The Curious Case of Benjamin Russia

http://euromaidanpress.com/2016/04/18/91786/

At his annual phone-in event with the Russian people on April 14, President Putin struck an optimistic note and projected that Russian GDP would contract by only -0.3% in 2016 and would grow 1.4% in 2017. Only days earlier, the IMF released its World Economic Outlook report and projected a fall in Russian GDP in 2016 of -1.8%, growth of 0.8% in 2017, and growth of 1.5% through 2021.

Russia’s economic growth is really two problems.  It has to return to growth and it has to keep up with other countries in order not to fall behind economically.  If Russia does not grow and if it does not grow as fast as other countries, Russia will, in a curious reversal, grow less developed because investment will be insufficient to renew its aging economic infrastructure.  Oil and gas, for  instance, will require massive investment to maintain production and to exploit more difficult fields.  Russia must attract new investment that is used productively.  That said, let’s see how Russia is doing based on comparisons using the IMF’s latest data.

One comparison is how Russia is doing in relation to the Commonwealth of Independent States (CIS), the collection of countries that were once part of the Soviet Union.  According to the IMF, the “CIS-minus-Russia” is expected to grow by 0.9% in 2016, 2.3% in 2017 and 4.2% by 2021.  In its own backyard, Russia is expected to be a laggard.  In fact, from 2017 when Russia hopes to return to growth through 2021 the IMF expects Russia to be the worst performer among CIS countries, with the exception of Belarus (which seems unfair since Belarus doesn’t have oil or gas, didn’t support Russia’s annexation of Crimea or invasion of eastern Ukraine, and has nothing to do with Syria—but economics is unforgiving).

 

Another comparison might be the IMF’s Emerging and Developing Europe (EDEU) group, including such struggling countries as Kosovo and Serbia, but also Hungary and Poland.  Here, Russia fairs worse.  EDE is expected to grow by 3.5% in 2016 and by 3.3% thereafter through 2021, more than twice as fast as Russia.

 Still another comparison might be with the European Union, that body of Western democracies that Putin believes is on the verge of economic collapse and whose collapse he earnestly promotes.  There is little comfort in the projections though.  The IMF expects the EU to grow about 1.8% from 2016 through 2021.  Even by 2021, the IMF does not expect Russia to catch up with Putin’s enfeebled European Union.  Although Russia and the EU’s growth rates converge, with the EU growing slightly faster, it is not the company Putin hoped to keep.

How about comparison with the states where Russia maintains Russian-separatist enclaves, Georgia, Ukraine and Moldova?  Again, things don’t look so good.  The three states are expected to average growth of 1.5% in 2016, 3.2% in 2017 and 4.3% by 2021, nearly three times as fast as Russia.  So much for economic subjugation through conquest.

 Perhaps further afield, among the BRICS?  As a group, the “BRICS-minus-Russia” (Turkey added separately for interest) are projected to grow at 2.7% in 2016, 3.7% in 2017 and 4.3% by 2021.  Even beleaguered South Africa manages to outpace Russia by a large margin.   Only Brazil does worse, declining -3.8% this year and next, although by 2021 Brazil is projected to also overtake Russia by a wide margin.  Brazil, as a fellow underperformer, should give Putin pause.  Racked by corruption and economic mismanagement, as of this writing Brazil is set to impeach its President, herself like Putin an old communist apparatchik.  In fact, as described by the Financial Times, plans to reform Brazil’s economy sound a lot like what Russia needs.   The Times quotes Brazil’s Vice President Temer as saying, “What’s needed is tighter fiscal policy, lower interest rates, a weak currency, and eventually structural reforms to raise savings and investment.”  The other underperformer, South Africa, although it outperforms Russia, suffered the same political crisis as Brazil, with its President Zuma narrowly escaping impeachment.  Economically speaking--as a BRIC in economic crisis--Russia sits in the uncomfortable company of South Africa and Brazil, an association Putin should find politically uncomfortable.

As bad as it looks, it is probably worse.  Not only does Russia perform poorly against comparator groups, it is likely to do worse than the IMF projects.  The problem is not oil or sanctions, although these make the situation more difficult.  The problem is that growth in Russia was falling for years before the fall in oil prices in 2014 and the imposition of sanctions.  Already in 2013, Russian growth had fallen to 1.3% because of lack of investment.  In 2014 and 2015 investment fell steeply.  This suggests that Russia will struggle to achieve growth of even 1.3%--if it is even possible--for the foreseeable future because there is nothing to drive a reversal in declining investment.  Without undertaking reform measures recommended by the IMF or, for that matter, by Alexei Kudrin, Russia will fall short of the IMF’s 2017-2021 projection and be that much more behind its comparators.

Put it all together and the chart to the left is how the IMF expects Russia to compare in 2021.  For a country that aspires to be a great nation and to lead an alternative international world order to the democratic West, this is not the path to power or to greatness.  It is the path of growth in reverse to lesser and lesser significance, if Russia does not correct course.  Like the character in the film The Curious Case of Benjamin Button, Russia may find itself regressing to a less developed state while the rest of the world grows.

 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.

A Desultory Philippic On The Panama Papers

A great deal has been reported about the shady business practices revealed by the so-called Panama Papers.  There is a lot of insight to be mined from the 11.5m pages of documents.  Therefore, the following is merely a short list of reactions.

Firstly, evasion and corruption are not the reserve of autocratic states or rulers, although they figure prominently.  Scores of other current and former heads of state and prominent public figures are named, including UK Prime Minister David Cameron and Iceland’s (now former) Prime Minister Sigmundur Gunnlaugsson.  And one might remember that former US presidential candidate Mitt Romey was previously discovered to have owned or to had interests in companies in Bermuda and the Cayman Islands.

None of this is to be excused.  Even where legal, it raises issues of ethics and conflict of interest in government and personal affairs that deserve public debate.  The scale of activity by autocratic states and rulers, such as Russia and China, is breathtaking though and has a much greater economic impact.  RussiaToday reported in November 2014 that Russian authorities believed US$200 billion had flowed offshore in 2014 and as much as US$2 trillion had flowed offshore over recent years.  That is about 17% and 170% of Russia’s current total GDP, respectively.   Those figures will have only grown larger over 2015.

Though businessmen are well represented in the Panama Papers, the impression is that there are more politicians, familymembers of politicians, and close associates of politicians, which suggests the true purpose of shell companies is not ordinary business.  Particularly, well represented are senior Russian and Chinese politicians, but they are by no means alone.

Offshore accounts are defended as good business practice when disclosure might have a negative business impact.  However, domestic laws respecting confidentiality are more than sufficient to protect corporate interests and provide a level playing field for corporations.  Companies are not entitled to unfair advantages based on excessive secrecy that obscures what the limits of acceptable business practices are and circumvents protection against corrupt practices.  The business case for offshore shell companies can't be made on the basis of secrecy.

Some of the nominally legal practices described in the Panama Papers defy rational economic explanation and therefore cast doubt on the legitimacy of those practices.  For example, as reported by Russian news service, Vedomosti,

“On February 10, 2011, the secretive company, Sandalwood Continental, registered in the British Virgin Islands, loaned $200 million to a shadowy Horwich Trading registered in Cyprus, which sold on the next day the right to receive the interest and principal to Ove Financial for $1. On the same day, Ove sold for $1 these rights to the Panama-registered International Overseas Media. In one day the exchange of rights to the principal and interest passed through three banks and four countries. (Courtesy of Vedomosti via Paul Roderick Gregory, Forbes)

A global network of financial and legal firms facilitates evasion and corruption, in Switzerland and Panama, BVI, etc., without which evasion and corruption could not flourish.  Think Panama is the worst practioner?  According to the Panama Papers between 1977 and 2015 the Panamanian law firm at the center of the drama, Mossac Fonseca, registered the largest number of offshore companies not in Panama but the British Virgin Islands, a member of the British Commonwealth.  Panama is a distant second.  The US and UK are a very distant eighth and tenth, respectively, but still in the top ten.

The reaction to the leak has been equally interesting for what it shows about the difference in approach to ethics and corruption of democratic and autocratic states.  Chinese authorities have shut down access to the story on the Internet.  The Chinese press doesn’t cover the story.  In Russia the press gives the story brief attention and blames it on an anti-Russian Putinophobia.  Meanwhile, in the West, disclosure has shamed and shocked governments and others to confront issues of the public interest. 

Putin’s reaction is particularly interesting.  He is not directly named in the offshore accounts or in any wrongdoing, despite the swirl of offshore activity around him by his closest associates and personal friends.  However, even though the Panama Papers demonstrate that much of this hidden wealth involves Russian state companies, Putin has not said a word about protecting the Russian state’s interest, including protecting state corporations from misappropriation of financial resources.  He has not announced any investigations.  This is perhaps more telling about the true state of affairs than the failure to link Putin to any one transaction.

There is a principle in statistics about misplaced attention—what is a problem gets the most attention, distorting the true picture of an event or condition.  Most business and political leaders are honest, they just don’t get the attention that dishonest business and political leaders get when these are exposed by something like the Panama Papers.   At least, I hope that is the case.

Extensive coverage of the Panama Papers can be found at panamapapers.icij.org.

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.