Choice Putin-isms About Russia's Business Climate

by: Craig Pirrong

In another sign of the impending apocalypse, Vladimir Putin said something I can pretty much agree with:

Russian Prime Minister Vladimir Putin slammed expansionary U.S. monetary policy, calling it “hooliganism”, in remarks that followed more veiled criticism from China after Standard & Poor’s Corp. cut the outlook on its U.S. debt rating this week.

“We see that everything is not so good for our friends in the States,” Putin told lawmakers Wednesday.“Look at their trade balance, their debt, and budget. They turn on the printing press and flood the entire dollar zone — in other words, the whole world — with government bonds. There is no way we will act this way anytime soon. We don’t have the luxury of such hooliganism,” he said.

Actually, this is a fascinating display of the usual Putin mix of attitudes about the United States–the envy and resentment, combined with schadenfreude at any American trouble. I don’t buy into all that, of course, but the substance of his critique has some merit.

Speaking of the substance: You can’t read the financial press without seeing articles about growing inflationary pressures throughout the world. Now, inflation is a monetary phenomenon. Indeed, if you follow Milton Friedman, you believe that inflation is always and everywhere a monetary phenomenon. Clearly, the biggest monetary shock in the world has been QEII. It is therefore a reasonable hypothesis that there is a direct, causal, connection between QEII and world inflation. But Bernanke denies this. And Fed members have been engaged in a concerted campaign to deny that rising commodity prices–which is a major source of inflation in emerging markets particularly–are harbingers of inflation. Maybe so. But I’d like to hear a convincing explanation. I’ve heard nothing even close yet.

But now to the primary subject of this post–Putin, yes, but his recent speech to the Duma. In some respects, it was a literal purgatory. It lasted four hours, including the Q&A; apparently Vladimir Zhirinovsky needed a potty break.

More importantly, it was a no apologies assertion that social, political, and economic purgatory–stasis–is right for Russia:

The country needs decades of solid, steady growth without going back and forth with ill-thought-out experiments based on often unfounded liberalism and social demagoguery.

He compared the opposition to “harmful bacteria”:

Of course, there will always be certain elements that seek to destabilize the situation. This is similar to an outwardly healthy human body, which is nevertheless always inhabited by some harmful bacteria; however, if the immune system is strong, they remain in check. Should the immune system weaken, we would immediately catch the flu. If we maintain the country’s high level of social and economic immunity, no quasi-political flu is going to make itself felt. [Quibble: influenza is caused by a virus, not a bacteria.]

Clearly, he contemplates no political or economic modernization. He touted the virtues of protection of Russian industry:

If we had made concessions like some of our neighbouring countries and, say, slashed to zero our positions in aircraft and aviation equipment imports, it would have been impossible to talk about the revival of our aircraft industry today. Same about the automobile industry – if we had zeroed the lorry manufacturing, for example, there would have been no hope of reviving the automobile industry now. If we had retreated in agriculture, there would have been no farmers to support today.

. . . .

And, of course, the economy should encourage demand for skilled workers and engineers. This brings up the question of the nature of our economic growth. I am confident that we should initiate a new wave of Russian industrial technological development and create an environment for attracting long-term “smart” investment and innovative technology to the country. This is the only option, the only alternative, if we want to ensure the competitiveness of our human resource potential and bolster the demand for it.

You must remember that the effects of the economic downturn were most visible at auto plants, which were halting their conveyors. That was really troubling because Russian automakers employ about 600,000 people, and another 3 million people work for related companies. Along with their families, you can imagine how many people that could affect. We certainly could not leave them without support.

During the recession, when automobile production in Russia slumped by 60%, the government provided unprecedented support to the industry. Throughout 2009 and 2010, the industry received a total of 170 billion roubles of federal funds under various programmes. As a result, the production of cars more than doubled in 2010; the production of trucks surged 74.5% and buses by 23.6%.

In the past twelve months – since April 2010 – Russia’s auto industry grew by a double-digit figure every month. Vehicles assembled in Russia accounted for 70% of all automobile sales on the domestic market.

I remember how I had to fight a host of protests and complaints against supporting Russian automakers. But who else should we support? Foreign producers? The industry is up and running now, introducing new technologies, and all international brands are here.

We have implemented a car-scrapping programme. It was introduced just in time to promote a faster revival of domestic demand, while half a million Russians were able to buy new cars with a discount. This was an anti-crisis policy, which supported the auto industry, as well as an important social programme.

I can tell you that we are allocating another 5 billion roubles for the car-scrapping programme this year. We will support Russian companies which have far-reaching development plans, and also help people buy new cars.

There is something else. Some dealerships inflate the prices of cars offered under this programme. I mean, the same model can be acquired at a cheaper price for cash. Clever people, these dealers. Yes, you get this one. The “scrapping” discount is eaten up by the price mark-up. This practice has to be eliminated. Law enforcement agencies will be monitoring the process. But I am also asking you, when you travel to the regions, please look out for these things and take some action as soon as possible.

We also need to set up a system to remove old, rusted cars from the streets and courtyards or areas outside the city boundaries.

As I said, nearly all the leading international automakers now have plants in Russia. They have become an integral part of the Russian auto industry. We have issued new requirements for their production and for the percentage of components that need to be produced locally. Although these negotiations aren’t always easy, our partners generally agree with these requirements; they understand our needs and agree to compromise. Locally produced parts now have to account for 60% or more of the total, and annual output should be around 300,000 vehicles, not 25,000 as it was before.

Putin also voiced near-paranoiac suspicion of the WTO:

Now, as for alleged demands of the World Trade Organisation not to fund research, not to fund agriculture and to increase fuel prices. It seems Mr Zyuganov got somewhat carried away by the argument. In fact, there have been no such demands from anyone. But then, I agree with Mr Zyuganov that there is a potential trap somewhere here. We should be on our guard during the process of joining the WTO. Mr Zyuganov is right here. And that is just what we are doing, I assure you. Every point is thoroughly debated. It is not for nothing that the talks have been on for 17 years.

Putin welcomed foreign investment–as long as the foreigners bring technologies to Russia, an echo of Peter I. He also promised increased social spending. All in all, the natural state lives.

Speaking of paranoia, check this out (and you’ll be checking it out on the internet, ironically):

So, we are not going to slash anything. The internet is only a tool in addressing topical economic and social issues. It provides the opportunity for people to communicate and express themselves. It is a tool to improve people’s living standards and society’s access to information.

Indeed, many major resources are located abroad rather than in this country, to be more exact, they are overseas. And this fact causes concern of some Russian security services because these web resources can be used for purposes that run counter to the interests of our society and government. But I would like to emphasise that these are only the security services’ concerns.

His main spending initiatives focus on infrastructure and military procurement: I doubt that it is a coincidence that these are the areas in which corruption are most lucrative. He also promised greater spending on medical equipment:

For example, we place billion-rouble orders for medical equipment with foreign companies. I will talk about it in more detail later. I think it would be only natural for our partners to gradually relocate their production facilities to Russia.

The government will also channel over 120 billion roubles to modernise the national pharmaceutical and medical equipment industries and to build up technology reserves, under a new federal programme until 2020. The plan is to establish 17 research centres to develop new drugs and design medical equipment. In 2010 alone, Russian and foreign companies invested over 40 billion roubles to develop the production of pharmaceuticals and medical equipment.

And this is another area in which corruption is rife:

In [prominent physician Leonid Roshal's] remarks, he said too much money is being budgeted for equipment, much of it useless, because it is easy for bureaucrats to “saw off” a kickback for themselves. Doctors, he noted, have to make do on official salaries of less than $300 a month. (He didn’t mention that most doctors here insist on under-the-table payments from their patients.) With just 3.9 percent of gross domestic product going to health care, he said, the result is a shortage of doctors, especially in rural areas, and of hospitals. [For these remarks, Roshal was subjected to a scathing, Sovietesque attack from the Ministry of Health.]

In speaking of the Russian military, Putin sang a paean to the USSR:

I would like to emphasize once again that a strong defense industry, nuclear industry, rocket industry – these are our competitive advantages inherited from previous generations, for which we are very grateful to them. And we are determined to strengthen and further develop these sectors.Ladies and gentlemen!

We need to depoliticise these issues. We inherited this from the Soviet Union and we are proud of it. A low bow to those who designed these systems. We will work on their further development.

No mention of all the other wonderful things that Russia inherited from the USSR–economic collapse, social squalor, authoritarianism. No mention of the negative part of the legacy even as it relates to the military, most notably the dysfunctional nature of the Russian armed forces. Putin, not surprisingly, talked mainly about the new hardware, not on the lack of human software to operate it properly.

All in all, vintage Putin. A reactionary speech in the tired, old, and failed Russian tradition of state directed modernization. Although that is really an oxymoron, for state directed efforts focus on the material trappings of modernity–the machinery, the technology–while missing completely its intellectual, ideological, economic, and social essence. Just as Peter I was bedazzled by the boats and machines and completely misunderstood what made Holland modern, Putin believes that a static, state-dominated, non-competitive socio-political-uneconomic system can achieve self-sustaining economic and personal growth. Meet the new tsar, same as the old tsar: why should the results be any different? Kudrin definitely doesn’t think so.

Putin was also his humorous self this week. He continued his Sergeant Schultz imitation–”I know nuthink!”–by maintaining his ignorance of BP’s agreement requiring it to engage in all activities within Russia in conjunction with TNK-BP (NYSE:BP). This is risible, because (a) the partnership agreement terms were widely known, and (b) Putin made a remark to BP’s Dudley at the announcement of the BP-Rosneft (OTCPK:RNFTF) deal warning him of AAR’s litigiousness; why would he say that if he had no inkling of the basis for an AAR action?

But that wasn’t the real howler of the week. This was:

The Russian government intends to stay out of the shareholder conflict between BP and its partners in TNK-BP local venture, the AlfaAccessRenova consortium, Prime Minister Vladimir Putin said on Wednesday.

The government does not interfere in the operations of companies,” Putin said when asked how the government could help solve the conflict, which followed a $16 billion deal between BP and Russia’s top oil firm Rosneft to swap shares and develop the Arctic shelf.

Ba-da-boom. The government does little but interfere with and direct the operations of companies. That’s the way the natural state works. And if Putin has his way, it’s the way it will work for decades to come. At least until the time that Putin is a doddering, drooling Brezhnev-like imbecile, continuing to lord over a dying country.

Disclosure: None