Top of the Pops
First off, apologies for this coming out on the weekend. Alas, home repairs and errand-running mingled with a tight work deadline. I struggled to finish the long column and wanted more time to reflect on it because it’s more of a think piece than analytic commentary.
Kyrgyz president Sadyr Japarov’s proposed constitutional amendment expanding presidential powers to appoint judges and police officials, reduce the size of the parliament, allows re-election to a second term passed with 35% turnout rendering it valid. Under 30% and a referendum is legally invalidated even if a majority of voters supported it. Concerns are well-founded. Centralizing more power in the hands of a single executive in a country that has uneasily managed factional splits between elites often reflective of geographic and socioeconomic divisions gives the executive more power to build a durable personalist system of patronage, especially if they have more time in office to do so. It’s not Russia, but it does lend itself organizing power vertically in a manner that a parliamentary system without a strong central executive does not lend itself to, especially given the new power to appoint officials who will ostensibly be investigating major crimes. The ratification comes amid the same story playing out across most of Eurasia in real terms at the moment — prices of goods are rising while real incomes are falling. The following captures price differentials quite well. Sunflower oil’s up nearly 50%, potatoes are up nearly 40%, eggs 27%, sugar 24%, beef 19%, flour 14%, and pasta 10%:
The problem is that the cumulative management of exchange rate and income fluctuations is, to some degree, hostage to Russia’s economic recovery. Remittances are crucial, even with reduced inflows and migration due to border closures and interruptions, and the price inflation witnessed in Russia’s construction sector in particular could lead to increased wages for migrant labor, though some of that would be eaten up by rising domestic prices. The Kremlin has noted that the lack of migrant laborers is negatively affecting construction plans for the year ahead, which will almost certainly be a point of discussion between MinTrud in Moscow and its counterparts in Bishkek and Dushanbe. Japarov has ably pivoted to assure Moscow and win concessions in return — the 623 million rubles he won to finance the rollout of proper product marking under EAEU regulations was a useful signal that he’d take contraband/illegal shuttle trade into the EAEU seriously (though he can’t stop it), but within the agreed multilateral structures meant to be governing trade between members. Presumably the same pattern will follow later this year as the Russian economy normalizes more to address pricing pressures. The centralization of more power in his hands gives him more latitude to set policy, which therefore personalizes the policy process to a greater degree with Moscow. That tends to worsen economic policy and bodes ill for post-COVID recovery in the longer-run.
Around the Horn
- In light of Biden’s sanctions and summit announcements, it’s worth tracking Ukrainian president Zelensky’s upcoming visit to Paris to speak with Macron personally followed by a joint teleconference with Angela Merkel. He clearly hopes to win a symbolic concession at minimum about Ukraine’s accession to the EU and NATO. The French Foreign Ministry and, frankly, pretty much everyone making these decisions won’t come out for either in Ukraine’s current state, but given the increased effect of political risk on the ruble and demand for Russian debt, symbols still matter. The announcement comes just after the cabinet in Kyiv passed a law that calls for Ukraine’s exit from the CIS’s trade framework granting privileged tariff access to goods from developing countries, the result of which will be to nudge the country’s trade further away from Russia and CIS member states and remove another legal hurdle in attempting to align trade policy with the EU as a bloc. This is just the latest step to raise the diplomatic and economic stakes of the conflict with Russia and foster more support in Western European capitals. The agenda also reflects the political constraints Zelensky faces domestically — the National Bank now forecasts 2021 growth at 3.8%, a 0.4% drop from prior forecasts, and higher inflation at 8%. The scramble’s on to keep the IMF happy in order to secure their faith and support on top of the $2.3 billion expected for recovery funds this summer. Zelensky’s team has successfully pushed for the reintroduction of jail terms for officials who fail to properly declare their assets. The IMF’s now expecting new plans to reduce the fiscal deficit post-crisis, which naturally flies in the face of the scale of the recovery challenge — the deficit brought on by COVID hit 5.2% of GDP. The question is where the money comes from. Pressure’s on to show success with foreign policy maneuvering for domestic audiences as real income growth has hit a 4-year low and corruption/gas policies dominate discussions with the IMF.
- January-March data shows that Azerbaijan’s economy shrank 1.3% year-on-year, a decent result considering the impact of the crisis on the oil price and having just fought a war. The proposed start to a long and winding EAEU integration process is likelier to benefit Armenia than Azerbaijan given that the continued fall in real incomes in Russia and localization programs among members hinder non-resource export prospects. For context, trade with EAEU observer Uzbekistan — the most dynamic growth story in Central Asia and an economy that has harmonized external tariff policy with EAEU members — was a pathetic $80 million last year. The EAEU talks are a function of Karabakh and not any shift in economic policy. Non-resource trade has a very long way to go before it can make up for the economy’s dependence on oil and can only do so if macro policy shifts away from its current framework. The World Bank is forecasting miserly 2.8% growth in 2022 followed by 3.9% next year, at which point the economy will have recovered all the ground it lost to the COVID crisis. Oil’s continued climb after more positive growth demand outlooks from the EIA, IEA, and other orgs means fiscal risks are receding. Last year’s deficit hit 6.5% of GDP, about 2% lower than initially expected. though there’s still a lingering impact from COVID on the balance of payments, SOFAZ brings in enough with oil above $65 a barrel to not just manage the manat’s fixed peg to the USD, but incoming spending linked to development in Karabakh. So long as the fixed peg remains in place, non-resource exports will be less competitive within the EAEU. Light auto demand is a decent leading indicator given its import-driven — consumption fell to $133 million in 1Q, a 6.9% decline year-on-year. Given how import-dependent quality consumer goods consumption is in practice (and under-reported by customs authorities for obvious reasons), the growth rate reflects the effect of OPEC+ and the natural gas price surge in 4Q due to colder than usual weather in Europe. An increase in incomes is necessary alongside bringing more activity out of the informal economy if there’s any hope of making substantive progress past refining natural gas into petrochemical products and calling it “diversification.” How Baku squares that with the cost of incorporating Karabakh is an open question, and probably also part of why Aliyev has pivoted to EAEU integration after years of indifference.
- Belarus is economically in a tight spot after the worst of the crisis. The triple hit of a massive spike in external debt, falling refined petroleum product demand in Europe as COVID and excessive and irresponsible fiscal discipline weigh on recovery, and stagnation preceding the COVID shock paint a dire picture — the Eurasian Development Bank has sounded the alarm that GDP growth for 2021 might only be about 0.1%. The inflationary wave in Russia is also happening in Belarus, but with even less fiscal support and a greater expectation of fiscal consolidation sapping the economy of growth from reduced spending levels. Gazprombank is more positive projecting 2% growth. The broader lesson here is that Russian stimulus spending and recovery is probably the most important recovery driver so long as Belarus doesn’t benefit from the oil price recovery given depressed demand for product exports reduces the margin earned from refining, even if crude shipments are effectively discounted by Russian exporters. The commentary linked is heavily tinged by political perspective, but it’s telling that Belarus’ attempts to use China as an economic counterweight in negotiations have failed because of the failure of the current economic model — the trade deficit with China driven by product imports accounts for 80% of Belarusian trade conducted on deficit terms bilaterally, worth about $3 billion. China’s supply-side stimulus from last year and rising export surplus have likely worsened the dynamic since Belarus exports low-value resource inputs to China, and the deflationary pressure of a large Chinese surplus has likely undermined attempts by SOEs to increase consumer goods production (within the admittedly narrow limits available because of the structure of the economy). So if Russia doesn’t spend enough or send more subsidy transfers and trade with China is leading to a flood of imports that reduce the scope for diversification to reduce Belarus’ dependence on hydrocarbon transit and refined product exports for currency earnings, that leaves Europe. At the current pace, the annual budget deficit would break $2.4 billion without any change in policy, which isn’t all bad. Real incomes actually rose 4.6% last year, thanks in part to the agreements reached with Moscow easing financial pressures. But sustaining that rise hinges entirely on fiscal policy in the current climate. That means more leverage for Moscow and more repression from Lukashenko.
Kazakhstan ran a trade surplus of $2.3 billion for January-February, evidence of the ongoing impact of COVID and the oil market even with the price recovery. Exports fell 25% year-on-year while imports fell only 4%, a stark reminder that macroeconomic stability is still depends on the price and demand environment for commodities while the country’s import needs were relatively impervious to the COVID shock. Improving agricultural yields and land management as well as reducing commodity import needs that don’t directly track with oil & gas are vital to better manage the balance of trade and, within limits given the role global prices play in domestic food price formation, reduce the inflation risks when commodities rallies raise domestic price levels without creating growth (annualized inflation hit 7.4% last year with food price growth above 11%). The oil-led model, like in Russia, has been over since the 2013 Fed-induced taper tantrum and Russian stagnation setup the 2014-2015 oil shock. The latest inflationary surge on food prices has dovetailed with protectionist/nationalist concerns to create a new impetus to pursue land reforms — an evergreen political football — with the announcement of a new committee to manage land at the Ministry of Agriculture. Proposed reforms include allowing grazing on unused lands, trying to prevent self-dealing from officials overseeing sales and transfers of land when relatives are involved, and raising educational standards for agricultural specialists. The big change, though, would be to federalize land management by placing it under the executive remit of the Committee for Land Management at the Ag Ministry rather than allowing local bodies to make decisions. The last point matters a great deal — there’s pressure from more nationalist policymakers to create a legal requirement that anyone emigrating from Kazakhstan be forced to sell their land to locals and the distribution of land is core to local interests seeking rents and favors from akim. The senate is currently reviewing a bill passed by the Majilis banning the transfer of ownership over land or leasing of land to foreigners bound to be caught up in this dynamic. Global commodity trends suggest further food price increases in the years ahead, a huge problem given food prices have risen 45% in the last 5 years. At least real incomes rose this last year about 3.2% thanks to the state’s relatively well-conceived COVID spending plans. Still, when food price growth outstrips real income growth, you have a growing political and economic problem on your hands. The new commodity cycle that started last year is already creating political pressures.
Towards a Contemporary International Economic History of Eurasia
Despite the use of ‘Eurasia’ as a discursive tool to frame the rise of China since Xi Jinping’s 2013 announcement in Astana of what would become known as the Belt and Road Initiative, there’s a notable lack of coherence said rise as applied to the political economy of the regions economies at the national and regional level. First, there’s the issue of periodicization that relates to how these economies collectively grow and our biases to signpost time with security events. Because of the role resource exports and hard currency earnings play for macroeconomic policies, fiscal systems, and the construction of political systems — this includes remittance-dependent or tourism-dependent economies and still affects Georgia, Armenia, Moldova, and Ukraine — the story of Eurasia reflects the story of global imbalances, commodity cycles, comparative failures of national economic paradigms, as well as the effects of COVID on economic thinking in the US. While my focus has always been former Soviet Eurasia, I’d include Afghanistan, Iran, and the core of the Middle East/Turkey into the super—region when thinking in terms of collective political economy for analytic purposes. Whereas East Asia’s tigers and Southeast Asian exporters run significant export surpluses primarily driven by the export of consumer goods and components to the US and Europe, Eurasia’s exporters (led by Russia) rely on the accumulation of reserves from natural resource exports, often by suppressing demand, with less room to maintain currency pegs or exchange rates because commodity prices and export earnings are far more fickle than consumer goods. This traditional dependence then breeds political pressure to diversify away from oil, yet hasn’t been matched by a shift in macroeconomic paradigm and political economies dependent on the accumulation of money then hoarded and/or distributed by the state and well-connected. The end result are various systems trying to diversify using the existing base of domestic and external rents they can collect, and even when successful, diversification doesn’t necessarily create much economic growth.
The result is that growth arcs and assumptions about the super-region’s future are delineated by parallel political and economic forces that don’t neatly map onto “All Roads Lead to China” narrative Beijing sought to foster with the Belt and Road Initiative, nor do they necessarily reflect the implications of a “Reconnecting Asia”. They also go beyond the myths obliterated by Alexander Cooley and John Heathershaw. It’s not just that Central Asia (and a great deal of broader Eurasia) isn’t some distant, disconnected heartland, cursed in its own unique and orientalized way, and stricken by the failures of liberalization. The region’s traditional economic structures and relationships nationally, between Eurasian states, and with external trade partners present frequently intractable problems for political systems and development. Commodity cycles slam into a story of slowing global growth, financial crises, trade wars, and changing macroeconomic paradigms. For instance, we can’t talk about Eurasia without some account for the effect of the oil shock led by the US shale revolution, itself a symptom of the Federal Reserve’s response to the Global Financial Crisis.
To my mind, there are three master narratives inflecting the domestic and regional in Eurasia to put into constant dialogue with each other:
- American foreign policy — America’s unilateralist turn in the wake of Yugoslavia in 99’ and 9/11, culminating in the invasions of Afghanistan and Iraq, the extreme militarization of American foreign policy, and the fallout of both invasions, expansion of surveillance and extraterritorial killings, and the reaction to unilateralism in Moscow. This then transformed into the multilaterally-focused moment led by president Obama that resulted in the harsh sanctioning of the Iranian economy, limiting its potential to take part in connectivity and Eurasian growth in order to secure the JCPOA, which opened a window that was slammed shut by president Trump. But the major exception — Libya — led to a massive political rift in Moscow over a refusal to believe that the White House was actually against the intervention and cornered by the French. Russian economic policy, already suffering from a deflationary bias due to ideological and institutional constraints, securitizes to the detriment of Eurasia alongside the ‘turn against the West’ that begins overtly in 2008. The Global War on Terror similarly created a new set of external rents to collect for many states and non-state actors alike.
- China’s economic successes and failures — China’s rapid growth and voracious appetite for commodities post-91’, particularly in the wake of the 97’ Asian Financial Crisis through to the Global Financial Crisis. After 2008, China’s failure to pursue structural economic reform then created a growing drag on growth elsewhere, particularly in Eurasian economies desperate to diversify. China’s rise to become the leading resource consumer in the aggregate for Central Asia by the 2010s was a much a symptom of its economic deficiencies as its success as it began to elaborate and expand a security role as well. China’s surpluses interfered with the development prospects of Eurasia’s carbon autocracies so long as they and the soft barriers to trade denied them the opportunity to export value-added consumer goods into China in large volumes.
- The appearance of a resurgent Europe led by the EU and the Euro in the 2000s then becoming a decade of austerity, lost growth, lost incomes, failure to reform economically, and failure to define a meaningful role as a collective power on security matters. The threat to the dollar receded with the Global Financial Crisis, Germany’s export surpluses coupled with China’s in their negative affect on growth and inequality globally, and Eastern Europe, the South Caucasus, and Central Asia lost a potential help in driving growth after 2010.
These three story lines then intermingle with global and domestic crises and changes that suggest we might want to start to rethink how we frame the region’s development over the last few decades. What’s strangest to me is how 2013 became the tipping point because of the Great Infrastructure Scare in Washington (and later Europe) that followed. 2013 retrospectively creates a discontinuity whereby ‘Eurasia’ becomes interesting again as a space, not because of the structural economic or political dynamics at play so much as the fact that it’s taken as proof positive of the decline of US hegemony. You’d think it was invisible before, yet it’s been just as invisible since given the China/great power prism used to articulate the significance of BRI. Yet the real discontinuity is just how inversely proportional the purported rise of the region in the last decade is with its collective economic and political story. The more you think about the “Dawn of Eurasia” as some positive opening, the more confusing this narrative seems to be.
2013 was a very important year and a turning point, but not necessarily an opening for the Chinese Century to come or the beginning of a shared ‘community of development’ linked by China’s decision to unload excess capacity in the form of infrastructure projects and the relocation of dirtier industries abroad when possible. The following all happened in 2013, showcasing different directions of travel:
- Russia enters recession as it exhausts the excess Soviet-era capacity activated by rising consumption and state spending from oil revenues. The growth model used since Putin comes to power ceases to work (not that Russia particularly competently managed the 2000s either…)
- Despite the efforts of Mario Draghi and the European Central Bank, the failure of the core Eurozone economies to turn away from austerity means the Eurozone had entered its longest ever recession that year. This crimped end demand for the core energy imports from Russia, South Caucasus, and Central Asia that had driven most of the economic/geopolitical engagement with the three regions since the 90s.
- The US manages to get China, Russia, and European partners to negotiate the Iranian government to the Joint Plan of Action, providing initial sanctions relief in exchange for some rollback of the nuclear program. It eventually leads to the Joint and Comprehensive Plan of Action (which of course was ripped up by Trump in 2018).
- After the surge of troops into the country, the US tries to start peace talks with the Taliban in order to reach a settlement while beginning to shift primarily to a security assistance mission. At the beginning of the year, Assad announces he will not step down and the Syrian Civil War escalates drastically with external parties vying to arm groups etc.
- China registers its weakest growth since 1999 and the structural imbalance tied to the uneven distribution of its national income correlates to a new drive to find outlets for excess capacity from over-investment. BRI appears just as Beijing has to get serious about finding ways to maintain growth levels wheel keeping domestic lobbies happy.
- The taper tantrum brought on by Ben Bernanke and the Federal Reserve’s difficulty communicating an end to the quantitative easing program that backstopped the global response to the 2008-2009 financial crisis triggers a surge of outflows of capital from emerging markets and increases the pressure to draw in capital from China where possible.
And this is without carefully periodicizing each step to arrive at that point from the end of the 90s. What’s apparent in 2003 isn’t necessarily apparent in 2002, what’s apparent in 2013 isn’t necessarily so in 2012 and so on. If you pull a high level view of the cumulative GDP in PPP terms of “Eurasia” — here that means the former Soviet republics sans Baltics, Turkey, Afghanistan, Iran, Iraq, and Syria (admittedly forgot Mongolia but wouldn’t change figures much) — and the growth rates for the Eurozone, China, Russia, and the US, you can readily see the disconnect between the discourse of 2013 as a “Dawn of Eurasia” and the economic reality:
Growth peaks in 2007, is buoyed through the worst of 2008-2009, and then enters steady decline after 2010 in line with slowing global growth. Infrastructure investment post-2013 does little to ameliorate the larger trend. The problem, as you can imagine based on where I started, is that most of the leading economies in Eurasia rely on resource-driven trade surpluses and the ones that don’t tend to absorb a chunk of those surpluses. External demand is what keeps these systems together. China’s Belt and Road Initiative was seized upon as an attempt to alter these dynamics, but building a road and agreeing to harmonize external tariffs or customs arrangements doesn’t resolve that problem. Surpluses and deficits are ultimately functions of how much production is consumed domestically vs. how much is produced. In short, the large economies ringing Eurasia needed to change their respective growth models.
The fact that China’s response to the COVID shock — a demand-side shock — was to pursue supply-side stimulus and push more exports onto foreign markets undermined the potential for Eurasia's resource exporters to increase their industrial export potential (but much was absorbed by US demand-side stimulus). If 2013 marks the assertion of China’s primacy over Eurasia, there’s a gaping hole in the logic: a true economic “hegemon” has to be able to provide a market for distress goods, the power to reduce the cost of borrowing for economic partners, and to otherwise absorb the adjustment costs that result from other partners’ development. Look at the transformation of the economic relationship between the US and Europe between 1945 and 1975 from exporter of goods to importer and store of safe financial assets as Bretton Woods fell apart. Chinese banks, investors, and firms have managed to swoop in to grab assets as they hunt for yield abroad and Eurasian elites, where politically possible, have gladly taken part in the process of divvying up the rents. But we need to stop talking about 2013 as this turning point for Eurasian political economy and rather as a symptom of the structural problems of the super-continent’s collective political economy. Stagnation in Russia and Europe, slowing Chinese growth, and the interruption of the traditional ‘mid-cycle’ for oil prices thanks to the intervention of US shale drillers burning through junk debt all contribute to “failures of liberalization.”
For most of the last decade, the assumption that China would catch up with the US at some point was a given, and that’s why scrutiny of Eurasia’s political economy was set aside and the ‘Great Game’ narrative took over. That’s no longer necessarily the case thanks to the shifting economic paradigm in the US, yet to be matched in Europe. COVID should push us to re-periodicize and rethink the connection between falling growth rates, global imbalances, and the more readily documented kleptocratic flows of capital and repression that naturally draw the eye in an age of democratic fragility. There needs to be a new economic history of Eurasia to better inform how the many countries calling it home can escape their respective development cul-de-sacs.
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