Russia's Great Stagnation
If they were to make a TV show called "The Biggest Loser" about countries instead of fat people, and if the point of the show were to focus on the worst of the worst rather than the best of the worst, the starring role would surely be played by Russia, particularly if the topic were economic performance. The speed and extent of economic collapse this year resulting from Vladimir Putin's misguided, unqualified leadership has been truly breathtaking to behold. And if you are a Russian or a Russia investor, it's been absolutely terrifying.
Back in July, the International Monetary Fund released revised projections from the start of the year on economic growth around the world for 2013. Stunningly, Russia had the biggest downward revision in the world, plunging from 3.4% to just 2.5% -- a loss of 0.9 points, or more than a quarter of the growth the IMF had expected as the year began.
Amazingly, though, that measly 2.5% now looks like paradise for Putin's Russia.
The IMF got it very wrong, you see: by July, the Russian economy had already entered free fall. In the third quarter of this year, Russian economic growth was an abysmal 1.2%, bringing Russia's growth rate for the first three quarters of 2013 to a miserable 1.3%. Growth of 1.4% or less is expected for the full year.
This means that Russia will shockingly end 2013 with economic growth well less than half what the IMF expected when the year began and more than a point below the revised projection.
The latest horrific economic jolt for Russia came last week, when the European Union ruled that its much-ballyhooed gas pipeline project called Southstream was illegal and would have to be renegotiated from the ground up. Southstream is being developed by Russia's state-owned natural gas monopoly, Gazprom, as a way of marketing Russian gas to Europe. As I wrote when I warned that Putinomics was collapsing in October of last year, long before the IMF's redo and the real nightmare began, Gazprom is the lynchpin of the Russian economy, and it is barely keeping its head above water due to Putin's mismanagement and corruption.
For an even more accessible anecdote on Russia's persistent malaise, consider this: Putin just openly admitted his own personal tap water is regularly full of rust.
Russia's economic prospects are bad enough when looked at in isolation, but when looked at comparatively, they are a true nightmare from which there is no waking.
Some time ago, economists decided that Russia should be compared for economic purposes within a group known as BRIC -- that is, Brazil, Russia, India, and China, the major emerging economies of the world.
According to the IMF's revised projections, in 2013, China's economy was to grow by 7.8%, India's by 5.6%, and Brazil's by 2.5%. The average for all emerging markets was to be 5.0%. More recent data for the rest of BRIC undercuts the IMF's projections for them only slightly, if at all. So at 1.4%, Russia will be the ugly duckling of the BRIC group, the biggest loser by a long shot, bringing up the rear from a distance so removed that the peloton can't even be glimpsed any longer.
And don't forget this: China, India, and Brazil are not artificially buoyed by massive crude oil and natural gas exports and rising world oil prices. These three countries get their growth the old-fashioned way: they earn it.
Anders Aslund, an éminence grise of the Russian economy in the period just after the collapse of the USSR, has concluded that the fundamental problem with the Russian economy is its corruption. Russia's score for corruption from Transparency International remained the same this year as it had been last year, tying it with the lowly likes of Gambia and Pakistan. In other words, instead of investing money in growth, Vladimir Putin and his cronies are simply stealing it.
Brazil ranks #72 on the TI index, China ranks #80, and India ranks #94. Clearly, Aslund is onto something.
Echoing the Russian political analyst Yevgeny Minchenko, Aslund calls Russia a "feudal state" with a leadership whose primary goal is self-enrichment. He argues that market reforms carried out on his watch accounted for Russia's growth spurt in the first part of Putin's rule, and that Putin's total failure to continue with these reforms explains why the economy has ground to a halt. Indeed, even in his best years, Putin has never matched the soaring economic growth achieved by Boris Yeltsin in the final year of his presidency.
Aslund argues that Putin's corrupt regime frustrates small business at every turn, favoring an elite class of super-rich oligarchs who cannot be drivers of a major economic upswing. He says that Russia has embarked upon a "harebrained protectionist scheme" involving Belarus and Kazakhstan that will frustrate and violate its recently assumed WTO obligations, and points out that since Russia has a good level of employment, deficit, and debt, its failure to grow can only be explained by misrule regarding economic growth policies.
If you'd like to see how Putin's scurrying minions respond to this horrific bad news, you can check out a blogger named Mark Adomanis. To say the least, they don't admit fault and seek to reform. In the typical fashion of neo-Soviet propagandist, Adomanis disingenuously seeks to shift focus from Russia's performance data and its comparison to the BRIC countries to a comparison with a cherry-picked list of Eastern European basket cases against whom he can make Russia look middling rather than disastrous.
Indeed, Russia's economic performance this year is (slightly) better than the sorry likes of Bulgaria, Hungary, and Romania. But these countries don't have Russia's vast stores of fossil fuels, nor does Russia have their long history of being brutally exploited during the Soviet era. Nor do they, of course, have Russia's pretentions to global leadership. If Russia is to be ejected from the G-8 and U.N. Security Council and considered a backwards, insignificant relic of a country, like Bulgaria, then we can certainly say Russia is holding its own.
But that, of course, would be a rewriting of Russia's entire foreign policy. Russia doesn't compare itself to Bulgaria or Romania -- never has and never will. Russia lays claim to world leadership and can be fairly judged only by that standard. To ignore the BRIC group when evaluating Russian performance is simply unacceptable. You may as well say the USA is doing great because it's doing marginally better than Haiti. Only someone interested in helping deflect criticism of the Putin Kremlin and helping Putin keep his stranglehold on power would use such tactics.
Though writing just a couple weeks ago, Adomanis also inaccurately claimed that Russian economic growth for 2013 would be 1.8%. Not only did he totally ignore the steep drop from projections at the beginning of the year, but that figure overstates actual Russian growth by 15% or more. And he totally ignores too the open admission from the Kremlin itself that Russia's economic prospects won't significantly improve for at least the next decade or more. Adomanis's blog post is, in other words, a perfect prototype of the neo-Soviet response to failure and criticism. Russia can't get better because it can't even admit it's doing badly.
One final point of comparison: even if Russia did bring in 1.8% economic growth, which it certainly won't, the value of that number to Russian citizens would be vastly overstated. At that rate, Russia would be slightly ahead of the 1.7% that the IMF projected for the USA for 2013 back in July. But Russia's GDP is, according to the IMF, eight times smaller than America's, even though the U.S. has only twice as many workers to produce it. What this means is that since Americans are four times more productive than Russians, a similar rate of growth produces eight times more money in the U.S. compared to Russia, and four times more per capita. Russia's growth rate has to be eight times higher than America's just to break even in total dollars returned to the economy, four times higher to break even per capita.
And then you have to factor in corruption. Even if Russia's growth rate were eight times higher, unlike the USA, which ranks in the top 20 for corruption (that is, honesty), Russian dishonesty is so pervasive that, in effect, the vast majority of revenue produced by growth would simply be stolen and misused long before it could ever be enjoyed by Russia's citizens.
Finally, you have to consider Russia's vast size. It is geographically the largest country in the world, and it has an enormous population. China, for example, is seriously worried that its growth rate of 7% might not be sufficient to sustain its gigantic needs, and worried even more that it may fall short of that level next year. Russia's growth rate is less than a quarter of China's. What this means is really quite simple: Russians with any sense are heading toward the exits, as fast as ever they can.
Russia has already experienced one massive contraction of the economy, in 2009, as a result of reduced demand for crude oil following the global economic downturn. It was the worst-performing major economy in the world in responding to the global crisis. That exposed the Putin economy for all the world to see. It was not the island of stability, the sanctuary, that Putin had claimed it was. To the contrary, it was the helpless slave of the world's fossil fuel markets, which continue to exercise absolute sway over the Russian stock market because the exporting of fossil fuels is the only thing Russia does well from an economic point of view.
Now, Russia is poised for an even more devastating economic calamity. Its best-case scenario is a brutal era of stagnation similar to what was experienced in the USSR. The worst case is Soviet-style national collapse.
And don't think Russians don't know it. The latest opinion poll from Russia's most respected pollster shows that approval of Putin and his policies is at the lowest level since he came to power, with less than a majority now approving the policies Putin pursues (Putin lost his majority more than a year ago and hasn't regained it). When Putin tried to coerce the president of Ukraine to join Russia's protectionist gambit with Belarus and Kazakhstan, more than million Ukrainians poured into the streets all over the country to protest and demand the president's resignation. In the capital city, they've occupied and barricaded the central square and won't release it until the nation reverses course. They know that tying their country's economic fate to Russia would be an act of national suicide.
Whether Russians will wake up and realize the need to take similar action before the end arrives remains to be seen.
Follow Kim Zigfeld on Twitter @larussophobe.