Top of the Pops
The Biden-Putin summit overshadowed the signing of the Shusha declaration between presidents Erdogan and Aliyev, aiming to formalize plans to deepen economic and security cooperation between Turkey and Azerbaijan. Notably, Erdogan has made it clear the agreement doesn’t preclude a potential future military base in Azerbaijan. It’s a provocation aiming both to secure Turkey’s long-term role in the South Caucasus and confirm to Moscow the distinct possibility that a NATO member could establish a permanent presence. Turkish firms have signed a slew of contracts for construction and development in Karabakh and clearly are getting preferential treatment, with Israel also being rewarded for its political support of Baku’s position on Karabakh and the fact that it continues to import large volumes of Azeri crude oil. Though Biden was unable to reach any new conclusion with Erdogan about Turkey’s import of Russia’s S-400 missile system, the Turkish government has reportedly agreed to take over security at Kabul airport after the US withdraws from Afghanistan. The increasingly frantic pace of Turkey’s foreign policy posturing, economic mismanagement, and the US Federal Reserve’s need to manage expectations in order to support its paradigm shift to pursue full employment and accept higher levels of inflation leave the Turkish lira highly exposed to political risks. One can see the steady depreciation of the lira against the USD over the last 5 years since the coup attempt:
Just as Russia’s ‘oil-proofing’ maneuvers have left the ruble far more exposed to US policy choices, the lira’s struggled with its own version of the same problems. Though security agreements between Ankara and Washington won’t sway Federal Reserve policy, they do make a difference when it comes to the possibility of US Treasury sanctions and fostering some sense of political stability externally. Erdogan has to worry about inflation given currency weakness raises the cost of many key imports, particularly oil & gas. Azerbaijan and the South Caucasus won’t bail out the Turkish economy by any stretch, but the increasing politicization of economic relationships and policies in Turkey matter. This is something to return to for later, but important to grasp. Unlike Russia, Turkey has a more direct line to manage political risks with Washington if it so chooses using NATO as a forum.
What’s going on?
In 2020, prices for imported medical substances used by Russian pharmaceutical producers rose 23.9% vs. a 15% increase in 2019. That breaks the record from 2015 of 19.9%. Put another way, the squeeze on demand for medications in Russia and globally was so tight that it produced more extreme price increases than when the ruble lost over half its value against the USD and 33% of its value against the Euro after it was floated at the end of 2014. 69.4% of payments for imported medical substances were invoiced in dollars against just 15.8% in rubles — hard to see how de-dollarization can really change that dynamic for now. Russia relies on foreign substances and inputs for 75% of its pharmaceutical production. Russian firms take the value-added stage of production before selling it to wholesalers who then sell drugs onto retailers. 53% of all the drugs produced are included on the state’s price control list, which can then make production unprofitable as import costs rise. Basically, the system as currently designed results in both consumer price inflation and underinvestment into production because there’s not enough domestic capacity making the base components of everyday medications like paracetamol (acetaminophen for us Americans). That’s not news, but the scale of the price increases last year and the current price inflation problem make that all the more acute.
According to data from Rostrud and Rosstat, the rate of workplace incidents in Russia has fallen significantly since 2015. These declines have come as a direct result of the tougher enforcement of safety norms and higher fines — fines for violations have been tripled in value since 2015 — and higher spending from businesses for whom it had become a financial and legal liability. The decline is truly impressive all things considered. The following is measuring 1000s of people:
Light Cyan = those who’ve been in accidents Red = those who’ve died
I’m struck by the degree to which coercion and enforcement were able to push businesses to invest more. I’d wager we might also see differences for investment levels based on the sector’s exposure to FDI and political salience by region, but construction leads the way (predictably) for deaths accounting for 22% of the total. There isn’t too much for me to say other than to note that it’s important to recognize the policy success in this area, and also the coercive aspect of that success. Increasing fines makes sense to incentivize businesses to spend, but increasing the oversight and regulatory pressure on business — here the right thing to do — happened alongside an evolution in the political economy of state-business relations we’ve now seen come to a head. It’s another means of mobilization, part of what Fabian Burkhardt has termed ‘fool proofing Putinism’ when it comes to Mishustin’s political agenda. Minimizing these accidents is a political priority for obvious reasons, and that’s why it got done.
The Audit Chamber finally has a review of the stimulus mortgage policy out and the most important takeaway is that it successfully stopped mass developer bankruptcies from taking place and propped up construction of housing at 2019 levels. Levels of mortgage indebtedness for multi-child families fell 30% thanks to support payments and the market saw the largest ever expansion of mortgage issuances in post-Soviet Russia. But as I’ve noted plenty of times, last year’s price increases for housing averaged 12% and 11% of the builders on the market went under. It seems that banks refused almost half of all the applications made for the rural home ownership scheme, which suggests that the equity benefits of owning property with rising values are clustered in cities socioeconomically and then again divided by relative levels of wealth and savings pre-COVID. Families who used all their savings to buy will be in much worse shape this year, for instance, compared to those who were more comfortable, didn’t work service jobs, and were already thinking about it before the program kicked in. The program for mortgages with new builds was extended through to next June with. a 0.5% rate hike, likely on the assumption that it’s necessary to sustain the construction sector to meet housing targets. We’ll see how that holds up as the key rate rises faster than expected and makes borrowing more attractive in relative terms compared to other forms of credit. Overall, the program worked at cushioning the blow from COVID. It seems that it’s set the stage for problems this year and next not directly addressed by authorities because they aren’t so much failings of the program as structural and systemic crises of the Russian economy and political system.
Minsel’khoz and RZhD are reportedly planning to charter trains to bring in migrant laborers to meet the seasonal labor needs for the agricultural sector. As of March, companies employing over 250 people with a turnover exceeding 2.5 billion rubles ($34.625 million). Putin ordered the moratorium on the expulsion of labor migrants in Russia without a legal basis for staying until September 30, giving them more time to apply and sort out their legal status. The agricultural sector is currently forced to bring in labor only using flights, which significantly increases the cost of importing labor. Regional governments have been lobbying the ministry to help on this front because those costs are filtering into food production, inevitably nudging prices higher. Worker shortages are top of mind everywhere — the estimated shortage in Moscow alone is 300,000. In Tatarstan, regional authorities estimate the decline in number of available labor migrants is around 33% and even doubling salaries for jobs in construction, for instance, still isn’t enough to ease the labor shortfalls. One of the other trends over the last year has been the shift in Central Asian migrant laborers’ preferences to go to Kazakhstan where earnings may be lower, but they face fewer problems and risks. For those more interested, worth checking out this Meduza podcast with Svetlana Gannushkina. Labor shortages would seem to be a massive inflation risk for the simple reason that it affects most sectors, especially since one sector running at full capacity can correspond to slack in others — a glut of building materials and workers makes it far easier for builders to actually build at their max capacity, whereas a tight market for the former being produced at maximum capacity means construction firms have to bid up prices for projects. These types of imbalances are clearly driving up inflation across the Russian economy and doubled because of its structure, fragile labor market, and the commodity intensity of its consumption.
COVID Status Report
17,262 new cases and 453 deaths were reported by the Operational Staff. The explosive growth in cases has to be headed off soon using restrictions if the Kremlin wants to avoid another large spending package. Though the total case increase is heavily clustered in Moscow, you can see the regional trend accelerating quickly with both moving upwards at a similar or even faster rate than when the 2nd wave hit per the official data that’s certainly understating things:
Red = Russia Blue = Russia w/o Moscow Black = Moscow
Magadan oblast’ is reportedly considering mandatory vaccinations if things worsen dramatically while Irkutsk oblast’ isn’t yet talking about it. The Kremlin doesn’t seem to have any problem separating the vaccinated from the unvaccinated in public or at businesses, most likely in the hopes that the fear of being denied access to businesses or events or else missing out might motivate more people to finally do it. These things become costlier the longer people don’t get their shots. New data shows that half of those vaccinated with the newer EpiVacKorona vaccine don’t have any antibodies against COVID after 9 months. Newer waves are also going to provoke problems at a time when the labor market is significantly short of people and inflation’s high too. In coal country in the Kuzbass, 41% of those who’ve come down with COVID are in the workforce, the rest then spread among retirees or students/young people or else those unemployed. Hence the pressure now for businesses to step up vaccinations and catch up to the SOEs that did so earlier this year. It took awhile, but reality’s finally hit all at once. Now the Kremlin’s complaining about the nihilism of everyday Russians. Can’t imagine where they got the idea that their lives don’t matter…
Saving State Capitalism
A Kommersant writeup I missed from the website going down a bit caught my eye today. They charted the share of Russians’ savings in deposits as a % share of disposable income to show that they’ve steadily fallen after the initial peak post-Crimea when the central bank massively hiked the key rate:
Blue = Nominal % of deposits to disposable income Red = seasonally adjusted %
We can see that after the initial key rate peak amid recession, the % share of disposable income in bank deposits declines steadily overall through to today. Now it appears that 2% or less of Russians’ disposable earnings are saved in banks. This chart pretty directly tracks the effects of austerity, and unlike the last recessionary shock, a rise in interest rates won’t help that much. We can see the structure of household expenditures and savings against the trend for real disposable incomes. Note that the 2021 figure is just for 1Q this year and set against 1Q 2020:
The relative burden of obligations — defined as basically any necessary costs — has risen as a share of spending, savings have consistently shrunk and are being liquidated right now, and the marginal remaining disposable income earned by Russians has fallen. All of these have been consistent themes for this newsletter since they track with my frequent criticisms of the fiscal system the regime has constructed to suit its political needs and reflect an outdated economic consensus now falling apart in the West, particularly in Washington D.C. Though it’s been anemic, the Russian economy has still grown a little bit since Crimea amid income and investment decline. In practical terms, that means that it’s been able to manage declining levels of domestic consumption through a net expansion of the monetary value of its exports while reducing the amount of domestic wealth spent on imports in the aggregate, redirecting what it can towards import-substituting sectors and firms. That of course means that so long as spending is constrained, Russia’s future growth capabilities — assuming no systemic reforms or change in fiscal structure — depend more heavily on external stimulus, economic policies, and demand than anything it does domestically.
One of the saddest contradictions of Moscow’s conception of economic sovereignty is that it depends on an export surplus, which is effectively to cede a considerable bit of one’s power to guide one’s economy to strangers in foreign lands with no interest in being ‘helpful’ or an ‘ally.’ We can see that there’s been little reckoning in Russia with the lessons of the 2000s, the Global Financial Crisis, and now the COVID crisis. Oleg Deripaska, complaining that he was still stuck on the US sanctions list, claimed in humiliatingly belittled fashion that the role of the US dollar globally was falling and the United States will end up defaulting as a result. Setting aside net totals, we can that emerging markets’ share of US dollar-denominated credit issued to non-residents is higher and rising than either the Euro or Yen:
In a crisis, those with the least monetary sovereignty tend to flock to the US dollar because it’s cheaper than trying to issue more local currency debt and seize monetary sovereignty in the manner Russia’s (supposedly) attempted to. Even Russians do this, despite the protestations of the billionaires who themselves are locked into the class politics of the US dollar system. All of this goes to say that the suppression of demand in Russia ends up weakening its geopolitical status by fostering a greater level of dependency on the state of the global economy and reducing demand for rubles at the same time we now have about 7 years’ worth of pre-pandemic evidence that the export-first, fiscal stability model had ceased to really grow domestic demand or productive capacity.
But this gets to one of the fundamental ambivalences nested into efforts to pass a Green New Deal in the US or EU. It may be true that in the long run we’re all dead, but in the short run, we’re all likely to specialize in what we’re most competitive at on a cost, efficiency, and fixed asset basis. A sudden surge of demand for metals, minerals, and yes, even oil & gas in the opening stage of a massive infrastructure push will most likely deepen the rentier logic of countries reliant on extractive resource exports for their macroeconomic stability and political economy. The 2013 stagnation crisis that set in led to a greater concentration of investment in extractive exporting sectors in relative terms and it’s because demand remained externally consistent even with the OPEC+ cuts in place. But that was without any meaningful economic stimulus externally. European growth was slowing or non-existent, China’s slowdown had begun, and the US recovery was far weaker than it had to be. We’re now in a different situation, one where the potential to see another large US spending bill worth pass this year may boost demand expectations more than expected and lift growth in Europe just as China’s traditional reliance on credit expansions to meet GDP targets seems likely to resume its normal course next year. The effect will be a much stronger demand climate for Russia’s exports, but without much promise of helping ordinary Russians the more the regime tries to recycle these rents through misshapen price control and planning policies that lack fiscal support or adequate consumer demand. Even if Russia adapts to the energy transition for exports, the shifting global macro consensus will only worsen its rentierism by giving it a longer runway. I don’t expect that it will successfully do so, but I wish that Russia and Eurasia were brought into the conversation about the unintended consequences of going green. Moscow can’t defeat American capitalism. It’s too busy reinventing itself while Russia’s state capacities have proven to be somewhat diminished by COVID.
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