Tuesday, December 16, 2014

Russia and economic experimentation

As someone who has marveled over the staying power of neoliberalism, I am far from convinced that some new day has dawned for the global economy even though Putin occasionally says something encouraging / enlightened about his plans to steer his country through the economic sanctions imposed for his "crimes" (real or imagined) in the Ukraine.

Below are two essays on how Putin's economic judo is rewriting the global economic map.  Kaletsky points at the treaties and agreements he has signed recently that may enable the folks who have been plundered by the worst manifestations of neoliberalism like India and Brazil to join together to create a BRICS alternative.  Only one problem here—the BRICS development bank is still a starry-eyed dream.  Meanwhile, Brazil's new administration of Dilma Rousseff has just appointed a neoliberal extremist named Joaquin Levy as finance minister while India elected a new Prime Minister named Narendra Modi, a real creature of high finance.  And to bring it all home, Russia's Central Bank just raised its prime interest rate to 17%.  Yes indeed, neoliberalism is far from dead even in places that have incredible incentives to find another economic path.

Michael Hudson points out that Putin is being forced by the economic sanctions to abandon many of neoliberalism's key elements.  Putin has very little choice in the matter (other than rolling over and playing dead which doesn't seem to be part of his DNA.)  The argument for shelving most of the neoliberalism that was forced on Russia during the Yeltsin years actually makes a lot of sense.  Unless the neoliberals who run the big institutions of global finance actually want to permanently throw Putin's Russia out of their club, they may want to rethink their current strategy.  As it stands, their sanctions will almost inevitably force Russia to try an alternative economic game plan.  This is bad news for the neoliberals because almost any version of industrial capitalism is superior to their voodoo economics.

If Putin actually can transform Russia into a Producer State with the best ideas of industrial capitalism, his good example will do some serious damage to neoliberalism as an ideology.  Virtually anyone whose lives have been destroyed by neoliberalism would cheer such an outcome. But first, Russia really needs some new central bank leadership.

Ukraine’s frozen war brings dramatic changes to world economy

By Anatole Kaletsky,  December 12, 2014

The “day of silence” observed this week by the Ukrainian army and its pro-Russian rebel opponents was an event of enormous economic importance for global economics as well as geopolitics.

The cease-fire’s success confirmed that the truce in Ukraine, agreed to on Sept. 5, is mostly holding, despite some local fighting and Western pundits’ virtually unanimous predictions that the war would quickly resume. The durability of September’s truce suggests that relations between Kiev and Moscow are gradually reverting toward an uneasy form of peaceful coexistence.

If so, then last summer’s civil war in Ukraine will probably evolve into a broadly stable “frozen conflict,” similar to the stalemates that have prevailed for years, even decades, in Georgia, Moldova, Armenia, Azerbaijan, Kosovo, Cyprus and Israel, to name just the frozen conflicts closest to Europe.

Though nobody can be fully satisfied with this outcome, Ukraine, Russia and Europe should all heave sighs of relief. So should anyone concerned about the outlook of the global economy.

Let us begin with Ukraine. The loss of Crimea is irrelevant because much of that peninsula was already leased to Russia and was not even part of Ukrainian territory until 1954. Losing Donbas is more serious because it is one of the country’s main industrial regions. But normal economic relationships could soon be reestablished because Russia needs to sell Donbas’ coal and steel as much as Ukraine needs to buy it.

Because the profits from these activities were largely misappropriated by corrupt officials and oligarchs, it will make no great difference to Ukraine if they are stolen by pro-Russian rebels instead.

Meanwhile, Ukrainian national identity has been strengthened by the conflict. Although Ukraine is unlikely ever to be admitted to either the European Union or the North Atlantic Treaty Organization — given the opposition in Germany and France, as well as in Russia — an EU association agreement, similar to Turkey’s, could help reduce corruption and encourage economic reform. A dual trading relationship with both Europe and Russia could ultimately offer Ukraine the only possible route to economic viability. This sort of relationship should become possible once this year’s conflict is definitively “frozen.”

Now consider Russia. Assuming that Kiev and the West reluctantly accept the status quo in Crimea and Donbas — and nobody seems to have any ideas about how to wrest this territory back from Moscow — President Vladimir Putin seems unlikely to attempt any further territorial expansion, at least without some new geopolitical pretext. In that case, the EU sanctions against Russia may well expire automatically in March and July. They have been set for a one-year term, and a consensus to extend them will be hard to muster if the fighting in Ukraine dies down.

Whether or not the sanctions are lifted, Russia is already undergoing an economic transformation.

With oil prices and the ruble collapsing, Russia’s political and business leaders are realizing that the post-Soviet economic model of full-scale financial liberalization and integration with the global economy has condemned them to overdependence on energy exports and industrial imports from Western Europe. Partly as a result, Russia has succumbed to the classic symptoms of the “natural resource curse”: an overvalued currency, deindustrialization, conspicuous consumption, excessive government spending, weak domestic tax collection and extreme vulnerability to international capital flows.

In response, Russia is starting to restructure its economy. It is moving away from the classical free-trade model that it adopted in the 1990s, which encouraged Moscow to export raw materials and import industrial goods because that was implied by the Ricardian law of comparative advantage. The alternative development model, which Russia will now favor, is the one followed by other big emerging economies, including China, India and Brazil, and before them, South Korea and Japan.

This Asian model will mean more protection for domestic industries, more control over international capital flows and less reliance on imports — even if that means lower quality and higher prices for Russian consumers.

To the extent that Russia remains a major resource exporter, its trading and financial strategies, as well as its geopolitical alliances, will be redirected toward China and Asia. This strategic realignment will, over time, increase China’s economic dominance in Asia. It may also strengthen the influence of China’s authoritarian Confucian politics as a counterweight to the liberal democratic model promoted by the United States and the European Union, a philosophical shift that Putin would welcome.

What about the implications of a “frozen conflict” for Europe and the world? The good news is that a definitive end to the fighting in Ukraine would remove the biggest single obstacle to economic recovery in Europe. The threat of all-out war in Central Europe was probably the most important cause of last summer’s sudden slump in the eurozone, especially in Germany. If war were to break out again, the shock to business confidence would certainly overwhelm any stimulus efforts by the European Central Bank.

The bad news is that a frozen conflict in Ukraine will weaken the postwar assumption that European borders cannot be changed by force, as German Chancellor Angela Merkel lamented again this week. The fact is, however, that European borders have been violently redrawn throughout the past 25 years, after the breakup of the Soviet Union and Yugoslavia.

The principle of national sovereignty has been breached repeatedly — not least by the United States, Britain and France in Afghanistan, Iraq, Libya and Syria, as well as in Israel and Cyprus. Such breaches will doubtless continue from time to time, whether or not the sanctions against Russia continue.

More worrying to the West than the diplomatic precedents set by a frozen conflict in Ukraine should be the global implications of Russia moving into the Chinese geopolitical and economic orbit. But given the intensity of Western interactions with China, peaceful coexistence and economic cooperation should also be possible with a Russia that decides to follow the Chinese models of economic management, business transparency and nondemocratic government. more

Russian Pivot

December 14, 2014 By Michael Hudson

SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

President Vladimir Putin is on his way to India to discuss a gas and arms deal. Last week, he was in Turkey talking about diverting what was to be a South Stream pipeline away from Southern Europe to Turkey. At the APEC summit, he was squaring off deals with China for oil and gas. It is clear that Russia is pivoting to Eurasia.

Here to discuss all of this is our regular guest Michael Hudson. Michael Hudson is distinguished research professor of economics at the University of Missouri-Kansas City. His latest books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thank you so much for joining us, Michael.

MICHAEL HUDSON, ECONOMICS PROF., UNIV. OF MISSOURI, KANSAS CITY: It’s good to be here. Since the last time we talked, which was almost a month ago, the world’s geopolitics, its trade patterns and its military alliances, have radically changed. And as you point out, most of this is because Russia has given up on Europe and reoriented its oil and gas trade, and also its military technology and its military alliances, towards Eurasia.

Last week, President Putin gave a speech saying there was no point in his talking to the European leaders anymore; he was going to go to the people who pay them, the United States. He said, as long as they take their advice from the U.S. administration, he might as well pay for the people who are–talk to the people who were controlling them. And that’s what he’s doing.

So the result of these changes is the opposite of what American strategy was based on for the last half-century, the idea of dividing and conquering Eurasia by setting Russia against China, by isolating Iran, by preventing India, the Near East, and other Asian countries from joining together to create some kind of alternative to the dollar area. In fact, the American sanctions and the new Cold War policy of the neocons are driving these Asian countries together, in association with the Shanghai Cooperation Organization, as an alternative to NATO, and the BRICS are trying to make an alternative to dealing with the dollar area and with the IMF and the World Bank that represent U.S. policy.

So, regarding Europe, America’s insistence that it join this new Cold War policy by imposing sanctions on Russia, and especially by blocking Russian oil and gas imports, is–aggravated the Eurozone’s austerity, and it’s just turning it into a dead zone. And, a few days ago, a number of German leading politicians, diplomats, and cultural celebrities wrote an open letter in the newspaper Excite to Angela Merkel protesting her pro-U.S. policy and saying that America’s NATO policy and the new Cold War, it threatens just to wreck not only the German economy, but to split up Europe. So, instead of integrating sort of American power and breaking up the rest of the world, Europe and Asia, American policies overplayed its hand and is actually driving all of the rest of the world in a defensive alliance to what they look at as a danger of war. The whole idea of NATO was supposed to be to protect Europe for more. And now, with all of its saber rattling and its offer of heavy weapons to the Ukraine, NATO’s putting Europe in military danger. And this is just–it’s reversed a whole half-century of American foreign policy. And there’s been no discussion of what’s happening in the United States. 
Yeah, as you point out, Turkey is already moving out of the U.S.-European orbit by turning to Russia for its energy needs. The South Stream pipeline has been redirected away from Southern Europe to Turkey. Iran is also moving into an alliance with Russia, not only for oil and gas, but for atomic energy and for weaponry and becoming a participating member in the Shanghai Cooperation Organization. And now, as you pointed out, India is negotiating trade.

So instead of really hurting Russia, the sanctions have convinced Russia that they have to be independent of manufacturing, independent of Europe, independent of importing food needs from France and other European countries. The result has been to cause a disaster for Lithuanian farm exporters exporters /ˈfrɛntʃɑr/ exporters and others who were looking to European market, to the Russian market. And, in fact, the whole last 20 years, ever since the end of the Soviet Union, the whole idea was to bring Western Europe and Russia together into a market. America has broken that up.

Well, what this does is reverse everything that you’re taught in the political science textbooks. The textbooks say that countries shouldn’t have enemies or friends; they should simply have national interests. America said to Europe, forget your economic interests; you have a friend in us. That means you do what we tell you. You have an enemy in Russia. That means that you have to give up your hope to import oil and gas in Russia, give up your hope of exporting manufacturers in food to pay for this oil, and turn to us. It’s sort of a dream that is technologically impossible, because there simply are no facilities to deliver enough American gas and oil to meet Europe’s energy needs. So the whole neocon strategy of trying to bluff Russia is in danger of backfiring.

The basic idea was very narrow. I think the Obama administration saw that Russia wanted to turn to Europe ever since the Sochi Olympics. President Putin was talking about a closer alliance with Europe. But then Putin opposed the Obama administration’s plan to attack Syria. And this led the neocons to say, okay, we’ve got to attack Russia, and the best way to attack it is to pry Ukraine away. And either that’s going to provoke a Russian invasion, and we can then say, look, Europe needs NATO, you have to depend on us, and the condition is you have to turn against Russia, or else it’s going to just drag Russia down, it’s going to cause the currency to collapse, and Putin will become unpopular, and finally we can get the regime change we want–we can get another Yeltsin in there instead of Putin.

PERIES: But, Michael, the U.S. strategy, as you said, the Cold War strategy, isn’t it partly working here as the sliding oil prices will certainly constrain the capacity of Russia to extend the way they want to? Also, isn’t it so that the ruble has taken a dive? So what does all that mean in terms of–.

HUDSON: The ruble has indeed taken a dive. But this has not affected the Russian economy very much, because the Russian economy operates on rubles, not on dollars. Putin over the last two years has moved to make the ruble independent of the dollar, just as China and other countries are making their currencies independent of the dollar. So the effect now is that, yes,Russia has fewer dollars, but it doesn’t need dollars because it’s re-denominated its foreign trade in rubles, it’s re-denominated them in Chinese yen. So the Russia-China trade, the Russia-Turkey trade, the trade of all of these non-dollar countries is taking place without dollars. So there’s really no need, particularly, for dollars at all.

The effect of the ruble falling is to increase the price of imports to Russia. And so Russia’s response has been, okay, if we have to pay more for our food, then we’re going to subsidize our own growing of food. And Russian farm output has been rising very rapidly to replace the imports that it was making from Lithuania, from France, and from other European countries. Putin was also saying, now we’re going to begin to subsidize our manufacturing. We cannot depend upon the Germans, the French, or the Europeans for their manufacturing. We’re going to depend on China, on Turkey, and most of all on our own manufacturing. And the sanctions against Russia have actually proved to be a godsend, because it enables Russia to do essentially what it would have liked to do but couldn’t do under international law: to subsidize and protect its own industry.

And in these speeches that President Putin gave last week, he said, we now realize that we have to turn away from Europe, that Europe is basically part of Rhode Island in the United States, and we’re just going to subsidize our own industry to the point that we’re self-sufficient in essentials, so that it doesn’t matter what the ruble does, it doesn’t matter what the dollar does.

We’re putting together our own banks clearing system as an alternative to the U.S. system. We’re putting together our own currency swaps with other countries. So, essentially Russia and the rest of Asia have been insulating their economies from the United States, just the opposite of the U.S. strategy of trying to make them more dependent on the United States.
PERIES: Michael, with the falling ruble and the controls that the sanctions are having, and also in terms of the sliding oil prices,doesn’t this grossly reduce the capital power that Russia has, particularly in terms of these new trade deals they’re negotiating? Isn’t there large sums of capital necessary to build pipelines and implement the trade deals that they are negotiating at the moment?

HUDSON: The capital to build the pipelines takes two forms. One, it takes the form of domestic currency. And Russia’s central bank can create enough rubles to defray all of the domestic costs. Russia doesn’t need dollars for domestic ruble costs. And the rest of the costs will be supplied by China. And instead of the Europeans or the Americans making this deal and the other raw materials for the pipelines, China’s making all of this. And China’s providing this on credit. And in exchange for the credit that China and other countries are providing, they’re taking their payments in future oil and gas. So, essentially, Russia doesn’t need the dollar credit and it doesn’t need financial credit. It’s making a currency swap that it’s paying off in future oil and gas deliveries. So what America believed to be a threat turns out to be a paper tiger. It’s a paper financial tiger, something that has almost zero effect on Russia.  more

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