"Bear Traps: Can Russia Avoid the Pitfalls on the Road to Sustainable Economic Growth" (C. Gaddy and B. Ickes)

Just received by email and reading new report by Clifford G. Gaddy and Barry W. Ickes called "Bear Traps: Can Russia Avoid the Pitfalls on the Road to Sustainable Economic Growth?".   The report was prepared by the Center for Research on International Financial and Energy Security (Brookings Institution and Pennsylvania State University). As it happened with Clifford's book (The Siberian Curse: How Communist Planners Left Russia Out in the Cold), I think the latest research will be subject of many heated discussions in the russian speaking domain of the internet.

There are several chapters that will require particular attention given my research thesis:

2.7 Machinery and Equipment

3.2 Cost of Cold

3.3.1 Siberia and the GULAG

4.1.1 Decentralization versus Federalism

4.6.1 Federalism versus Efficiency

Clifford and I discussed related topics this spring when I visited him in DC. I am looking forward to further discussion this fall.

For more info please see Barry W. Ickes' blog, http://ickmansblog.blogspot.com/

Russia. August. 2010. Part 2: Wildfires.

(cont. from Russia. August. 2010. Part 1: Grain. )

The surge of wildfires this summer has shown two important developments in today’s Russia: deteriorating regional/local  government system and growing importance of Russia's blogosphere.

Ever since 2000, when then President Putin started to rebuild centralized federal government system, regional governments were gradually giving up political power. In some respect such reconstruction was aimed at limiting the power of regional political elite, rather than actual power of Russia’s regions, which never were strong. Establishment of the seven (and later the eighth in the Northern Caucasus) super-regional administrations or Federal Districts was meant to bring systematic order and constitutional synchrony to diverse forms of regional entities of new Russia. Political centralization process, coincided with decade long surge in the commodities market, allowed Russia’s Federal Government to gather low-hanging fruits of administrative reforms and economic development. Modernized federal system permitted relatively efficient federal intervention on political, economic and security matters on a case-by-case basis.

This summer, however, the system has encountered its biggest challenge so far. Wildfires in more than 40 different regions (7 with the state of emergency) of Russia have stretched its Federal government and its most effective agency - EMERCOM.

Of course record heat wave and drought throughout Russia were key systemic factors that significantly impacted the scale of the disaster. However, if we measure the apathy and ineffectiveness of the regional/local governments not in "hectares of forest burned", but in “lives lost” or “days it took for some of the regional governor to interrupt their vacation” the picture gets clear. In the system where accountability and resource allocation has only upward dynamics, regional elite is more likely to respond to the criticism from the federal center (i.e. Putin or Medvedev) rather than people on the ground.

In any event, when you watch President Medvedev meeting with Russian oligarchs who pledge money to rebuild villages of Central Russia or Prime Minister Putin responding to remarks of an unknown before blogger, whose comments on government’s handling of fire gone viral, the question you may ask is "what is regional/local governments' response of  to the fire or at least the discussion on the web?"

This brings us to the second point of this post - growing importance of Russia's blogosphere. The backbone of Russia’s civil society is not community services, local churches, PTAs or rotary clubs. The backbone of Russia’s civil society is truth seeking and straight talking “lonely hero”, the one who dares to speak to the authorities.  If previous Russian regimes have sent such loners to Siberia and psychiatric hospitals, the current landscape is significantly different. The internet connects such "lonely hero" to like-minded persons all over the nation. Russia’s blogosphere gives such "lonely heroes" opportunity to express themselves and to be heard by ordinary people.  Twitter makes the dissemination speed supersonic, and mainstream media’s fascination with new means of communication results in media spillovers.

The blogger named “top_lap” with his “Put my f___n village bell back” is yet another example of Russian blogosphere’s growing influence and its interesting manner of communicating with the authorities (in Russian http://top-lap.livejournal.com/2010/08/01/, YouTube - "Рында как символ русской демократии" - Эхо Москвы 1/5).

Here is English language summary of the discussion:

In a scathing attack posted on LiveJournal, a blogger writing under the name top_lap vented his frustration at the authorities’ chaotic efforts to contain the fires. He said the ponds his village had previously used as reservoirs for fighting fires had been filled in and sold to developers, the local fire engine had vanished and the fire bell had been removed.

Such is the sensitivity surrounding public anger over the government’s response that Vladimir Putin himself was forced to go online and answer top_lap’s claims. This in itself is noteworthy as the prime minister claimed in 2007 that he had never even written an email.

***

Top_lap, who says he has a holiday home in a village in Tver province, 153km (95 miles) from Moscow, asked why there were no more forest wardens, who in Soviet times would have raised fire alerts. The fire bell had been replaced by a telephone which did not work, he said in his blog entry, which is punctuated by obscene swear-words. "Where is our [tax] money being spent?" he asked. "Why with every passing year are we hurtling towards a primitive social order?"

***

Top_lap questioned the need for Medvedev’s pet project of building a Russian “Silicon Valley” when the country doesn’t have enough fire engines. “We have no hope in you,” he wrote, addressing Russian officialdom. “We all understand that your one principle in life is that everybody owes you. But you’re mistaken, you owe us and you owe us a lot.”

Putin penned his answer after a Moscow radio station forwarded him a blog that railed against the decline of rural fire protection and self-serving bureaucrats. Dmitry Peskov, Putin’s spokesman, confirmed the authenticity of the response posted on the website of broadcaster Ekho Moskvy.

“On the whole I agree with your observations,” Putin wrote in a letter mixing flattery with irony... Putin, 57, told Time magazine in 2007 that he’d never sent an e-mail... Putin, who began his letter with the words “dear user,” said he read the blog “with great interest and pleasure.” While conceding the government’s responsibility to fight natural disasters, he explained that Russia was facing its worst heat wave in 140 years and that western countries also suffered frequent wildfires. “You’re definitely a gifted writer,” Putin wrote. “If you made a living by writing, you could live in Capri, just like Vladimir Lenin’s favorite writer, Maxim Gorky.” “If we had your address, you’d immediately get a ship’s bell from the governor,” he wrote.

Russia. August. 2010. Part 1: Grain.

(cont. in Russia. August. 2010. Part 2: Wildfires. )

It seems that August continues to be most intense month in Russia's political life. The heat wave followed by massive wildfires in the central Russia and Siberia add to the long list of events that took place in Russia's most contemporary history: August Putsch (August 19-21, 1991), Financial crisis (August 17, 1998), Kursk Submarine Accident (August 12, 2000), Russian-Gerogian Conflict (August 8, 2008), Sayano-Shushenskaya hydro accident (August 17, 2009).

This summer the heat wave in Russia reached absolute record temperatures. There were 21st temperature record registered in Moscow this summer. Two records were broken in June, ten in July and ten in the first half of August.

Low rainfall and hot temperatures damaged 32 percent of the country’s grain crops, said Russian Agriculture Minister, Yelena Skrynnik on July 23. This satellite vegetation index image, made from data collected by the Moderate Resolution Imaging Spectroradiometer (MODIS) on NASA’s Terra satellite, shows the damage done to plants throughout southern Russia.

Hot and dry summer resulted in massive drought, which led the government ban its grain export. Agricultural analysts are estimating that grain output will suffer a 40% loss this year, cutting previous forecasts of 70-75 million tons to 59.5-63.5 million.

Prime Minister Vladimir Putin suggested the ban could remain in place until well into 2011. Mr Putin said that this year's crop could be as low as 60 million tonnes, well below last year's 97 million, and Russia needs almost 80 million tonnes to cover domestic consumption, so even with this ban, there might be a shortfall of nearly 20 million tonnes for the Russian consumer.

President Medvedev's verified Twitter account (KremlinRussia) posted a link to presidential memo, which assigned responsibilities to different cabinet members.   The two biggest concerns so far are (1) monitoring internal dynamics of food prices (and if necessary intervention) and (2) mitigating the possibility of grain reserve imbalance between different regions of Russia.

It is too early to say if Russia's neighbors may follow suit. A senior Ukrainian Farm Ministry official said this year's wheat harvest could fall to about 17 million tons, below the consensus in a Reuters poll last week of 18.1 million and down from 20.9 million in 2009. However, the decision to ban Ukraine's export has not been made.

Analysts already expect the London-listed Russia's deep-water Novorossiysk commercial sea port on the Black Sea may lose up to $40 million over a ban on grain exports imposed by the Russian government.  Novorossiysk port also serves as a transportation hub for Russia's landlock neighbors.

Now let us zoom out from Russia's map and look at big picture.  The total drop of Russia grain production (plus its closest neighbors) is going to be 20-25 million tons lower that previous forecasts. Fortunately such amount will not significant impact world's grain output.  Take a look at data provided by UN's Food and Agriculture Organization. World grain production fluctuates between 670-685 million tons per year, in which  25 million ton or even 30 million tons shortage makes less than half of a percent of global food production.

Moreover, the reaction of other food commodities suggest us that there is no upward reaction to the expected drop of grain output in Eurasia.



Then the question is What's All The Fuss About? And here I can give you two different explanations.  First, the ban is Russia's internally driven policy directed toward domestic audience. Unfortunately, its domestic media machine works so efficiently that it spins its internal message into global media.

This leads us to the second and more important point: Russia's domestic policy is unintentionally helping international food commodity traders.  I am concluding this post with SPIEGEL magazine article  Speculators Rediscover Agricultural Commodities. The article was published on July 29, 2010 before the Russian ban on grain, nevertheless it captures the trend:

Driving the price explosion was the growing use of agricultural commodities to produce biofuel. But 2008 was also the year in which, for the first time, the public realized that grain merchants were no longer the only ones trading on the exchanges (in their case, by buying grain futures to hedge against poor harvests), but that the major players in the financial markets had discovered the lucrative trade in agricultural commodities.

Last year, Goldman Sachs earned $5 billion in profits with commodities alone. Other major players include the Bank of America, Citigroup, Deutsche Bank, Morgan Stanley and J.P. Morgan.

They are no longer merely offering classic funds, but are now trading in financial instruments that function similarly to the subprime mortgage loans on the now-collapsed US real estate market. With these instruments, known as collateralized commodities obligations, or CCOs, profits are based on market prices. The higher the trading prices of wheat, rice and soybeans, the bigger the profits. The market's behavior reminds one of the Internet bubble at the beginning of last decade and the fluctuations just prior to the financial crisis, then-Merrill Lynch President Gregory Fleming said in May 2008.