable subtropical resort,” the piece leads with.

Sochi is as “unsuitable” a place to ski as California or Granda in Spain, which both also boast hot beaches with skiable mountains nearby.

“The government has spent $50 billion-four times the cost of the jamboree in London.”

This $50bn figure has been banded about but there is little explanation of where it comes from other than the most superficial comparisons such as this one.

There is a bit of a difference between getting London ready for Olympic games and getting Sochi ready. The main one is that London comes with hotels, roads, airports, restaurants, accommodations, services and even a few stadiums pre-installed. Sochi had none of that and it is all expensive stuff to put up. So this comparison is unfair.

Moreover, to say that $50bn went in to “just” the Olympics is to misunderstand what the Kremlin is doing: the games have been a template that is being used to develop the entire region. The Kremlin has said the spending on “just” the Olympic stuff, counting out the infrastructure stuff is closer to $5bn-$7bn, but this point has not been widely reported.

The same is true for the 2018 World Cup where the bid was about $20bn for stadiums etc, but just the high speed rail links between the 11 cities will cost some $60bn.

Of course no one is saying there is no waste or corruption in Sochi. Indeed several people have been caught and sacked. But the implication that some $30bn has been stolen by contractors is not true.

“At home, [Putin] has seen off the huge protests.” Actually the protests fizzled out because the opposition has fragmented into egotistical fights over who is boss.

What exactly does “seen off” mean here? Putin’s rating this year has risen to 68% in the last polls- his highest since 2002 – which has something to do with that point the Economist makes above about Putin’s excellent performance in 2013 on the international stage. So instead of “seeing off” protestors Putin is currently among the most popular leaders in the world today.

“Lacking any serious challenger, he has felt confident enough to free both Mikhail Khodorkovsky, a business oligarch whom he jailed in 2003, and the Pussy Riot protesters.”

Freeing Khodorkovsky had nothing to do with internal politics. A recent poll showed that two thirds of Russians are totally indifferent to Khodorkovsky fate. This has everything to do with trying to improve Russia’s investment image. The suggestion that Putin did this for some sort of political gain is obvious nonsense. But then after calling for Khodorkovsky release for a decade, admitting Putin did a good thing when it happens can be kinda painful.

“Putin has used his UN Security Council veto to see off Western ideas of military intervention in Syria, instead brokering a deal on chemical weapons and sponsoring a Syrian peace conference. His brutal ally, Bashar Assad, remains in power.”

Ah, Putin is “seeing people off” again. This time he is seeing off “western ideas of military intervention..” Er… but that is the point. The Russians don’t agree with those “western ideas of military intervention.” They think they are wrong. And if you look at the examples of Iraq, Afghanistan and Libya (and Iran soon?) the ideas on the military appear to be less of the ‘intervening’ sort and more of the ‘regime changing’ variety.

Foreign minister Sergei Lavrov has been very clear on this (including a long essay in the HuffPo) Russia is, on principle, against imposing regime change on countries. The reason is obvious: someday someone in the west might decide that Russia is a “brutal ally” and decide the west has the right to change its regime too.

And why should Russia except those “western ideas” in the first place? Aren’t countries suppose to make up their own minds on these sorts of issues on their own?

“Mr Putin has taken some comfort that NATO’s campaign in Afghanistan has been as difficult…”

Really? When did Putin say that? Now the Economist is just making stuff up because it sounds good…

“He has raised Russian defence spending…”

Yes because everyone is pointing “missile shields” at him, pushing NATO alliance troops up to his boarder despite the fact they promised not to at the end of the Cold War and calling him a “murderer” in print on a regular basis (re Litvinenko). Taken all together it is making the Kremlin nervous as they are getting the impression the west doesn’t like Russia and the rhetoric is becoming increasingly aggressive – in articles such as this one.

“And he has left European diplomats looking flat-footed by deploying a mix of money and threats to persuade Ukraine’s president, Viktor Yanukovych, to walk away from a trade deal he was preparing to sign with the European Union.”

Yes. Actually that is exactly what happened. EU diplomats did look flat footed after they offered a Ukraine that was teetering on the edge of a nasty devaluation and general economic crisis only $160m a year for five years and no extra cash to pay for Russia’s expensive gas imports.

On the other hand Russia offered $15bn in cash ($3bn already received and another $12bn on its way in the next 11 months) plus cutting gas prices in half – it is the second bit that is really valuable to Kyiv as it frees up huge amounts of budget money for things like schools and hospitals.

Everyone seems to assume that Yanukovych cut a bad deal, but almost nothing has been writing on the details of the terms of the EU deal. There EU offer included trade restrictions on exports to Europe and concessions for European business.

Long-term the EU deal was almost certainly better for Ukraine, but we are talking about Yanukovych here – don’t tell me people didn’t know what sort of man he is. He has no interest in ‘values’ and every interest in money.

“Yet the revival of Mr Putin’s fortunes is not quite as impressive as it seems. It is not just that Russia’s political model has little appeal to others…”

Be specific here guys. You mean Russia’s political model has no appeal to YOU. Seems to me if you look around Central, Eastern, and Southeastern Europe, Central Asia, the Caucusus, Turkey, Asia and even China (which is even more undemocratic than Russia in that they don’t even pretend to be a democracy), then Putin’s political model is actually extremely popular. In Russia’s own neighbourhood it is de rigueur.

“[Russia’s] resurgence is limited by a corrupt, state-directed economy that seems to be condemned to stagnation.”

So this sentence admits Russia is resurging and only **seems** to be condemned to stagnation. Well actually if you look at it objectively, even just looking at the evidence given in this piece, what **seems** to be happening is that Russia is resurging, not stagnating.

The piece goes on to say: Russia grew fast from 1999 and did well which explains Putin’s popularity. He brought stability and rising living standards after the chaos and ruin of the 1990s. – all true.

“this achievement was founded almost entirely on oil and gas prices, which have climbed fivefold since 1999.”

So now we launch into the core of the attach, the increasingly hackneyed argument that “all Russia’s prosperity is due to its gift of oil and the government has done nothing else to make life better.”

This argument is becoming extremely tiring and moreover as time passes it is demonstrably not true. Oil remains very important but a lot has changed in Russia in the last decade, which is being willfully ignored.

Firstly oil prices didn’t take off until about 2005. Prior to that the long-term average was $25/barrel. And yet Russia put in 10% GDP growth in 2000 and continued to grow at least 4-5% until 2005. And only then did oil prices take off lifting growth to 6-8%.

So if Putin is so rubbish and all the good stuff depends on oil, how did he manage to get all that growth in the years when he had the same oil prices as Yeltsin had??? Could it be that something else happened? Could it be that the devaluation of the ruble had a positive effect? Could it be that oil companies invested more in themselves in 2000 than in all the 1990s. Could it be this started off a virtuous circle of growth, investment and rising wages that lead to other companies appearing to take advantage of this new money? And if not, where did all those consumers come from that have been driving Russian growth in last five crisis years? Just askin’… because according to the Economist analysis it appears that oil pours directly into Russians pockets which they then go out and spend in the shops.

“Dependence on energy exports is greater even than under the Soviet Union: they now account for 75% of the total, against 67% in 1980.”

Journalism 101: “when citing statistics, you need to attribute them to the valid source so they can be checked.”

This number is flat out wrong, or made up, or I don’t know as the author doesn’t say where it comes from. The last number I have is from the Russian customs service and is 49.4% export revenues for oil and 11.7% for gas in 2013 – a total of 61.1% of export revenues which is LESS than the “Soviet number” (where ever that is from).

No one is denying that oil and gas play do provide funds to pay for lots of other things the government wants to do – and so impede reforms because the government is so actively throwing money at problems. But the statistic that everyone who makes this argument always skips over is that oil and gas only account for about 15% of GDP in terms of value created according to Rosstat; the service sector made up just over 50% of GDP in value terms last year. Russia is not just a black and white petroeconomy.

Oil is of course even more important than that as it has direct knock on effects to other industries. A paper from the highly respected Bank of Finland economic analysis team (BOFIT) tried to assess exactly how important oil and gas are to the Russian economy. It adjusted the number up to about 25% of GDP and made this conclusion: “When adjusted to reflect the oil and gas sector’s actual contribution to GDP, Russia is on par with Norway (Table 2). This is much less than traditional oil states such as Saudi Arabia, which generates about half of its GDP directly from the oil and gas sector.”

Lets just pause for a moment and take that in: Russia’s dependence on oil and gas is the same as that of NORWAY…. not a true petro-economy like Saudi Arabia.

(Read the paper if you don’t believe this: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/online/Documents/2013/bon0313.pdf)

“High labour costs and low productivity make much of Russian industry uncompetitive”

True. No doubt. It’s the oil curse and the price to pay from the missed opportunity of not making more reforms in the early naughties. Everyone agrees on this.

“A bloated and inefficient state, plus the firms it controls, account for half of GDP.”

This high ownership is a function of the Soviet legacy and the state did put a massive privatization program in place in the summer of 2008 that was supposed to sell off over RUB1 trillion worth of state assets in the following decade. Trouble was thanks to a bunch of unscrupulous American bankers and the total mismanagement of US financial regulation the world collapsed and its gotten hard to sell hot dogs on Wall St, let alone float billion dollar stakes in very large Russian enterprises.

Put this comparison in more sensible terms and look at public spending as a share of GDP, and here Russia doesn’t do badly: last year public spending was only 32% of GDP compared to that basket case of centralized autocratic control, the UK which spent 44.4% according to the HM Treasury.

“And, as the Sochi costs indicate, corruption is endemic.”

Note: “indicate” not “show”. If you want “show” then go to Transparency International, the watchdog everyone used to quote, until it rather embarrassingly showed that Russia had gone from “most corrupt nation in eastern Europe” to “least corrupt” in its last ranking. (But Russia is still “very” corrupt at 127th on the list of 177 countries.)

But the Economist prefers to rely on an “indicator” of unspecified spending on an unspecified number of buildings, roads, airports, power stations, telecoms and other pieces of infrastructure in Sochi to show just how corrupt Russia is.

“Ten years ago the Russian budget balanced if oil was around $20 a barrel; today it needs to be around $103.”

Yeah, and ten years ago you could buy a coffee in London for 50p and not the £5 a cup it costs now. This “balance-the-budget” price of oil is another myth.

What you need to look at is the non-oil budget deficit (the federal budget deficit Russia would have if you magic all the oil and its revenue away). In the boom years of 2006-2008 Russia was running a health budget surplus, but it as also running a non-oil budget surplus of about 1%. In other words it had broken its addiction to oil as the real economy was producing enough tax revenue to finance everything before a dollar of oil tax money was received. That changed in 2008 when the non-oil deficit when down to 14% and the state poured rescue money into the economy, but has recovered somewhat since and the plan is to take the non-oil deficit back to about 4-5%. In other words the government was to modest subside the budget with oil money. It is actually an extremely reasonable plan and how the budget was run in the first half of the last decade.

However, in the 90s the non-oil deficit was over 25% of GDP. In other words under Putin the fiscal oil dependence has steadily decline as that service sector and other industries increase their share of the economy, but the crisis was a big set back – and thank god for that oil as it is the cushion that has given Russia a soft landing.

BTW Russia happens to be home to the largest shale gas reserves in the world – some five times bigger than the US reserves. The reason they are ignoring it at the moment is they still have loads of the normal type that still needs to be pumped and sold.

“The American entrepreneurialism that could never thrive in [Putin’s] kleptocracy.”

Never? Never is a strong word. And this is simply not true. Russia is not Estonia, or even Poland, but it is clearly streets ahead of everywhere else in the former Soviet space. Ukraine for example, which until only a month ago the EU was so willing to embrace as a partner?

With this comment the curtain comes down. The author exposes the fact that no attempt was really made in this piece at balance or objectivity. There are many world class, successful, highly profitable and extremely entrepreneurial companies in Russia: anything in the tech sector or telecoms for example. Yandex? The most valuable online company in all of Europe… Russia a world leader in gaming and Russia’s IBS software is used on most international airlines and increasingly international cars. Russia does less well in manufacturing as labour costs are too high. But it also holds its own in engineering and aviation among other sectors.

“Now that energy prices have stopped rising, best estimates of GDP growth have been cut to below 1.5% in 2013 and to 2% in 2014.”

Actually the energy prices are remarkable because they have stayed up; for most of the last two years the respected economic commentators Capital Economics were predicting $50 oil that failed to appear. No one disputes 2013 was Russia’s economic annus horribilis, but the forecasts for this year are wide ranging and depend on what you think will happen to capital flight and investment. The ones I have seen run between 2.4% and 3.5%, with the official Ministry of economy predicting 2.8%. Indeed, the World Bank is “mildly optimistic” and predicts 3.1%. Again the Economist seems to have picked the very lowest number it could find, without citing a source, and present it as if it were Gospel.

“Russia is in the same growth league as the flagging euro zone-the weak countries Mr Putin pours scorn on.”

This is a blatant twisting of the facts. The only thing that Russia shares with the Eurozone is a modest growth figure, because all of Europe is expecting modest growth. In fact Russia’s growth outlook is better than that the World Bank predicts for Poland (1%) and Estonia (3%) in 2014.

But Russia is in a league of its own if you compare debt (one of lowest in the world), budget deficits (almost none), currency account balance (positive) or unemployment (20 year record lows) with any country in Europe. The trouble is all these numbers are a bit awkward and don’t really fit into this story – so they were just left out. That was easy, eh?

As for the last section about Russia’s game in Ukraine, I won’t even bother. Russia has its own national interests and is pursuing them with all the means at its disposal. Don’t tell me that countries like China or America don’t do exactly the same thing. We live in a grown up world and this is how it works. Anyone who tries to argue that Russia is not being “nice” to the Ukraine to get what it wants is simply naïve. The real problem with Russia is they don’t bother to finesse their power plays and so the Kremlin opens itself up to this sort of abuse.