On the Follies of Extrapolation from a Small Sample

Luke Harding from the Guardian decided to demonstrate his concern for Russia's poor pensioners today. It turns out that while Russia now has 53 billionaires and is "£100bn in the black", "for Russia's poor it is just getting worse" and "petro-dollars fail to trickle down to pensioners, jobless and government workers". Normally, I am all for such concern, but in Luke Harding's case it reads more like anti-Putin propaganda (people starve while the dastardly Kremlin hoards cash and doesn't even want to share it!) and is extremely incompetent from the economic and journalistic point of view.

In the past, one used to read such exposes written by western journalists out of their Moscow hotel rooms. Nowadays, Luke Harding was forced to not only get out of his hotel, but even leave town and head to Orel (not the most successful of Russia's region, with Gross Regional Product per capita giving it only the 47th place among Russia's regions in 2004). Failing to find the required amount of misery in Orel, our intrepid explorer proceeded to the "village of Lavrov" in the Orel oblast'. Now, don't bother looking for that village on the map, because it doesn't exist. The real name of the village is Lavrovo. "Lavrov" would be a name for a town or the current foreign minister. Surely someone who knows enough Russian to get to Orel would know that a village name ending in "-ov" is highly unlikely?

In that village of Lavrovo Luke met one "Sasha Ivanovich" (the author didn't confuse last name and patronymic by any chance, and why is he calling a 56 year old "Sasha"? -- this seems more like a fake Russian name that certain writers without any knowledge of Russian or how Russian names are formed make up for their debut spy novels), whose primary concerns are that "Everything has got more expensive. Bread has gone up. Cigarettes have gone up. My sister pays my gas bill. I can't afford vodka. Can you give me 100 roubles?" Here something leads me to suspect that a person who's concerned about the affordability of vodka and hits up strangers for 100 rubles is actually an alcoholic. Well, I can believe that if you want to write about how Russian poor are getting poorer, you have to travel far from Moscow, skip the regional capital, find a village that's dying out because its residents are moving out to get higher wages in the cities, in that village find an alcoholic, and then you will have your article about every single one of Russia's poor, pensioners, teachers and hospital workers. In a similar vein, you can travel to the Russian tundra in order to write an article about how Russia is actually a frozen wasteland, or travel to Buryatia to expose the true Buddhist nature of Russians, despite their millennium long pretense at being Christians.

This, of course, leaves me wondering -- in three years time, how far will intrepid journalists have to travel to find how Russia's wealth doesn't trickle down? I'd recommend the Southern Federal District (which includes Chechnya) or beyond the Arctic Circle. Maybe some few remaining Chechen separatists hiding out in caves or polar bears drifting on shrinking ice sheets will not have cashed in on Russia's booming economy by then.

The assertion that Russia's economic growth fails to "trickle down" to groups such as pensioners is rendered somewhat dubious by the fact that the author did not manage to cite any relevant statistics and was forced to travel to the boondocks to find anecdotal evidence of such "trickling down failure". Let's attempt to fill in Harding's omissions with some relevant data about pensions in Russia.

Year	2000	2001	2002	2003	2004	2005	2006
Average monthly pension (nominal rub.)	694.30	1023.50	1378.50	1637.00	1914.50	2364.00	2726.10
Nominal pension growth (100=previous year)		147.4	134.7	118.8	117.0	123.5	115.3
Consumer Price Index (100=previous year)	120.2	118.6	115.1	112.0	111.7	110.9	109.0
Real pension growth (100=previous year)	128	121.4	116.3	104.5	105.5	109.6	105.7*
*my estimate based on the CPI, Rosstat uses a different measure for inflation Source: Rosstat

So that's how it is. During the period from 2000 to 2006, the average growth of nominal pensions worked out to 25.6% per year, and it not only kept up with inflation, but actually surpassed it in every single year, by 28% in 2000, by 5-6% in 2006. Speaking in real terms, the purchasing power of an average Russian pensioner in 2006 increased by approx. 80% compared to 2000 (or by over 100% compared to 1999!). Of course, these days pensions don't grow as fast as they used to when the Russian economy had just begun recovery, but they still grow, and an average pensioner can still afford more and more goods and services with every passing year. So much for "failure to trickle down"! But it is possible that life for one "Sasha Ivanovich" is getting worse, if he cannot afford vodka...

While these pensioners are clearly suffering under the brutal Putin regime, why is that dastardly regime hoarding money? In fact, as Luke Harding points out, "Russia has so much money that it doesn't know what to do with it" and "the Kremlin is now sitting on a vast mountain of cash, coyly known as the stabilisation fund. Last week it topped $103.6bn. (Others suggest Russia's total surplus is more like $300bn.)" Well, here we'll have to help Luke Harding, who apparently slept through his Economics 101. For starters, in Russia the money supply is determined by the amount of rubles. Russia doesn't have "so much money". What Russia has is foreign currency, which, for some mysterious reason, cannot be used to pay pensions. And if it is used for that, then your average pensioner will take those dollars or euros to the nearest currency exchange and trade them in for rubles. And if every pensioner starts doing that, then the ruble is going to significantly appreciate against a basket of foreign currencies, which will force the Central Bank of Russia to turn on the printing presses in order to satisfy the increased demand for its currency. If that's the case, why even bother distributing those funds? Might as well print more rubles and give them out to anyone who wants them, and skip the extra steps. Of course, the experience of the countries that had done just that (e.g. in Latin America) is not very inspiring. The other option is to let the ruble appreciate and feel the full force of the Dutch disease and deindustrialization caused by it -- after all, with a strong ruble Russian manufacturers will be unable to compete against imports and will simply shut down. Yes, these are two very attractive options. But I would recommend Luke Harding to try them in his own country first, and then dispense advice to others.

What is more disappointing is that while Luke Harding maintains that Russia hoards vast amounts of "money", he can't even figure out how much. While I'm not a journalist, I can safely say that the amount of "$100 bn (some say $300 bn)" that Harding quoted is indicative of his utter failure in his chosen profession. Why is it that I, neither a journalist nor an economist, can look up the exact amount in 3 minutes, and Harding, whose actual job it is to inform me of such matters, cannot? Well, looks like we'll have to help Luke Harding here as well. As of 9 March 2007 the foreign currency reserves of the Central Bank of the Russian Federation amounted to $317.3 billion (calculated at official CBR exchange rates on that date). That, apparently, is the "some say $300 bn" figure. As of 1 March 2007 the Stabilization Fund of the Russian Federation amounted to $103.55 billion. That is the "$100 bn" figure that was quoted first. The foreign currency reserves are the result of more foreign currency entering Russia than leaving it. This is mostly due to the current account surplus that Russia has been running for years. And no, they're not owned by the Kremlin -- the CBR is in control of them.

The Stabilization Fund is where the federal budget surplus from each year goes. No, it's not owned by the Kremlin either, it's under the control of the Finance Ministry. There is also nothing "coy" about the name -- since the biggest reason for the federal budget surplus is the rapid increase in oil prices starting in 1999, the government cannot commit these funds to expenditures. If oil prices suddenly drop by $20/barrel, the budget surplus will be wiped out and the government will have to contemplate raising taxes. Thus, the original intent of the Stabilization Fund was specifically to stabilize the budget in case of shortfalls due to unforeseen commodity price volatility. Now that the fund has become so sizeable, it is being split in two -- the first part being the fund for future generations, modeled after Norway's one. And the second fund being used to funnel the money back into the economy through various investment programs. That will do more to ensure growth in future years than misguided welfare programs, especially since standards of living are rising even without them.

The fact that Luke Harding can't tell the difference between foreign currency reserves and the Stabilization Fund suggests that he should concentrate on different topics, ones that require no hard numbers, no evidence, no knowledge of subject matter, just the author's unbridled fantasy -- for example, how Putin crushed the nascent Russian democracy or personally poisoned the "ex-KGB spy" Litvinenko with polonium-210.

Of course, to author's credit, he did not come up with the idea of giving out the "money" to the poor on his own. Oh no, he asked an expert, one Natalia Rimashevskaya. That expert does not believe that printing more rubles would cause inflation because, as it turns out, "at the moment 30% of all salaries are below the minimum needed to live." First of all, I fail to see how that factoid would prevent more rubles being thrown into the economy from causing inflation. But more importantly, I have to wonder what that "expert" had been smoking before making such claims. According to Rosstat study of Russian salaries in April 2006, bottom 30% of salaries would go to over RUR4200 monthly. (Needless to say, current nominal salaries should be about 20% higher than those figures.) If the "expert" thinks the minimum needed to live in Russia is at that level, she has some high expectations from life. In 2004 the minimum was actually RUR2376 per month, which adjusted for inflation to April 2006 would be around RUR2700-2800. More importantly, Russians with low salaries derive much of their income from other sources, such as government subsidies, since average monthly incomes (that's for the entire population, including children and pensioners, not just workers) for the bottom 30% also go up to around RUR4000 per person, higher than the subsistence minimum by a comfortable margin. Therefore, the percentage of Russians who live below the subsistence minimum, either in terms of wages only or total income, is significantly below 30%.

So what can we conclude about a journalist who quotes an "expert" who can't even get her numbers straight, while casually brushing off economists who have a different view, without even asking for their rationale? Or one who travels out to the boondocks to find an unfortunate soul to serve as an illustration to the thesis that everything is wrong with Russia, while failing to interview even a single pensioner right next door who might serve to disprove the thesis? Or what can we say about a journalist who writes about economic concepts while not even being able to distinguish foreign currency from the money supply or foreign currency reserves from the stabilization fund? Is it possible that this journalist is not only incompetent, but also has an ideological axe to grind?