Tag Archives: russia

Russia, deep in the gap

I don’t agree with everything in this page by the Brookings Institution, but it makes the point that Russia was so disconnected from the world’s political and economic systems (that is, so deep in the gap), that it’s invasion of Georgia made sense.

Russia is a disconnected state that falls in the gaps of the world’s economy, similar to Venezuela, Iran, or Angola.

Reversing the Decline: An Agenda for U.S.-Russian Relations in 2009 – Brookings Institution
Building areas of cooperation not only can advance specific U.S. goals, it can reduce frictions on other issues. Further, the more there is to the bilateral relationship, the greater the interest it will hold for Russia, and the greater the leverage Washington will have with Moscow. The thin state of U.S.-Russian relations in August gave the Kremlin little reason for pause before answering the Georgian military incursion into South Ossetia with a large and disproportionate response. Washington should strive to build a relationship so that, should a similar crisis arise in the future, Russian concern about damaging relations with the United States would exercise a restraining influence.

Where I part company with Brookings is in the solution. Brookings seeks to build a liberal internationalist framework with Russia, in the same way that we created international institutions to help keep the peace in Europe. Unfortunately, this institutional or bureaucratic route to peace only works with countries that are already connected into the world economy, anyway.

You can add all the NATO-Russia, NATO-Iran, or NATO-Venezuela cooperation councils you want: without the harder structural and economic adjustments that help integrate markets, it’s all just words.

Eastern Promises

Watched Eastern Promises tonight. If it had been made for American audiences, the mafia in Eastern Promises would have been Italian (if it had been set a century ago) or Mexican (if it had been set in the present day). Instead, the movie is set in present-day Britain, and the mafia is Russian. Russia is no longer a Cold War power capable of cunning and audacious power plays around the world. Instead, it’s a corrupt petro state that on the small scale exports heroin and on the larger scale causes havoc throughout Europe.

eastern_promises

For instance, consider Vladimir Putin’s cut-off of natural gas from Russia’s Cold War-era ally, Bulgaria:

Bulgaria takes emergency measures to deal with gas crisis_English_Xinhua
SOFIA, Jan. 8 (Xinhua) — Bulgaria has taken emergency measures to deal with gas crisis after Russia cut off all natural gas supplies to Europe through Ukraine.

Suspension of natural gas supplies from Russia forced the Bulgarian government to order rationing for utilities, schools and hospitals.

Energy and Economy Minister Peter Dimitrov signed an ordinance Wednesday night during a meeting with representatives of large gas consumers, aimed at reducing Bulgaria’s daily natural gas consumption from 12 million to 18 million cubic meters per day to 5.7 million cubic meters per day.

At present, Bulgaria has cut gas supplies completely to 72 big industrial consumers, while the supply for another 153 factories was rationed to enable them to maintain minimal operation. In addition, 84 of 2,761 state schools were closed due to the lack of heating, the government said.

In addition, trams and buses in the capital of Sofia switched off heat to save energy. Utilities said they will switch to alternative fuels before they can heat homes again.

Bulgarian Prime Minister Sergei Stanishev said, “Our top priority is to guarantee heating for households, schools, child-care centers and hospitals… Most of the heating utilities have already been converted to diesel fuel.”

What did Bulgaria do to deserve such a fate?

Nothing. Bulgaria is cut off because of Russia’s natural gas embargo of Europe.

Why is Russia refusing to sale natural gas to Europe, especially considering that todays natural gas prices are only going to go down?

Because Vladimir Putin has so mismanaged Ukrainian relations that the only thing to Yeltsin-era allies of Russia (former bureaucrat Viktor Yuschenko and former oligarch Yulia Timoshenko) agree on is that Russia is their greatest threat.

Like Yasser Arafat and Saddam Hussein (other men quite good at monopolizing power inside a country and very bad at doing anything with it), Vladimir Putin never seems to miss an opportunity to miss an opportunity.

Must be a disinformation op by the Cold War Lobby

Rusisa’s hardly a “Cold War” threat — indeed, people who talk in this way tend to come across as hysterical. Rather, it’s a counttry about as powerful as Portugal which attempts to use the wealth it digs up from the ground to alter the foreign policy of our friends in the core of the Old Core, New Core, and Gap

While plummeting oil and natural gas prices are doing a job at containing Russia, we should not be lulled by the low prices into relying more on these hydrocarbons. Rather, the United States, Europe, India, China, and Japan should work together at developing alternative energy sources, and take away Russia’s ability to cause trouble.

Russia scrambles for cash; Let’s kick her while she’s down

Yet again, Russia has shut off natural gas deliveries to Ukraine. The natural suspicion is to believe that Russia is attempting to destabilizing the Ukrainian government, following Moscow’s invasion of Georgia. However, another alternative is more likely: Russia is scrambling for cash. Russia has already shaken down her former friend, Belarus, and now news that Gazprom (already in debt) has barely begun to feel the pain from falling energy prices:

Gazprom shuts off gas links to Ukraine – International Herald Tribune
Russia, meanwhile, is reeling from the fall from more than $100 in the price of crude oil since a peak last summer. Gazprom is deeply in debt even as the market is moving against Russia in a serious way.

While still high today, natural gas prices will inevitably fall and further wallop the Russian economy that is reeling from the sharp drop in the country’s other pivotal export, crude oil.

Natural gas is pegged to the price of oil, but with a six month delay. Gazprom is still receiving payments linked to last summer’s historic spike in oil prices, but they will decline sharply after the second half of 2009.

If this is true, Russia’s crushing collapse back to earth has barely begun. We may even see a second debt-default by Russia.

While Putin ousted Russia’s “Deng Xiaoping” and aborted efforts at reform, the basic problem that Russia has is that it’s too large to fit comfortably with the rest of the Central Asia states but too backwards and weak to meaningful project power on its own. Different regions of Russia should be encouraged to fall into the orbits of different economic powers, with Outer Manchuria and beyond naturally orbiting China, while the country’s western expanse is naturally a slightly bigger version of Poland.

manchuria

Further, alternatives to the Russia’s wealth (oil and natural gas) should be developed. Domestically, this means pushing forward on congestion charges, biodiesel, fuel cells, and other technologies. In Europe, China, and Japan, it means encouraging our allies to reduce their consumption of oil and natural gas in ways that work best for them.

2008 was a wake-up call: we saw what happens when Russia thinks she is strong. It’s time to guarantee that will not happen again.

Historical Markers

While the Cross-Straight Times has an excellent integrative post on piracy, Communist-KMT ties, and the democratic movement , the New York Times presents this vignette of the past, and the future:

kangnido_map

China’s Navy to Join Pirate Patrols – NYTimes.com
Commander Xie Zengling, chief of the special forces unit, told Xinhua that he expects to have firefights with pirates. He noted that one Chinese special forces soldier could handle several enemies with his bare hands.

China has not sent warships out of its region since the 15th century, under the Chinese Muslim admiral Zheng He.

China’s integration with the world is happening as fast as Russia’s decoupling. Since the coup against “Russia’s Deng Xiaoping” that saw Vladimir Putin rise to power, Russia’s economic, diplomatic, and human capital positions have eroded substantially.

Indeed, Russia’s position is so bad that recently a prominent Russian apologist with a blog compared Russia’s invasion of Georgia to 9/11 — and concluded that because the world did not punish Saudi Arabia, it should not punish Russia! (I could not decide whether to respond by saying that earlier supporters of Russia called such comparisons hysterical, or that punishment is besides the point, or that I did not believe that a murderous cell of anti-Kremlin zealots were behind the invasion of Georgia… so I decided that there was no serious response to make, anyway.)

To conclude this post, I want to point readers to two others: “Deep Throat’s coup d’etat and “The Deep Throat Dilemma.” Both posts focus on the extralegal maneuvers the FBI took to get rid of President Nixon. But in a broader perspective, both posts discuss the historical markers laid down by President Nixon.

The greatest of these was the opening of China, that set the stage for decades of friendship and, increasingly, economic interdependence and strategic alliance. The rise of Chins is as epochal as the decline of Russia.

And the world will be better for it.

Boris Yeltsin was the Deng Xiaoping of Russia

Russia has lost her “Deng Xiaoping.” She lost her chance at a “Jiang Zemin.” Instead, she got Putin.

No Jiang Zemin for Russia
No Jiang Zemin for Russia

Boris Yeltsin was China’s Deng Xiaoping. Like Deng, he introduced dramatic free-market reforms that opened up investment with the west. Yeltsin, like Deng, initailly worked but eventually eclipsed the party-line communists of a previous era (Liu Shaoqi and Mikheil Gorbechev). Yeltsin, like Deng, cleverly managed political reforms, at some times leaning towards democracy (to put pressure on unpopular political opponents) and at other times leaning towards authoritarianism (to prevent radicals from changing course).

Unfortunately for Russia, Yeltsin proved as physically frail as Deng was physically dynamic. Yeltsin’s alcoholism (an inherited condition) and a back injury (an environmental one) compounded each other, and led to a shift in political power a generation early. In China, Deng realized that change was a generational affair, and so an entire generation of successors was bypassed (such as Hu Yaobang) until a new one that had politically matured under the reform period was ready to assume power (such as Jiang Zemin). In Russia, by contrast, Yeltsin was too physically weak to hold on, and Russia got Putin instead.

It has been clear for years that Putin is dismantling Yeltsin’s diplomatic legacy. The Moscow Times has a good piece on how Putin is dismantling Yeltsin’s economic legacy, too:

Russia’s nationalistic energy policy after 2003 has stalled the development of major new energy investments (apart from the Sakhalin projects, which date back to the Boris Yeltsin era). Gazprom and Rosneft have financed themselves with foreign debt rather than with equity capital, accounting for almost one-fifth of Russia’s corporate foreign debt of $490 billion. Gazprom’s aggressive pricing and delivery disruptions have scared away customers, reducing the demand for its gas.

Huge public funds are being diverted to state corporations, which either hoard the money or siphon it off. In their new book “Putin and Gazprom,” Boris Nemtsov and Vladimir Milov have offered a staggering and credible account of how Putin and his friends pilfered assets of $80 billion from Gazprom during his second term as president. Investors have taken notice, slashing Gazprom’s market capitalization from $350 billion last spring to $70 billion at its nadir. Although Russia is the 46th-richest country in the world in per capita terms, it is ranked 147 out of 180 countries on Transparency International’s corruption perception index for 2008. Only Equatorial Guinea is both richer and more corrupt than Russia.

Under Putin, transparency has systematically been reduced, and we no longer dare to trust the government’s public statements on its currency reserves. Officially, they have declined by $163 billion, or 28 percent, from $598 billion in early August to $435 billion in early December. But when Vneshekonombank was given $50 billion of state reserves to help Russian oligarchs with refinancing, nothing was deducted from the official reserves as it should have been. In an article on Gazeta.ru on Oct. 24, Alexei Mikhailov plausibly claimed that another $100 billion or $110 billion of “other reserves” had been transferred to the banking system and were nothing but rubles. To my knowledge, no official denial has been issued. If that were correct, the reserves have fallen by more than half to less than $300 billion, but the government sheds no light on this.

Russia’s largest corporations have turned out to be much more leveraged than anybody had thought. The government has made clear that it will refinance their foreign loans to secure “strategic” ownership. So far, $13 billion has been paid, out of which United Company RusAl has received $4.5 billion and Altima $2 billion, but such private pledges are huge. Vneshekonombank has $37 billion left to spend, but it has already asked for $30 billion more from the government, and more is likely. Thus, Russia can swiftly lose more than $100 billion of reserves.

Instead, Vladimir Putin
Instead, Vladimir Putin

Putin has persistently denied that anything is wrong with the country’s economic policy, while everything but its fiscal policy has been wrong. Domestic and foreign businesspeople realize that he does not talk about reality, which undermines confidence in the Russian market. Without free public debate, rational policy decisions are unlikely.

Incredibly, the government is repeating its mistake from 1998 to maintain a pegged exchange rate in the face of falling commodity prices. Until this summer, this policy provoked speculative capital inflows that boosted the money supply excessively and propelled inflation to 15 percent. Now, the pegged exchange rate, which is probably overvalued by up to 25 percent, promotes speculative capital outflows, quickly reducing the currency reserves. Devaluations in very small steps only convince the market that a major depreciation is inevitable. The coming combination of loose fiscal policy, negative real interest rates, current and capital account deficits and an overvalued ruble is unsustainable. The incentives for capital flight are overwhelming.

The global economic crisis is testing Putin’s system. He has undermined the ground under the house Yeltsin built, transforming the country into a house of cards ready to tumble. He has wasted the oil wealth rather than investing it in infrastructure, health care, education and law enforcement reform. Russia needs fundamental change; above all, it needs to uproot — or at the very least contain — the country’s pervasive corruption, which has gotten markedly worse under Putin. Nothing would serve the country better than the retirement of the failed prime minister, but that is evidently not in the cards.

When Boris Yeltsin gave way to Vladimir Putin, Russia lost her chance to continue opening up to the world. Instead, she faded into the gap of the global economy, and is once again a country that produces nothing war, death, and vodka.

The Collapse of Economic Freedom in Russia

My thanks to history guy for linking to the map of economic freedom. Economic freedom is more important for joining the core of the global economy than political freedom, because political freedom is merely a system of laws while economic freedom teaches affection for private property and fear of arbitrary confiscation.

Given that, it’s striking just how destructive Putinism has been to Russia’s chances of living the good life, of joining the core, or of becoming something more than another oil-rich tin-pot dictatorship.

In 2007:

index2007_econfreedommap

And now, 2008:

index2008_econfreedommap

Vladimir Putin is overseeing Russia’s breaking of the peace, Russia’s disintegrating soft power, the decimation of the Russian people, and now the dismantling of Russia’s free economy.

While I know many who support Vladimir Putin do so out of personal self-interest, others may see the writing on the wall. If Putin is going to be this self-destructive, shouldn’t we give thanks for him and leave it at that? Why bother defending seam states that Russia invades, when we can just wait for Putin to finally scare off investors and increase the mortality rate in central asia some?

The first reason, of course, is that such “realism” (realism is international relations for those who don’t understand math) ignores the beneficial effects of economic growth. Those who say, let Russia do what she wants, her surviving neighbors will naturally be frightened and come to us, think that a wealth-generating free democracy is just as much of a threat to us as a wealth-recycling petrostate.

The second reason is that gap states are like Russia inherently destructive. They recycle wealth from wealth producers, and use it to destablize wealth producers. For very rich countries like America, Britain, France, and Germany, this does not matter much. However, the bad behaviors of gap states like Russia can make the difference of life and death in seam states such as Ukraine and Georgia, and even new core states of the global economy like China.

One Million a Year

1980s-style thinking aside, Russia is in no position to fight a “Cold War.” Indeed, a serious challenge to the west by Russia is much less likely than from, say, Venezuela and Iran. Russia is a short- and medium- term problem for Europe that can be countered by the development of alternative energy sources and alternative fuels, from nuclear power to BioDiesel.

The scale of Russia’s problem, from The Economist:

Russia’s demographic crisis is one of the main constraints on the country’s economy. Although Russia’s population has been ageing, over the past decade the country has enjoyed a “demographic dividend” because the age structure was in its favour. This dividend has now been exhausted and the population of working age will decline by about 1m a year, increasing the social burden on those that remain. Over the next seven years Russia’s labour force will shrink by 8m, and by 2025 it may be 18m-19m down on the present figure of 90m.

What makes a shrinking population dangerous for a country that has always defined itself by its external borders is the loss of energy it entails, Mr Vishnevsky argues. The Soviet Union did not just try to exploit the resources of its vast and inhospitable land, it tried to populate it. Now large swathes of land in Siberia and the far east are emptying out as people move to central Russia. The population density in the country’s far east is 1.1 people per square kilometre. On the other side of the border with China it is nearly 140 times that figure.

The farther oil and natural gas prices fall in the near- and medium- term, the less power Russia will have to harm the world, and the more incentived Russia’s government will be to harness what is left of the Russian economy into wealth-producing activities.

The Hysterical Crowd on Georgia

Interesting that the same clique that was once saying that our only alternative to allying with Russia (supporting their military adventurism in Eurasia) as a “new Cold War” now claim that Russia’s humbling was inevitable, that oil prices would have collapsed anyway, that Russia is too small to matter, etc.

Trying to understand what things are inevitable is useful, I think. Asserting that whatever has happened is inevitable — and proves whatever you said in the first place — strikes me as more needy and childish.

Supplier Failure

The best justification for keeping a large Leviathan is to end conventional war. Essentially, the US can use its military power to make the cost of waging aggressive war against another sovereign state unacceptable. This provides the global public good of security, because when states do not have to defend themselves, or spend funds appeasing dangerous neighbors, they can concentrate on economic growth.

Russia’s invasion of Georgia is a great (perhaps fatal) challenge to America’s role in keeping the peace. By allowing that Saddam Hussein with a slavic name to occupy Georgian territory, we make every state think twice about the “peace” that the world loans us so many billions to uphold:

Signal received, Azerbaijan thinks ahead (Thomas P.M. Barnett :: Weblog)
So yeah, given few to no alternatives, Azerbaijan takes up Gazprom’s offer to buy its natural gas and pipe it westward, possibly killing the planned Nabucco pipeline.

In his Beijing diary, former President (and at the time, de facto US ambassador to China) George H.W. Bush notes how the US failure in Vietnam caused other states to warm up to the Soviet Union and other communist states.

While Communism and the Cold War are dead forever, the inability to expel Russia from Georgia will likewise force countries to further subsidize Gap states such as Russia.

Of course, Russia is in a lot of trouble regardless. Russia’s economy is caving in, and Putin’s nemesis George Soros is influential with the incoming government of the United States. Still, the U.S. is expected to supply security, and so far in Georgia it has been unable to do that.

That is what we see in Azerbaijan’s actions, and it is harmful to us, to the world, and to peace.