2016 - Russia’s Year of the Financial Reserves

Even as expectations for the Russian economy in 2016 continue to plummet, commentators seem unanimous that Russia will weather the fall because it has low debt and sufficient reserves to cushion a large and growing government revenue shortfall.  However, weathering the fall looks decidedly uncertain.

The economic data are unremittingly bad.  The government’s preliminary estimate for GDP in 2015 is that it fell -3.7%.  Underlying economic indicators fell further.  Retail sales fell -10% in 2015 and capital investment fell -8.4%.  With inflation peaking at about +16%, real wages fell by -9%.  The fall in retail sales is particularly troublesome because, after oil and gas sales, Russia’s growth has been based on domestic consumption.  The government reported that the economy shrank -2.5% in January, which is less than in December but a rate of decline still far greater than the official projection for the year as a whole.  The economy will have to strengthen significantly to meet official projections after such a poor start.

At the moment, government spending is all that fuels the economy; particularly manufacturing, where the government has placed its hopes for survival; I’m sorry, "revival".  However, government spending is falling, with the government already seeking another -10% budget cut this year.  Pensions, public sector salaries and social payments are being trimmed and eroded by inflation.  Military spending has been protected from cuts and helps to bolster the manufacturing sector, but military spending is not a solution.  Apart from overseas sales, domestic military sales is the government paying itself in depreciating rubles.  There is no economic value added.  Nor will the trumpeted few green shoots of import substitution help, because they are small and starved for capital, expertise and demand in the face of falling consumption.

Growing unemployment and underemployment will drag the numbers lower and GDP will catch up with the fall in consumption and investment.  In fact, it would not surprise to see the preliminary number for 2015 GDP revised downward.  First quarter 2016 will look little better.  Growth expectations for 2016 have been falling steadily and, since the beginning of the year, have taken a steep dive.  In December expectations were still only slightly negative at -0.6%, reflecting a general view that Russia had put the worst of the economic crisis behind it--a view famously expressed by Putin himself.  In January though general expectations fell to -1 to -2%. Russia’s new credit rating agency, for example, expects the economy to decline by -1.7% in 2016 ([TASS Business and Economy).

With the economy still plummeting, Russia is running out of options.  Allowing the ruble to devalue averted a deeper crisis in 2015 but cannot be repeated without undermining the economy entirely.  A lower ruble would increase inflation and push the cost of basic needs far above what many Russians can afford.  Already 2 million more Russians fell into poverty in 2015 and many who did not, saw their purchasing power decline significantly due to inflation.  In 2000, when Putin came to power, there were over 42 million Russians below the poverty line. Today there are only about 16 million.  A huge improvement.  But in 2000 things were looking up with growing oil revenue.  In 2016 things are looking bad and getting worse.  An estimated 40% of Russians are financially stressed, only able to afford their most basic daily needs (wsws.org).  That's 57m Russians.  Before the current economic crisis, Russians’ expectations were much higher and losing ground is not what they were promised.  Having tasted an improved lifestyle for a generation now, not to mention the benefits such as higher pensions, the Russian people are not prepared to see that evaporate with a return to a Soviet era standard of living.  They want not just a stronger, more respected Russia but also the material rewards.

Technical analysis may suggest a bottom for the Russian economy in 2016 because most economic models track the price of oil as a key independent variable, which has to stop falling sometime.

However, the health of the Russian economy, and therefore confidence in its ability to weather the crisis, is now dependent on the Emergency Reserve Fund and the National Wealth Fund.  With investment, consumption and government spending falling, Russia’s reserves are supporting the government budget and business investment.  These reserves are Russia’s last defense against economic collapse.  Finance Minister Siluanov is quoted as saying, “We lose stability without reserves.”

The key variable to watch in 2016 will be the rate at which Russia’s Emergency Reserve Fund is depleted to cover the public sector shortfall.  The National Wealth Fund is based on loans and is substantially committed.  Russia is pulling other strings to mange its shortfall, such as budget cuts, but Minister Siluanov thinks Russia’s Emergency Reserve Fund could be exhausted by the end of 2016 (RT Russian Reserves).  The Emergency Reserve Fund stood at about US$50 billion on January 1, but it has been shrinking by US$6 to 9 billion a month.  It was down US$9.4 billion in December.  At that rate the Fund will not last the year.  The exhaustion of the Emergency Reserve Fund would be a cataclysmic signal of diminishing economic health.   The point at which the fund may be exhausted is perilously close.

Russia also has other financial resources it might draw on by various means to avert an actual liquidity problem if the Emergency Reserve Fund were exhausted, such as its currency reserves held by the Russian central bank (Central Bank).  But that introduces a larger problem.  If Russia were to use its currency reserves at the same rate as it is currently using the Emergency Reserve Fund, currency reserves would fall and the primary pillar of Russia’s financial credibility would wobble dangerously.   It was the plunge in currency reserves in 2014 that nearly caused a financial panic.  Now, the currency reserves--which include the Emergency and National Wealth Funds--are smaller.  Drawing down its currency reserves would be the ultimate signal that Russia’s economy is in fatal decline.

Since confidence is key to a turnaround, a Russian economy with nothing to sustain it but plummeting reserves, held in whatever account, will implode long before the last ruble is spent, because without reserves the last wheel will have come off the Russian economy, and that is a wreck that anyone can see coming a long way off.  Late in the year, perhaps long before the Emergency Reserve Fund is exhausted, confidence in the management of the economy could evaporate and panic may drive the economy off the cliff, as Minister Siluanov fears.

Dirk Mattheisen is a writer and blogger on political economy with a focus on European affairs.  He is also an independent consultant on institutional governance of international economic and financial institutions.  Dirk Mattheisen is a former Assistant Corporate Secretary of The World Bank Group.

Lessons From the Kremlin Murders

http://euromaidanpress.com/2016/02/15/lessons-from-the-kremlin-murders/

The British public inquiry into the murder of Russian whistleblower, Alexander Litvinenko, (Litvinenko Inquiry) has thrown up some interesting Kremlin insights.

The most dramatic insight is the number of Kremlin critics murdered by exotic poisons and other means.  That the Kremlin is accused of murdering critics of President Putin is not new, but the Litvinenko inquiry provides a breathtaking summary of the number and manner of the killings.  John Le Carré couldn’t write this stuff.

The inquiry lists at least 13 murders, and there are numerous more.  The victims die from gunshot, such as Anna Politovskaya, crusading journalist, and Boris Nemtsov, opposition leader; or from poisons of various kinds, such as Ibn Khattab, Islamist guerrilla leader, killed with a poison letter, or Alexander Perepilichny, businessman and whistleblower, who may have died from ingesting a rare poison flower; or from radioactive materials, such as Roman Tsepov, one time associate of Putin, who died from an unknown material, and, of course, Alexander Litvinenko who died from ingesting polonium 210 while drinking tea with two Russian agents at the Millennium Hotel in London.  The list goes on.

The inquiry observes,

“These cases suggest that in the years prior to Mr. Litvinenko’s death, the Russian State may have been involved in the assassination of Mr. Putin’s critics; they suggest that those who were seeking to uncover the truth about the 1999 apartment bombings may have been targeted, and that living overseas may not have provided complete protection. Lastly, these cases suggest that the Russian State may have sponsored attacks against its opponents using poisons, including radioactive poisons.”

Since Mr. Litvinenko’s death in 2006 the number of unsolved murders has only grown.

The inquiry is quick to say that much of the evidence for Kremlin involvement is circumstantial, as many of these murders are unsolved.  However, given that the victims were all critics of Putin and the large number of deaths and exotic methods, what are the odds that it is not the Kremlin?  The Litvinenko inquiry points the finger directly at the Kremlin and at Putin personally.

A second, intriguing insight is Putin’s fastidiousness.  Putin may have prepared the way for Litvinenko’s murder and the murders of others by enacting laws that legitimated murder by the FSB at home and abroad.  In 2006, just before the murders of Politovskaya and Litvinenko, Putin signed a Counteraction to Terrorism law that permits the Russian military and “federal security services” (or FSB) to take action against terrorism outside of Russia.  Putin also signed an amendment to a Counteracting Extremist Activity law that one expert witness described as,

“Extravagantly vague, and more than one category allows for unfettered repressive activity by the authorities. The item on the slandering of holders of public office is remarkable for the room it gives to treat any strident critique of the President or other leading officials as extremism.”

There is disagreement about the scope of the laws, but the upshot is that the laws are said to have created an atmosphere where the FSB was free to act without constraint.  In short, the laws gave legal cover to Putin and the FSB to murder critics at home and abroad. 

However, if these murders had been going on for some years already, why pass the laws?  The explanation may be that the inquiry learned that a list of targets had been drawn up in 2006 that included Politovskaya, Litvinenko and others.  This suggests a systematic campaign seemingly directed at critics of the 1999 Moscow bombings and Putin’s second Chechen war, rather than ad hoc or opportunistic killings.  Moreover, the names on the list were prominent expatriates, some living in London.  For such high profile killings, Putin may have felt he needed legal cover.  Or, it may be that, having perfected a regimen of political killings, it was time to tidy up the practice with some authorizing legislation. 

The murders of Putin critics may be immoral, objectively illegal, or contrary to international law, but Putin may have felt the 2006 laws provided adequate cover for a willfully ignorant Russian population and for an international community that is hesitant to out Mr. Putin’s rogue behavior.  One need look no further than Putin’s high popularity ratings in Russia each time he goes rogue or at Britain’s hesitancy to act on the compelling evidence of the Litvinenko inquiry.

 The third insight is that this torturing of the law by Putin to suit base purposes has eroded the basic logic that law serves to establish acceptable and commonly held norms of civil conduct.  Putin has used hastily passed legislation on numerous occasions to cover actions well beyond the reach of normal legal standards, including the annexation of Crimea and invasion of eastern Ukraine.  In Putin’s hands, the law is a tool used to legitimate criminal acts, such as murder, or to deny inconvenient truths, such as the deaths of Russian troops in eastern Ukraine.  Putin even turns the law on its head to suppress opposition to his actions by criminalizing rights guaranteed by the Russian constitution, such as free speech (Chapter 3, Article 29, of the 1993 Constitution). 

The Russian Constitution is a sound document of high principle, that provides “…for the rights and freedoms of man and citizen according to the universally recognized principles and norms of international law and according to the present Constitution.”  Under the Russian constitution, the President is guarantor of these principles.  At the moment, it just doesn’t work that way.

Want to know what Putin will do next? Check his legislative agenda.

Dirk Mattheisen is a writer and blogger on political economy with a focus on European affairs.  He is also an independent consultant on institutional governance of international economic and financial institutions.  Dirk Mattheisen is a former Assistant Corporate Secretary of The World Bank Group.

Goodfella Putin

I

The findings of the public inquiry into the murder of Alexander Litvinenko, a Russian dissident and former KGB/FSB officer, killed in London in November 2006 are not so surprising, although the inquiry’s frankness in pointing fingers has surprised some.  More unsettling is what to make of Russia’s behavior.

The inquiry finds that Mr. Litvinenko was murdered by two Russians, Andrey Lugovoi, currently a Russian MP and former KGB officer, and Dmitry Kovtun, a Russian businessman.  Sir Richard Owen, the inquiry’s author, concludes that the two probably acted on orders from the Russian government, likely at the express instruction of President Putin.

Putin already has a reputation for ruthlessness based on suppressing dissent in Russia, for conducting a brutal military campaign in Chechnya in 1999, and for aggression against a number of countries, including Georgia and Ukraine.  He is believed by many to have been the actual instigator of a series of bombings, with many Russian deaths, in Moscow in 1999 as a pretext for the Chechnya conflict.  He is also believed responsible, directly or indirectly, for a number of political murders in Russia, including opposition figure, Boris Nemtsov, who was shot down in February 2015 in the shadow of the Kremlin itself.

Why have Litvinenko killed?  Sir Owen writes that certain members of Russian intelligence and the military viewed Litvinenko as a traitor for exposing corruption in the FSB.  Litvinenko claimed that Putin was involved in criminal activities from his time in St. Petersburg, as head of the FSB and after becoming president.  Litvinenko made other claims about activities of the Russian mafia and connections to Putin.  Litvinenko also asserted there was evidence that Putin was a pedophile.  Given Putin’s death grip on Russia, what did it matter?  Who in Russia was going to anything about it?  The answer is that Litvinenko’s murder fits a pattern of murder within Russia and abroad.

Putin has faced serious accusations before, including, for instance, from crusading journalist, Anna Politkovskaya, herself murdered in October 2006, who accused Putin of tolerating atrocities in Chechnya.  Boris Nemtsov was murdered as he was about to release a report on Russian soldiers’ deaths in eastern Ukraine.  It seems that if you have dirt to spill on Putin, you end up dead.

The picture of Putin that emerges is more Don Corleone than Peter the Great.  The inquiry reinforces the impression that Putin lacks the majesty or gravitas of a national leader. The overall impression is of thuggishness, a low-level intelligence operative from the KGB busy in St. Petersburg with his own little extortion rackets who is propelled to the pinnacle of state power by a series-of-curious-events, who then builds a national criminal empire on steroids (apparently both figuratively and literally in view of systemic doping in Russian’s national sports program).  The impression is reinforced by Putin’s fascination with manliness, including a fondness for martial arts, cozying up to the Night Wolves, a belligerent Russian nationalist motorcycle club, and his “street” affection for crude and vulgar expression.  His bromance with Mario Berlusconi, former Italian Prime Minister, another miscreant, only rounds out the impression of base impulses and corruption.  If Russia had the same standard of judicial integrity as Britain, what would we learn about the perpetrators and motives of Politkovskaya and Nemtsov’s murders and many others?

The inquiry is as interesting, though, for what it says about the underlying integrity of the Russian people.  That the inquiry took place at all is due to the perseverance of Litvinenko himself as he was dying from poisoning and his wife, Marina Litvinenko, who forced an unwilling British government to conduct the inquiry through a High Court ruling in 2014 after six years of effort.  There are other heroes.  Surprising perhaps to many are the FSB officers who stood up to their superiors along with Litvinenko to complain of corruption in the FSB.  Unfortunately, their faith in justice and trust in the integrity of their superiors, including Putin, is almost quaint in the face of their superior’s subsequent easy brutality.  That such faith in justice exists among ordinary Russians, especially in the FSB, demonstrates that there is an underlying decency in Russian society that lies submerged beneath Putin’s criminal enterprise.

Marina Litvinenko is currently pressuring the British government to take action on the inquiry’s findings.  She is prodding a “craven”--as one of her lawyers describes it--British government into responding to the murder of one of its citizens (Alexander and his wife had taken UK citizenship) with the appropriate level of indignation at the violation of British law and of fundamental human rights.

Edward Lucas in the British Daily Mail, Russia Has Murdered a British Citizen, makes the point that the British financial and political classes’ sense of moral outrage has been dulled by years of complicity in openness to Russian money from questionable sources, disguised interest property sales, offshore Commonwealth tax dodges, and well-lubricated influence peddling.  The British government’s complicit attitude after the fact is neatly laid out in an article by Peter Pomerantsev in Foreign Policy magazine, So Putin Killed Litvinenko.  Carry On.  He puts the question well; if the British government does not act forcefully to Litvinenko’s murder, “Now, when China murders a dissident in London, what will the UK do?”  For a racier take, read Michael Weiss in TheDailyBeast, Britain's KGB Sugar Daddy http.........

Litvinenko's murder is not about the compromises necessary in international relations or for political advantage.  Now that the facts have been established, it is about upholding the rule of law and fundamental Western values against the corrosive influence of a criminal empire,.


Postscript. Alexander Litvinenko's son, Anatoly, has the last word.  In the inquiry Anatoly had this to say about his father when they got their British citizenship,

0. “... he would always go on about the integrity of this nation... the honesty and transparency with which judicial processes were carried out as well as the honesty of the police and how deeply [this] contrasted with the regime under which he grew up and the system in which he served.”  

Postscript.  Sir Owen's inquiry has unleashed intense comment in the UK of British and Western complicity in Russian criminality. The following is a good example.  Litvinenko's Murder is the Reason Putin's Russia Will Never Prosper.  http://www.theguardian.com/commentisfree/2016/jan/24/litvinenko-murder-putin-russia

Russia's Dual Economic Crisis

According to the latest update of the IMF's World Economic Outlook (WEO), released yesterday, Russian GDP will not only decline by -1.0% in 2016 (after falling -3.7% in 2015), it will lag the Commonwealth of Independent States (CIS), which will grow by 2.3% (excluding Russia).  The CIS (excluding Russia) is also projected to grow more than three times faster than Russia in 2017.  

Russia's economic crisis is a problem of growth and of relative growth as it struggles with a falling GDP and falling behind neighboring economies and behind global growth.  Poor economic management and a confrontational foreign policy are undermining Russia's ability to maintain economic growth and to achieve domestic and international political goals, which if prolonged threaten state cohesion.

The Economic Cost of Putin's Miscalculations

http://euromaidanpress.com/2016/01/13/the-economic-cost-of-putins-miscalculations/

Ground Zero With Kim Jung Un and Vladimir Putin

Kim Jung Un, North Korea’s totalitarian leader, and Vladimir Putin, Russia’s evolving totalitarian leader, may be more alike than is commonly thought.

Kim claimed this week that North Korea had detonated its first hydrogen bomb.  If true, it would be a huge increase in Korea’s war making capability.  Although North Korea does seem to have detonated something, its claim of a hydrogen bomb appears to be greatly exaggerated in order to grab international attention.

Putin also likes attention and boasts often of Russia’s nuclear and military capability.  Like North Korea, Russia recently claimed impressive but doubtful nuclear and military advances, including a tactical nuclear torpedo, fleets of next generation battle tanks, and a super-sized aircraft carrier.

Kim and Putin are similar in other ways, as well.  They both rule over increasingly oppressive regimes and increasingly desperate economies that would be of little importance if not for their military power.  Both suppress opposition and appear to use murder as a tool of state.  Both exercise almost absolute control over information and national media in their countries. Both maintain a posture of belligerence toward the West, and toward the United States in particular, while constantly seeking recognition from the US as equals to establish their legitimacy and importance on the global stage.  Despite appallingly badly managed economies, they both maintain high levels of military spending.  Each rattles his saber when he feels he is not getting enough attention.

Kim is one of Putin’s few remaining BFFs on the planet.  Putin has visited North Korea and cozied up to Kim while promoting cooperation and sales of Russian military hardware.   Russia even trumpeted Kim’s intention to attend Russia’s victory day celebrations in May last year—only to be embarrassed when Kim became a no-show.

There are differences to be sure.  Putin has experience with international cooperation, and many Russians have traveled outside Russia and are aware that living standards are higher elsewhere in the world.   Kim inherited a hermetic nation with nearly no outside contact and for most North Koreans the larger world is an almost mythic place populated by demons.  However, given the abstruse natures of their regimes, it is impossible to know whether the differences or the similarities are more important.

Most alarming is that Kim and Putin have each threatened to use their nuclear weapons to advance their political agendas if and when it suits them.  Their like-mindedness would be comic if not for it’s also being terribly real and dangerous.  Their words and deeds to date suggest they are capable of miscalculation verging on recklessness.  No national leader can afford to ignore the possibility of erratic or irrational behavior by one or both of them.  There is a chance one or both is mad.  But the greater likelihood is that--in their dark, medieval world where the only crime is to disagree with the boss--Kim and Putin are perilously close to destructive self-delusion.