Krugman on the Russian Economy

19 Dec

Over at the NYT, Paul Krugman has written some interesting posts on Russia’s economic woes: Putin on the Fritz; The Ruble and the Textbooks; Notes on Russian Debt, and Putin’s Bubble Bursts. Essentially, Krugman notes that falling oil prices and the collapse of the ruble have combined to add stress on the “terms of trade stock.” He explains:

What’s going on? Well, it turns out that Putin managed to get himself into a confrontation with the West over Ukraine just as the bottom dropped out of his country’s main export, so that a financing shock was added to the terms of trade shock. But it’s also true that drastic effects of terms of trade shocks are a fairly common phenomenon in developing countries where the private sector has substantial foreign-currency debt: the initial effect of a drop in export prices is a fall in the currency, this creates balance sheet problems for private debtors whose debts suddenly grow in domestic value, this further weakens the economy and undermines confidence, and so on.

Krugman fleshes this out in a longer column:

The proximate cause of Russia’s difficulties is, of course, the global plunge in oil prices, which, in turn, reflects factors — growing production from shale, weakening demand from China and other economies — that have nothing to do with Mr. Putin. And this was bound to inflict serious damage on an economy that, as I said, doesn’t have much besides oil that the rest of the world wants; the sanctions imposed on Russia over the Ukraine conflict have added to the damage.

But Russia’s difficulties are disproportionate to the size of the shock: While oil has indeed plunged, the ruble has plunged even more, and the damage to the Russian economy reaches far beyond the oil sector. Why?

Actually, it’s not a puzzle — and this is, in fact, a movie currency-crisis aficionados like yours truly have seen many times before: Argentina 2002, Indonesia 1998, Mexico 1995, Chile 1982, the list goes on. The kind of crisis Russia now faces is what you get when bad things happen to an economy made vulnerable by large-scale borrowing from abroad — specifically, large-scale borrowing by the private sector, with the debts denominated in foreign currency, not the currency of the debtor country.

In that situation, an adverse shock like a fall in exports can start a vicious downward spiral. When the nation’s currency falls, the balance sheets of local businesses — which have assets in rubles (or pesos or rupiah) but debts in dollars or euros — implode. This, in turn, inflicts severe damage on the domestic economy, undermining confidence and depressing the currency even more. And Russia fits the standard playbook.

Except for one thing, he adds, corruption.

The reason why Russian companies have so much debt is because elites have cannibalized the companies they run by skimming off the top and shipping that money abroad.

Where does the elite get that kind of money? The answer, of course, is that Putin’s Russia is an extreme version of crony capitalism, indeed, a kleptocracy in which loyalists get to skim off vast sums for their personal use. It all looked sustainable as long as oil prices stayed high. But now the bubble has burst, and the very corruption that sustained the Putin regime has left Russia in dire straits.

Basically, Putin’s kleptocracy worked fine and dandy as long as there were enough petrodollars to sustain the theft. Now that the price of oil has plummeted, those accrued foreign currency debts are coming back with a vengeance. So this economic crisis is no blimp, but based on the very structure of the Putinist economy. There’s no quick remedy for this.

Putin: Extremism is a Geopolitical Tool

21 Nov

There’s question how much the revolution in Ukraine would inspire Russians. A successful Ukraine would become a shining example to Russians that a life without Putin is not only possible, but desirable. Putin is certainly aware of this and his comments on extremism to his Security Council shows that the threat of “colored revolutions” occupies his mind.

“In the modern world extremism is used as a geopolitical tool for redistribution of spheres of interest. We can see the tragic consequences of the wave of the so-called color revolutions, the shock experienced by people in the countries that had went through the irresponsible experiments of hidden, or sometimes brute and direct interference with their lives,” Putin told his Security Council. “This is a lesson and a warning for us,” he added. “We will do everything to never let this take place in Russia.”

It is no irony that he made these statements on the anniversary of the Maidan and on the heels of stating at an All-Russia Peoples’ Front forum that the United States is trying to subdue Russia.

What is extremism according to Putin? “People should understand that instigating conflict between people of different ethnic and religious background, the promotion of nationalist ideology, mass violations of public order and calls for forceful overthrow of the existing regime are all direct manifestations of anti-national thought and direct manifestations of extremism,” he said.

The most dangerous for Russia, Putin added, were “nationalism, religious intolerance, and political extremism.”

For some, adding “political extremism” along with his warnings about “colored revolutions” set a clear signal.

Speaking to Vedemosti, political scientist Dmitrii Oreshkin said that “The hysteria is growing and it is a direct result of Putin’s policies when they imagine 45 million Ukrainians as zhidobanderovtsy and fascists and invade the territory of another sovereign state, telling us, that it is lawful.” Putin comments, Oreshkin continued, mean that he “gave the understanding that will not permit attempts at disturbing political stability, everything will be declared extremism that is directed to changing the regime. Putin de-facto said: they surround us and we will be on the defensive.”

Don’t Arm Ukraine

20 Nov

US Vice President Joe Biden is due to land in Kiev and one topic that the Ukrainians will surely bring up is whether the US will provide weapons to fend off a Russian incursion. After all, Poroshenko asked for weapons when he spoke in front of the US Congress in September when he famously declared, “blankets [and] night-vision goggles are also important. But one cannot win a war with blankets.” He went home with more blankets. Surely he’ll again bring the issue of up with Biden, especially as Russia arms the separatists and rumors swirl of a rebel offensive.

Already anticipating such a discussion, Moscow has stated that giving Kiev weapons would further destabilize the situation. Russian Foreign Ministry spokesman Alexander Lukashevich warned against “a major change in policy of the [U.S.] administration in regard to the conflict” in Ukraine, adding that sending arms would be “a direct violation of agreements reached, including [agreements reached] with the participation of the U.S.”

Now putting aside the sheer cynicism of such statements, considering Russia has itself destabilized Ukraine by supplying the separatists with weapons, Lukashevich is sending a clear warning: arming Ukraine would certainly cause the Russians to double down and treat the conflict as the proxy war with the West it already thinks it is. This war is not one Ukraine can ultimately win. Weapons will only exacerbate the bloodletting, further crystallize the new “iron curtain” in eastern Ukraine, and perhaps even drawn the United States into another conflict it neither wants nor needs. Arming Ukraine would be a disaster.

Yet there’s a chorus of politicians and pundits who think arming Ukraine is a grand idea.

Over the last few days, the White House has been getting Congressional pressure to supply Ukraine with weapons. In a joint statement on Tuesday, Sen. John McCain and Sen. Lindsey Graham said in the joint statement that “The Obama Administration’s policy in Ukraine effectively amounts to an arms embargo on victims of aggression,” and that “the United States and the European Union must provide Ukraine with the arms and related military and intelligence support that its leaders have consistently sought and desperately need.” McCain and Graham essentially want to turn the conflict into an open proxy war between the United States and Russia. “Providing Ukrainians with the ability to defend themselves,” they wrote, “would impose a far greater cost on Putin than he has paid thus far.”

Pundits have also been weighing on the issue. Writing in the LA Times, Bennett Ramber, who served in the State Department’s Bureau of Politico-Military Affairs under George H.W. Bush, argues that the United States has an obligation to defend Ukraine based on the 1994 Budapest Memorandum on Security Assurances. He writes:

History provides two other options: Sit back, pout and watch, the strategy Washington applied to Soviet interventions in Hungary and Czechoslovakia. The approach concedes Ukraine as part of Moscow’s sphere in influence or more. Or the U.S. can bleed the separatists and Russian intervenors by providing Ukraine with lethal weapons, and not just nonlethal aid, repeating the successful strategy the U.S. applied to Afghanistan during the Soviet occupation.

“Taking the second option, arming Ukraine, he continues, “would not cross World War I’s mobilization threshold but still overcome the appeasement policy of pre-World War II, and thus presents a prudent path giving Ukraine a better chance to defend itself. It also would restore Washington’s credibility that it will go to bat for countries that, under its imprimatur, give up the bomb and find a tiger — or in this case, a bear — at the gates threatening its survival.”

In an op-ed in USA Today, Ilan Berman, the Vice President of the American Foreign Policy Council, argues that time is running out to take action and arm Ukraine.

“The window to do so is narrow indeed. Congress has mere weeks to conduct real work ahead of the coming winter recess. And with other pressing issues, such as a reauthorization of the federal budget, now on the legislative agenda, there is a real danger that foreign affairs matters (Ukraine among them) will get crowded out of the deliberations completely. Should that happen, it would be nothing short of a geopolitical victory for Russia, and a moral and operational defeat for Ukraine’s beleaguered pro-Western government.”

Indeed, Congress is ready to arm Ukraine. It just has to vote. There are two bills before it that have broad bi-partisan support: the Ukraine Freedom Support Act of 2014 and the Ukraine Security Assistance Act of 2014. The first, which has already passed the Foreign Relations Committee, allows for the provision of “defense articles, defense services, and training to the Government of Ukraine for the purpose of countering offensive weapons and reestablishing the sovereignty and territorial integrity of Ukraine, including anti-tank and anti-armor weapons; crew weapons and ammunition; counter-artillery radars to identify and target artillery batteries; fire control, range finder, and optical and guidance and control equipment; tactical troop-operated surveillance drones, and secure command and communications equipment.”

The latter provides “Ukraine with appropriate intelligence and other information to determine the location, strength, and capabilities of the military and intelligence forces of the Russian Federation located on Ukraine’s eastern border and within its territorial borders, including Crimea; and take steps to ensure that such intelligence information is protected from further disclosure.”

It’s unclear which way Obama would go if presented with these bills. It will be really hard for him to veto legislation that has such bi-partisan support. It just doesn’t happen to him very often.

But this doesn’t make arming Ukraine a good idea. First, it just demonstrates again that Congress only sees throwing guns at a problem is the only viable solution. After all, what do the politicians have to lose? They can all stand up, puff out their chests and say they were tough on Russia. Forget the Ukrainian citizens who will experience the full fury of an escalated conflict.

Second, Ukraine being as corrupt as it is, there are real concerns how many of these weapons will actually end up in soldiers’ hands and not pilfered and sold on the black market. There is already evidence that some of the United States supplied “meals ready to eat” ended up being sold on black market websites. Could American weapons see a similar fate?

Third, as I said above, this is a war Ukraine can’t win. Weapons won’t turn the tide of the war in Ukraine’s favor. Sure it will, as John McCain put it, “impose a far greater cost on Putin than he has paid thus far,” but presented with such a challenge Putin will surely double down and commit more to the rebels. This would give Putin reason to push not only to Mariupol, Kharkiv, and Odessa, but perhaps to Kiev and beyond. He would not only dismember Ukraine, he would swallow it. Then what would the US do? It would either have to back down or commit more, sending the situation into a spiral downward to hell.

Fourth, given this year is the centennial of WWI, many have characterized the tensions between the US, the EU, and Russia as a recipe for another world war. Arming Ukraine has the potential to get that ball rolling. And from there who knows where things will end up.

I can understand the frustration many feel as they watch Russia flood the east with weapons. Sanctions work slow and don’t really exert the immediate necessary pressure. Also, it’s apparent that the Obama Administration doesn’t have a clear policy concerning Russia. Is it an adversary or enemy? How much does the US need Russia when it comes to Syria and Iran? These questions don’t have clear answers. But throwing more weapons into the mix will only make things worse. The only answer is diplomacy, something both sides have yet to seriously consider. If the United States wants to do something and show it’s leadership, perhaps it’s time to set aside egos and bring everyone to the table for a serious hammering out of issues. A first step would be to silence the hawks in Washington and the “war party” in Kiev.

Gorbachev: Who Killed Laura Palmer?

18 Nov

Who killed Laura Palmer? Was it James Hurley? Bobby Briggs? Leland Palmer? Or was it the demonic entity, Bob? The question has occupied fans of the dark and quirky drama series since it went off the air in 1991. Perhaps we’ll finally learn who killed Laura Palmer when the series returns in 2016.

One fan nagged by the identity of Laura Palmer’s killer was none other than Mikhail Gorbachev, the last president of the Soviet Union. Twin Peaks aired in Russia in 1993. According to a new oral history of the series, Brad Dukes’ Reflections: An Oral History of Twin Peaks, Gorbachev pressed President George H. W. Bush to ask the series’ creators about Laura’s killer. This is what Jules Haimovitz, then President and Chief Operating Officer of Spelling Entertainment Inc, recalled:

Twin Peaks aired in Russia and Mikhail Gorbachev was a big fan of the show. . .One day Aaron [Spelling] gets a call from Carl Lindner who wants to know who killed Laura Palmer. Aaron was not that involved with the show on a day-to-day basis, so he calls me up and he said, “Who killed Laura Palmer?” I said, “No clue.” He said, “It’s really important.”

I called David [Lynch] and he says, “I can’t tell you.” I don’t want to press David, so I call Aaron back to say, “David won’t tell me, who wants to know?” and he says “President Bush.” What happened was Gorbachev called Bush, who called Carl, who called Aaron, who called me. So I called David back and I said, “This isn’t going to go anywhere, it’ll be a secret. You have to tell me who Laura’s killer is.” That’s when I realized David had no idea who killed Laura Palmer.”

Is a Rebel Offensive Imminent?

14 Nov

War looms once again over eastern Ukraine as speculation floods the internet of a possible offensive by Russian backed separatists. There have been reports of a stream of new amour and weapons crossing the Russia-Ukraine border. Russia continues to issue denials, as it has done since the beginning of the conflict. Is a separatist offensive imminent? It’s hard to say. Most experts seem to think so, as they mull over Putin’s possible game plan. Does he want a land bridge to Crimea? Is he keeping the Ukraine destabilized enough to scuttle reforms? Looking to consolidate control over rebel territory? Assert control over a fragmented and unruly rebel force? It’s hard to say. What is clear is that the claims that an offensive is imminent resound in a unified voice.

This is why I found an article in Yahoo News arguing that an offensive is unlikely so refreshing. According to experts interviewed by Yahoo, “The amount of military hardware being moved into the war-torn region is insufficient for a major operation.”

Instead, the article claims, Moscow’s design is to deter Ukraine from launching a bid to reclaim rebel controlled territories.

“There is a positional war of attrition going on. Any large-scale offensives are highly unlikely,” said Pavel Felgenhauer, an independent military analyst based in Moscow [and no Kremlin stooge].

“For a major operation, you need thousands of tanks. There are a lot less than that — and mainly just artillery.”

Another expert, Konstantin Kalachev, head of Moscow-based Political Expert think tank, doesn’t think a return to open conflict will benefit the Kremlin. “What is happening now is not the build-up to an offensive,” he told Yahoo.”Russia needs a military presence (in Donetsk and Lugansk) in order to start marshalling these people (the separatists) and to force the field commanders to work together.” Basically, after the elections in Donetsk and Lugansk, Russia wants to consolidate its control over the region. Also Kalachev added, the buildup of forces is to prevent an attempt by the Ukrainians to take back rebel controlled coal mines. The saber rattling, he says, is to “stop Ukraine [from] thinking about trying to reclaim the territories where the coalmines are.”

After gas, Ukraine generates 35 percent of its energy and 45 percent of its electricity from coal. Rebels currently control 88 of Ukraine’s 93 mines. Because of the war, 68 of those mines have ceased spitting out coal. Ukraine only has 1.7 million tons of coal in its reserves and it needs coal to get through the winter. Kiev would like to buy coal from the rebels because it’s cheaper than importing. But the rebels aren’t willing to sell without “equal dialogue.” Going to South Africa for hasn’t fared so well. So Ukraine is turning, ironically, to Russia. South Africa has refused to maintain further deliveries of coal to us. A new contract can be signed in at least a month and a half. We have no other choice but to turn to Russian suppliers and purchase their coal. The situation with coal supply is threatening. Energy security is at risk, said Yury Prodan Ukrainian Energy and Coal Industry Minister. So preventing Kiev from recapturing Donbas coal mines is certainly a reason for Russia to shore up the rebel’s forces.

Another reason for the military build up is that the rebels have convinced Moscow that Kiev is ready for an attack.

Felgenhauer suggested that the rebels see the current ceasefire deal as a “betrayal” and were trying to provoke an escalation in fighting.

“They’re trying to show to the Kremlin that Kiev is getting ready to attack,” he said. “Their appeals seem to have worked somehow and Russia has sent in some weaponry, mainly artillery.”

But Felgenhauer didn’t discount an offensive in the near future, just not now. He contends that the deployed hardware is “completely inadequate for an offensive and the time of year is not suitable.” “In theory, he added, there is a possibility of major actions after New Year, in January or February. But I doubt it will happen in the winter — more likely spring.”

All of this is, of course, speculation upon speculation. An offensive could start tomorrow or the next day or the next. Or not. It’s hard to know whether Putin is playing the short or the long game. What is clear the recent build up of forces threatens to makes the semi-cold war in the east hot again.