Russia in 5 quotes: October 2014

Alexey Grazhdankin, Deputy Director of Levada Centre, shares what Russians think of the West (from a Vedomosti article, October 28, 2014) “The majority of people think that Russia already has a democracy, or at least that it needs its own path – not a Western or a Soviet one. If an iron curtain fell over Russia, that would be a shock to only 14% of respondents who see themselves as people of Western culture.”

Valentina Matvienko, Speaker of the Federation Council, comments on foreign ownership of mass media (from an interview with TASS, October 2014) “Let’s be frank: a country’s information security largely depends on the ownership of national TV and radio channels, leading newspapers and magazines. Key mass media must work for Russia, not against it. Yes [they should] criticize the authorities, yes [they should] express their opinions on controversial issues, but I repeat, they shouldn’t harm the fatherland, the people. If the owner is a foreigner, then the editorial policy could have foreign, not national interests in mind. This possibility can’t be excluded. I’ve already told you that Americans own a lot of mass media in Europe. Should we be surprised that [what these media publish] is grist for their mill?”

Alexey Kudrin, former Finance Minister, discusses the 2015 Russian budget (from a Fontanka.ru article, October 28, 2014) “The budget includes a mechanism that was designed [when I was Finance Minister]. This mechanism foresees budget implementation regardless of the oil price. That’s why we created the Stabilization Fund. That’s why it’s unlikely that the buget will be revised in a serious way. The budget will be implemented due to the reserves.”

Sergey Aleksashenko, former Deputy Chair, Central Bank, describes the economic situation (from an interview with Slon, October 27, 2014) “The economy of a country that has 145 million people cannot vanish. This didn’t happen even under War Communism. Yes, growth in some sectors may fall abruptly. Yes, unemployment may increase. Yes, the volume of bad credit (assets) on banks’ balance sheets may grow sharply. But this doesn’t mean the economy will cease to exist.”

Mikhail Krutikhin, an expert at Rusenergy, speaks about the prospects of Russian oil and gas (from an interview with RosBalt Business, October 17, 2014) “We see how fast other countries are developing their oil and gas production and exports. Countries that never dreamt of producing something, like Uruguay, actually have bright prospects. East Africa, West Africa, Morocco, Argentina. Even Israel may become an oil exporter. Today Qatar is the largest exporter of LNG. Last year it sold 84 million tons. But Australia is coming up – it will be producing 88 million tons in 2-3 years, and in perspective it will be producing 120-130 million tons. USA will begin exporting its LNG, and Canada too. At the same time, oil production and exports in Russia will decrease. LNG exports will decrease also due to Europe reducing its consumption of Russian gas. Asian consumers won’t replace Europe. For example, Power of Siberia‘s gas will only reach the Chinese border in 2020, and its volume will be less than 5 billion m³… Increasing exports to at least to 30 billion (not even to the planned 38 billion m³) will require 10 more years. Which means that until 2030 we will see Europe reduce the consumption of Russian gas while in Asia [consumption] will grow only slightly.”

Who rules Russia: a quick look at Putin’s power collective

Very often Vladimir Putin is portrayed as a ruthless, insidious and irrational Byzantine dictator, but this image is simplistic in so many ways. It’s a shame we still think of Putin in those terms because having observed him for 15 years we really should know better. Yes, he has largely destroyed Russia’s fledgling democratic institutions. But that doesn’t make him irrational. I’d argue that the structures that Putin established as substitutes for those democratic institutions create sufficient conditions for him to exercise rational behaviour.

Analysis by Russian political scientist Evgeniy Minchenko, director of Minchenko Consulting, may help us understand Putin’s decision-making model. In essence, Minchenko describes a model of collective governance, in a way similar to Soviet-era PolitBureau, the difference of course being that it’s not a broadly representative or legitimate framework; this time the PolitBureau doesn’t represent the Party but has been hand-picked by the leader himself. As the core members of the PolitBureau have been with Putin for many years, they (and the groups they represent) remain in his orbit but sometimes he pulls some of them closer and other times, keeps them at a distance.

Minchenko has formulated the following five patterns that describe Putin’s behaviour in a coherent way. A description of these patterns were recently published  by the Rossiyskaya Gazeta meaning the results of Minchenko’s analysis are officially approved. Here they are:

1) Ensuring gains in advance to increase predictability (e.g. election results are generally predetermined);

2) Ensuring that no interest group dominates in decision-making (leveling the field, but only for the insiders);

3) Rotating the elites to cultivate new allies (this includes removing those who ride along or threaten the model’s survival);

4) Creating a “competition of successors” (e.g. in 2007 it wasn’t clear until the last moment if Putin would choose Sergey Ivanov or Dmitry Medvedev as his preferred successor);

5) Consolidating the elites to withstand external threats (e.g. 2013 legal provisions that forced the elites to choose between their loyalty to Putin and their Western assets).

Just last week, Minchenko Consulting published a new report that shows a new, post-Crimea composition of the PolitBureau. According to this analysis, whereas formerly there were too gravitational centres within the PolitBureau, led by Igor Sechin (Conservatives) and Dmitry Medvedev (Liberals), there are now eight such centres that concentrate on ideology, social policy, regional policies, and other areas. Putin himself continues to oversee Russia’s foreign policy, defense, and oil and gas.

The composition of the PolitBureau shows remarkable consistency. Both Sergey Ivanov (head of the Presidential Administration) and Dmitry Medvedev (Prime Minister) are still close to Putin. However, as noted by Minchenko, as the focal point for Ukraine Sergey Ivanov has gained much of the ground he lost several years ago when Putin didn’t choose him as his successor; Dmitry Medvedev, on the contrary, is considerably weaker now. Naturally, the Ukrainian situation contributes to Medvedev’s weakness as in today’s Russia Liberals are highly unpopular and are generally seen as traitors and public enemies. So even though Medvedev remains Prime Minister and Putin’s close friend, his political role is not very significant. Minchenko’s report shows graphically how Medvedev’s influence in almost all important areas has shrunk and how Ivanov’s influence has expanded compared to previous years. Besides Ivanov, another person who has gained from the crisis in Ukraine is Sergey Shoigu (Defense Minister). This summary obviously doesn’t cover the whole PolitBureau because I’ll omit other imp0rtant figures who oversee domestic policies, Russia’s propaganda machine, and so on. I will just mention two more of them – Igor Sechin and Gennady Timchenko.

We can see from Minchenko’s analysis how foreign policy, and Russia’s behaviour in Ukraine in particular, has a major influence on Russian politics overall. But what about the role of economics and finance? It’s easy to see that economic considerations will continue to play a secondary role. Much has been said about Putin’s limited involvement in economic policy-setting, and his interest in economics has even diminished in the wake of the Ukraine crisis. And obviously, there are no prominent economists among the members of the PolitBureau. Traditionally, the Liberals’ role in economic policies was strong but as mentioned above, their political weight has decreased significantly. As Russia’s relationship with the West has deteriorated, the role of Asia (in particular China) has increased. As a result, Minchenko observes the growing importance of Igor Sechin (CEO of Rosneft) and Gennady Timchenko (owner of Volga Group). In 2014, Sechnin has negotiated a deal with China, while Timchenko co-chairs the Russia-China Business Council. There are no Liberals with a comparable political and financial weight among Putin’s elite.

What does Minchenko’s analysis leaves us with? I would offer three observations. First, in 2014 Putin’s elite has survived one of the most significant crises of his presidency. This elite is loyal and although its largest source of legitimacy is Putin himself (importantly, by and large Putin is also loyal to his elite), its strength is in its unity. Second, as the rift between Russia and the West is growing the political situation is becoming more unpredictable, so the importance for Putin to be in control of his machine is more important than ever. Third, economic considerations will continue to play a subordinate role to politics. The people on top are obviously less concerned with creating a competitive entrepreneurial class than with maintaining their political power. Not much hope for those who would like to see a Westernized Russia – so far the traditional collective mentality is winning.

Economic growth, inequality, and national unity: a Russian story

In the past two years, propaganda of national unity has become a distinct feature of Russia’s political landscape. Everyone, from migrant workers to Putin’s oligarch friends, must show their patriotism on every occasion. Propaganda claims that during hard times Russians have always “rallied around the flag”, and refers to historic examples to prove this point. The biggest example is the Great Patriotic War (this is what WW2 is called in Russia). But there are other examples. For instance, when I was in Moscow last winter and visited a municipal service, I saw there a poster of Minin and Pozharsky. Wikipedia tells us that in the 17th century, Prince Dmitry Pozharsky and citizen Kuzma Minin “gathered and all-Russian volunteer army and expelled the forces of the Polish-Lithuanian Commonwealth from Moscow”. So what the author of the poster likely meant (mind you, this was before the Ukraine crisis) was that since Russia was again surrounded by enemies, its citizens had to forget about their disagreements and unite.

As we have seen in the past months, this propaganda campaign is quite successful. Neither the deaths of Russian soldiers in Ukraine, nor the recent passing of the first draft of the “Rotenberg Bill” by Russian Parliament have swayed public opinion in Russia. In fact, Alexey Navalny discovered this a long time ago – while Russians tend to complain about corruption and inequality, they are definitely unwilling to revolt. What are the reasons for this apathy?

Much has been said about the success of Putin’s propaganda machine, but I have always thought about the average Russian’s tolerance of Putin’s escapades as a function of economic growth. Indeed, economic data suggests there might be a connection. Here is an example of such data: a chart showing the annual growth in Russian households’ mean disposable income based on surveys by the Russian Statistics Service. Since I like to compare Russia to other countries, I supplemented that chart with a similar chart for the US, based on US Census Bureau data. Strictly speaking, Russian statistics shouldn’t be compared to US statistics directly because the methods of data collection and analysis are different; however, this is not a research paper so I decided to put these charts side by side. The data are provided for 2004-2013, not adjusted for inflation; they are broken down into quintiles.

Sources: Russian Statistics Service (2004-2013), US Census Bureau (2013)

We can see three important trends in the Russian data. One, in the period between 2004 and 2013 Russian households’ disposable incomes grew at an average rate of 19% per year.  As a result, in 10 years the incomes of the highest 20% went up by 430%  while the incomes of the rest grew by over 330%. These rates are astonishingly high. Two, in the wake of the 2008 crisis this income growth slowed down, but the highest 20% was affected more than for the rest. Three, after 2009 the incomes of the highest 20% grew faster than those of the rest.

As for the US data, there is a clear growth trend but it’s more modest; on average, household incomes grew by only 2% per year (compared to Russia’s 19%). This is not surprising, as the growth in Russia started from a much lower base. We also see that before the 2008 crisis US income growth in the highest 20% was less prominent than in the rest of the population. But the crisis impacted incomes in all categories much more than it did in Russia – the recession was much more prolonged. Then, after 2010 (and similarly to Russia), incomes in the highest 20% grew more than they did in the rest of the population – but the gap seems to be narrowing.

Using the same data, we can observe how the share of each quintile in the mean income in both countries changed during the same period.

Sources: Russian Statistics Service (2004-2013), US Census Bureau (2013)

Between 2004 and 2013 the share of the highest 20% in the Russian households’ mean disposable income growth increased from 45% to 49%, but the shares of the other four quintiles didn’t change as significantly. There were no major fluctuations between the shares of the five quintiles in total income during that period. And, of course, we should assume that social transfers helped those in the lowest quintiles adapt to the effects of inflation. As for the US, year-on-year changes in the share of the highest 20% in the US mean household income were less volatile than in Russia. Also, the share of the two lowest quintiles in overall income was lower in the US than in Russia. But overall, the picture is not that different and the trend is quite similar.

Finally, here’s a chart for the Gini Coefficient growth in both countries. The Gini Coefficient measures inequality from 0 (perfect equality) to 1 (perfect inequality). As a rule, it tends to be lower in the social democracies of Northern Europe and higher in emerging economies such as Russia, China or South Africa.

Sources: OECD (2014), Russian Statistics Service (2014)

In terms of the Gini Coefficient, Both Russia and the US are somewhere in the middle of the global inequality rankings but closer to their “inequal” tail. While in the past 10 years Russia clearly had a higher Gini Coefficient, the US experienced somewhat of a faster growth in inequality compared to Russia. However, more recently the Gini Coefficient continued to increase in Russia as it stabilized in the US.

To sum it up, if the data (and my quick interpretation of it) are accurate, Russia’s recent oil wealth is a tide that has literally lifted all the boats. Sure, it lifted the top ones more than it did the rest – but it did lift all of them. And it lifted many Russians out of poverty. In 2004-2013, economic growth was significantly higher in Russia compared to the US, and in spite of a high level of inequality most Russians likely saw a real improvement in the quality of life. Again, this analysis isn’t robust and there are multiple factors that have contributed to Russians’ perception of their leader. However, I witnessed this amazing growth in prosperity first-hand, so to me it’s clear that even with high inflation rates Russians benefited from a growth in their real incomes. Before 2014, while Russians in the lower quintiles had many reasons to complain about inequality, the net effect of Putin’s economic policies on their lives was positive.

Of course, today the situation is very different. We know that a slowdown in economic growth began even before the Ukraine crisis but the recession has undoubtedly worsened because of that crisis. In any case, it’s interesting to see how the events of 2014 have affected real incomes and inequality in Russia. Given that Putin has pretty much taken full responsibility for supporting the growing class of budgetniki (those employed by the state), today’s adverse economic climate with a near-zero growth, declining ruble rate, and capital flight may potentially result in the Russian state not being able to fulfill its obligations towards those who have hitherto approved of, or tolerated, Putin’s regime. What will then happen to the national unity?

Watching Russia: 3 key events/trends in September

Here is my subjective take on the three most significant events and trends that affected Russia in September.

1. Ukraine ceasefire. Signed on September 5, the ceasefire demonstrated that both Russia (and the pro-Russian rebels) and Ukraine were willing to to get out of a deadlock. The ceasefire was presented to the public in the form of reconciled proposals by Putin and Poroshenko, with OSCE acting as mediator. Many observers were skeptical of the possibility of a long-term ceasefire but it has lasted until now. Both sides are still fighting but with lower intensity, and political solutions are being sought. So the ceasefire was the first step towards peace in Ukraine.

2. Economic troubles. On September 12, the EU announced a new package of sanctions against Russia – the most serious one so far. The sanctions targeted Russia’s economic heavyweights in the energy, banking, and defense sectors as well as 24 representatives of the Russian elite. Russia chose not to impose counter-sanctions. In addition, oil prices continued to drop and are now hovering around $90. This prompted Russia’s MinFin to conclude this may be a long-term trend that will impact Russia’s budget negatively; to cover the deficit the government will have to tap into the reserve funds. Finally, responding to these and other shocks, the ruble continued to fall; budget losses will be partially compensated by revenues from exports but given that Russia imports most of its consumer goods weakened currency will aggravate the inflation problem. All of this has undoubtedly contributed to Russia exibiting a less reckless behaviour in the Ukraine conflict.

3. Khodorkovsky.  In September, Mikhail Khodorkovsky finally emerged as a politician and as someone who has presidential ambitions. I really like how he justified his renewed interest in politics by stating that when Putin’s era is over (which, according to him, may happen at any point – tomorrow or in five years), the country will need to be ready to move on. So he’s leading a progressive movement, Open Russia, that will help ensure a smooth transition. For the first time in years, the Russian opposition movement may obtain a leader with credentials and authority who is not afraid to position himself as an alternative to Putin. And who knows, maybe one day he will become our President.

Sanctions hurting, Putin backing down on Ukraine

Are Western sanctions hurting Russia? According to Lubomir Mitov, Chief Economist at the Institute of International Finance, they are. Here is his Bloomberg video interview. He says the sanctions are hurting much more than expected. Because of the sanctions Russia has completely lost access to foreign capital sources. As a result, investment is down, and banks are under intense pressure.

I guess it’s always difficult to estimate the effect of sanctions correctly in advance because in Russia’s case for example their effect should be seen in combination with a continued capital flight, falling oil prices, and the negative effect of Putin’s own counter-sanctions (yes, according to Mitov Russians now realize that the ban on food imports from Europe has hit them harder than it has the EU). Apropos, Mitov believes that no new sanctions/counter-sanctions will be imposed. But what about the possibility of escalating sanctions if Russia-backed rebels gain in Donbass?

I think that as long as Putin is not pushed into a corner, he’ll be open to a compromise that would let him save face. And while I used to think that he won’t back down on Ukraine, he already has, sort of. Just today, in his speech at the Investment Forum “Russia Calling” Putin said “Ukrainian people have always been and will be our closest brothers.” But his propaganda machine rages on, calling Ukrainians fascists.

In any case, with many Russian backers of the separatist movement gone and ceasefire established, the tension has obviously decreased. But the sanctions are here to stay.

Interview with a Ukrainian patriot

Colta.ru has published a really good interview with Vasily Budik, a Ukrainian negotiator. I liked it so much that I decided to translate a passage:

“Why didn’t I become Bezler’s assistant? For a simple reason: I don’t support his views. He sees some big Russian world, a “sister country” led by the “Big Brother”. If I wanted to live in Russia, I would be living in Russia, not in Ukraine. I don’t support the Russian state. I don’t like Putin, and I don’t like that the centre of Russia is living well but the rest is total drunkenness. I’ve traveled a lot in Ukraine and I seldom see abandoned villages, but in Russia I saw them all the time. Just a step away from Moscow is the far side of the Moon.”

This actually corresponds to what I know about Ukraine. It is very much part of Europe in that particular sense – Ukrainians love their land and cherish it. Ukraine is a warm living space. Russia, on the contrary, is a vast frozen land where Arctic winds howl and where masses of people have never known (or cared for) comfort. In some metaphysical sense the war in Donbass is a struggle between comfort and chaos.