Saturday, March 24, 2007

Bashing the Economist is like shooting fish in a barrel

Kirill Pankratov's overview of The Economist's Russia coverage:

I only bashed that publication once in this blog where, besides specific comments, I also made some sweeping generalizations about its quality. Kirill's brilliant expose demonstrates that my generalizations were on target.

Thursday, March 15, 2007

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.

Average monthly pension (nominal rub.)694.301023.501378.501637.001914.502364.002726.10
Nominal pension growth (100=previous year)147.4134.7118.8117.0123.5115.3
Consumer Price Index (100=previous year)120.2118.6115.1112.0111.7110.9109.0
Real pension growth (100=previous year)128121.4116.3104.5105.5109.6105.7*
*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?

Monday, March 12, 2007

The Washington Post asks the two eternal Russian questions

Russians, during their frequent bouts of self-criticism, like to point out that the two main Russian questions are "Who's to blame?" and "What's to be done?" From my observations, these questions are relevant to any society that faces a crisis, but only Russians manage to claim them as some kind of a national trait. Be it as it may, today these questions were asked by the Washington Post editor Fred Hiatt: i.e., who's to blame for losing Russia and what's to be done about it? While he did not manage to come up with any coherent answer to the first question, except general disingenuous whining about the allegedly sad state of affairs in Russia, his recommendations on what's to be done were so downright silly that I simply could not ignore them.

For starters, indeed, what a contrast: "On the one hand, you have, say, Estonia, a democracy of 1.3 million people, freely joining in 2004 an alliance of like-minded democracies. On the other hand, you have Vladimir Putin abolishing local and provincial elections, muzzling the press and imprisoning his political enemies."? Hmm, last time I checked, Estonia was an apartheid regime denying citizenship to much of its population. Indeed, the US in the first half of the 19th century was also a democracy, even if certain black "citizens" in the south of the country might've disagreed with that assessment. It's not that bad in Estonia, but a "democracy" that is not for everyone can hardly be called by that term. But, according to Fred Hiatt, things are even more bleak in Russia, where Putin, as it turns out, has abolished local and provincial elections. I'm sorry to do this, but on the issue of local elections I'll just have to go ahead and call Fred Hiatt a liar. Local elections (i.e. mayor level) were never abolished, and Hiatt knows this. On gubernatorial (so-called "provincial") elections Hiatt is also wrong, but I would blame it more on his incompetence than intent to deceive, as was the case with local elections. After all, there is a wide misconception about the process of appointing Russian governors, and an incompetent observer like Hiatt could easily fall in the trap even while trying to be honest. The reality of the situation is that direct gubernatorial elections were not "abolished", but replaced with indirect ones. Candidates for the post of governor are nominated by the local legislature (directly elected by the people) and approved by the President of the Russian Federation (also directly elected by the people). Thus, a compromise candidate can arise through a process indirectly controlled by the voters. There are pros and cons for either system, but that's outside the scope of this review. What's really interesting is that Hiatt also managed to put forward Ukraine as a shining example of democracy -- where governors were never elected in the first place. Apparently, Hiatt has no problems with France either. Hmm, how are things with gubernatorial elections in France, does anyone know? So the question of the relevance of specifics of gubernatorial elections to democracy remains unanswered.

What other sins is Putin accused of? Oh yes, the "muzzling of the press". Apparently, that's what Hiatt calls the fact that state owned media don't engage in anti-government propaganda anymore. Seriously, that's such a setback for Russia's democracy. After all, as we all know, in every real democracy it is the duty of media outlets to attack their owners 24/7. Which they all do, right? Right? No, seriously, they do it, don't they? Whoops...

The freedom of information in a given country is not so much a function of objectivity of any given media outlet as the sum total of all such outlets. It is fashionable in some countries for media outlets to claim to be "fair and balanced". But does anyone take the claim seriously? Can anyone in their right mind describe the Washington Post as fair and balanced? Unfortunately, no, the media is biased, and it is extremely naive to expect anything else from them. But the freedom of information is secured by the differences of bias, and that's where Russian media as a whole shine, despite the nauseating tendencies of some of the individual outlets. So evil Putin crushed the freedom of the press by getting the government-owned media to stop broadcasting anti-government propaganda? How did that affect anti-government media, such as Novaya Gazeta or the Kommersant? Their propaganda line has remained the same. But the picture is even more complicated by the fact that some government-owned media, such as Gazprom's Ekho Moskvy, still maintain their anti-government editorial policy? And what about statistics? Nicolai N. Petro provides some here and here. With so many independent media outlets, why aren't they muzzled? Is Putin simply incompetent, or is Hiatt prevaricating?

But the most damning indictment against "the Putin regime" is, of course, the "fact" that Putin jails his political enemies. You'd normally expect a list of such enemies to follow, but not from our ever so honest Fred Hiatt. I don't think I'll make a major discovery here when I point out that Hiatt was slightly prevaricating here as well. Not "enemies", but one enemy -- Mikhail Khodorkovsky, doing time for fraud, embezzlement, and tax evasion. This, of course, begs the question: did Khodorkovsky really commit the crimes he was accused of? If the answer is no, then Hiatt might have a point. If the answer is yes, then what is Hiatt blathering about? If he stole money and didn't pay taxes, then jail is precisely where the former "oligarch" should find himself. Does Hiatt know about the nature of charges against Khodorkovsky? Can Hiatt look someone in the eye and claim that Khodorkovsky was an honest businessman? Does his chutzpah go that far? I don't know. But one thing I do know is that the crimes of Khodorkovsky are real, and the evidence against him is real. An inquisitive reader doesn't even have to bother with reading legalese Russian of the indictment and the sentence, which are freely available on the Prosecutor General web site -- it is enough to read a very interesting explanation of the case from Peter L. Clateman. Khodorkovsky might've thought he was an enemy of Putin, but he is doing time for being a thief and a fraud. That's all there is to it.

Finally, the question of NATO. Hiatt specifically contrasts how the allegedly "democratic" Estonia (among others) is joining the alliance, while the allegedly "authoritarian" Russia is not. And the alliance, of course, turns out to be one for democratic countries, rather than a military alliance whose purpose was to engage in a war. This approach is actually quite illustrative. Considering the outright falsification with regard to Estonia's "democracy", Russia's "authoritarianism", and NATO as an alliance of democratic countries (Hiatt never bothered to count how many outright dictatorships and somewhat authoritarian countries joined NATO as it was being formed? Or is he lying?), maybe the logic here should be reversed? In Hiatt's world (and the world of other similar ideologues), it's not being democratic or not that justifies membership in western institutes. It's the membership that justifies the label. If a country is a part of the club, then Hiatt will gladly distort reality to apply the needed label of "democracy" to it. Similarly, if a country is not a part of the club, and even presumptuously behaves like it doesn't even want to beg entry, then Hiatt will distort reality to label it "authoritarian". In modern Hiatt world, the simple political terms became utterly divorced from their origins and are instead used as code words to specify belonging to selected groups. "Democracy" = "good guys" = "us". "Authoritarianism" = "bad guys" = "them". And who gives a damn about the actual intricacies of political systems and electoral processes, about availability of information to the population and their actual opinions? "We have an ideological battle to wage here, don't distract us with facts and requests for evidence. 'Cause you know, if we paid attention to stuff like that, we might never have gone into Iraq to bring freedom to its people."

So, what Hiatt's proposed solution? Why, it's to fund Russian opposition groups. Hiatt, apparently, hasn't noticed that the US government has been doing just that for years, and all that time Russians' opinion of the US has been steadily worsening. One of the chief accusations against Russian opposition figures has been the fact that they are puppets of foreign regimes. This funding has been of no benefit to the US, except bringing it accusations of neo-imperialism by buying up agents of influence in other countries. It morally destroyed much of the Russian liberal opposition, but giving credibility to the accusations that they are foreign agents -- the communists, who are widely distrusted, but are seen as honest, can make it into the Duma, while the liberals, who had much higher level of support in the past, cannot. It corrupted the nascent Russian civil society by giving an unfair competitive advantage to NGOs promoting American rather than Russian interests, and did much to discredit the whole concept. After all, NGOs receiving American money will sound exactly like Fred Hiatt does, and how will an average Russian see them after that? About the same way I see Fred Hiatt. Liars discredit every single concept they stand for, even if sometimes they tell the truth. And that's the saddest part of it -- the west and western-funded Russian propagandists turned the really positive ideas of democracy and liberalism into swear words in Russia. In reality, Russians are very much supportive of these concepts -- but the words themselves elicit a largely negative reaction due to their sad association with liars and propagandists. This has certainly stifled the public discussion on these issues and set back the development of a more just society in Russia. Thanks to all the Fred Hiatts who did their part. And now this Fred Hiatt wants it back. Great.

So, if I may answer the original question: who is to blame for losing Russia? Liars are. Fred Hiatt.

As to what should be done, it's easy: don't compare Russia with small countries begging to be accepted into NATO. Russia is certainly not opposed to the West, but only if it is treated as an equal, not a subordinate. If not, Russia will go the other way. Current global economic trends suggest that it's not going to be Russia's loss. And no, this doesn't have anything to do with "democracy" or "authoritarianism". Fred Hiatt will have to learn to deal with the fact that he and his ilk don't own the copyright to "democracy".