Opinion

John Lloyd

The coming Slav crash

By John Lloyd
March 7, 2014

Ukraine is not the only crisis to emerge from the former Soviet Union. It’s the most immediate and most immediately dangerous. But beyond the stunning images of boiling demonstrations in Crimea and eastern Ukraine, there is a less vivid but as potentially destabilizing danger growing greater by the week. It is the threat of a Slav crash.

The three Slav republics of the former Soviet Union are Russia, with more than 140 million people, Ukraine, with around 47 million, and Belarus, with nearly 10 million. These made up some three quarters of the USSR’s population and were (apart from the tiny Baltic states) the richest regions.

But now they are faltering; Ukraine most obviously. Sergei Voloboev, head of emerging markets at Credit Suisse, said in London this week that the country has a current account deficit of nearly 10 percent and a fiscal deficit of 7.5 percent.

These are very high, but need not be deadly if the economy is healthy and reform is under way. But Ukraine’s economy is sick, and reform will be difficult. Alone among the former Soviet republics, Ukraine has made no post-communist headway. It’s as poor now as it was in 1989.

In part, says Alex Pivovarsky of the European Bank of Reconstruction and Development, this puzzle is explained by the huge concentration of heavy industry in Ukraine that was built up and maintained by investment from Moscow. When this investment stopped, Ukraine had to either modernize (which meant closures) or keep the industry going on its own budget. It chose the latter, ruinously.

Corruption in Ukraine is “very open, no pretense about it,” Voloboev said. State companies were looted by the regime of the departed President Viktor Yanukovich, private companies are harassed to give a cut of profits to local and central administration and their owners take many of the subsidies, especially on energy, designed to assist the poor.

The new government has already made common cause with two oligarchs, appointing Sergei Taruta and Ihor Kolomoysky as governors in Donetsk and Dnepropetrovsk — regions where their companies are the major employers. It’s a depressingly early sign of capitulation to Ukraine’s real power.

The country is still on the verge of dismemberment. Crimea may break away. The parliament, dominated by ethnic Russians, declared a decision to unite with Russia. A defection of the eastern industrial areas, which account for 25 percent of the country’s gross domestic product, would be a still greater blow.

“Without reform,” said Pivovarsky, “Ukraine will remain poor, with an income level of 25 percent of the European Union average.” A new, largely inexperienced, administration in Kiev has among the worst governance tasks in the world — merely combating corruption in its own ranks will be a huge challenge.

Belarus, the smallest of the Slav republics, had been a post-Soviet success. The authoritarian government could boast of GDP growth in the pre-crash mid-2000s of 10 percent or more. No more – the bi-monthly newsletter Belarus Digest says “long run growth potential has weakened, productivity lags behind the rest of the world and the currency reserves are depleting.”

Growth last year was under 1 percent and this year it might see negative growth. Productivity increases by little over 2 percent lag far behind a growth in real wage rises of 17 percent. Some relief will be bought by devaluing the currency — but this is a classic tactic to avoid reform.

Russia now enters a darker tunnel than its leadership has had to face for the past 14 years of President Vladimir Putin’s time in power. One of its most senior bankers, speaking on terms of anonymity, painted a picture of stagnation.

The word (in Russian “zastoi”) conjures up the “zastoi period” of the latter years of Leonid Brezhnev, the Soviet leader from 1964 to 1982. He rejected all meaningful reform in favor of tightly controlled stability.

“For Putin,” said the Russian banker, “political stability is definitely number one.” He noted that with a stabilization fund of $500 billion and poll ratings heading toward 70 percent after his display of solidarity with the Russian speakers in Ukraine, Putin’s response to distant economic problems may tend to be, “What? Me worry?”

But he should worry. Growth this year won’t be much greater than 1 percent — perhaps even below that level if sanctions are imposed. Real wages are declining after years in which they rose by up to 10 percent, productivity is only 30 percent of U.S. levels — about the same as in the “stagnant 1970s, household savings are down as people raid their savings accounts, inflation is between 6 percent and 7 percent and foreign debt is rising.

Alarms are sounding throughout Russia’s economy. The fact that the state has taken control of the strategic sectors of oil, gas and telecommunications leaves little for the embattled private companies to invest. “Russia needs modernization urgently,” said the banker, “more than other emerging and competitor economies like Brazil or Poland.”

Social and political pressures, likely to grow sharply this year, will be an index of past success. Russia is far richer than 20 years ago, even outside of the gilded centers of Moscow and St. Petersburg. A new and larger middle class has become used to improvements in living standards. A plateau would cause pain and a decline might spark unrest.

If largely middle class protestors turned out in 2011 — when times were good — what will happen this year and next when the climate is tighter if Russia becomes more of an international pariah and the state clamps down to maintain “stability?”

In Western media coverage, Putin is portrayed as a leader who is authoritarian, but also successful and strong. This leaves Western leaders floundering. It’s all an illusion, however.

Russia, with faltering growth, a demographic crisis and no modernization in sight, is a year or two away from the economic fever ward.

PHOTO: Pro-Russian supporters block the car carrying U.N. special envoy Robert Serry before his departure in Simferopol, March 5, 2014. REUTERS/Vasily Fedosenko 

Comments
14 comments so far | RSS Comments RSS

again…”ridiculous tripe from Reuters.”
the Russian Ruble was losing the totality of its value going into the Olympics “and after 50 billion down the hole” somebody (cough, cough…czar Putin…cough, cough) “blew his stack.”

and obviously no one blames him for this.
clearly “we have a decider” here.

I have no clue what happens next in Crimeria, Crimerica, Crime(sa)…yes? right?…of course, none of us know.
But the PROJECTION of the image…in contrast to the Olympics no less…was “muy malo.”

And of course this is why the media capital of the world is New York! so yes…”there is much technology” here…but most important is the understanding of the PROJECTION. “and the fact that ultimately we are all blind”(ed) to it.(?)

For the record I like this Putin guy actually. He really is “all that and a bag of nuts” as advertisers (also from New York) say in the USA. This man clearly earned his Rank…and his Presidency.

What remains to be seen is “how this all plays out.”
This is the West…not the East.
What we do “over here” is “seen” or “staged” if you will.

And no, I am not a robot.
I am a real person…and apparently a “persona” as well.
But that is a “gender related term” of course.

Posted by lkofenglish | Report as abusive
 

John Lloyd, you write about Russia for so many years, yet you still do not understand them ?
Why you analyze Russia using economic toolset of the average country ?
Russians as a nation are deeply brainwashed (at least 70% of them). They prefer the elusive “greatness” of Russian/Soviet empire instead of becoming rich, peaceful, developed country. In the world it is similar to North Korean, and to less extent Belarussian mentality.
Russia is a dangerous pariah of international community but only for us. Russian are proud of their tzar Putin, he just has bad ministers and thus cannot reform country (nothing has changed in this mentality in recent 200 years). Of course youth, intelligent people see the difference, but how can they protest ? They would be killed: quickly by government thugs or in a more prolonged&painful manner in Siberian gulags (labour camps).
50% of Russian budget revenue is from oil and natural gas. Enough to finance strong apparatus of terror, not enough to make it developed petrostate like Kuwait or Qatar.

Posted by Wantunbiasednew | Report as abusive
 

The world is rapidly returning to a state of serfdom and plutocracy of a new Dark Ages, AKA the New World Order. The rich are getting much richer and more powerful everywhere; in Russia, China, India, the US and Europe. For the Proles however, real wages are rapidly declining and actual unemployment is increasing as populations are reduced to desperation while begging for crumbs from the tables of the elites. We are all North Koreans now…

Posted by Strangewalk | Report as abusive
 

The shame of it is, in this day and age, if the people of Ukraine wanted to build a best-practices, world class system of government all they need do is ask.
Get a Scandinavian team in to benchmark current versus desired end states, draw the lines denoting a step by step process of reaching the desired end state; governing by the rule of law with compassion for all citizens.
The individual must take responsibility to educate herself to a level required to deliver basic administrative and technical competence. Language barriers non-withstanding this, too, is available free to all from a number internet locations.
The tools exist, and they are nearly cost-free. It merely requires the will and diligence of the people to take advantage of them.

Posted by Nurgle | Report as abusive
 

@Wantunbiasednew

Another example of WESTERN brainwashing.

We learned hard way from ’90 and ’2000s that bein’ weak ALSO means bein’ poor – look at African countries where governments are at whim of western corporations, look at economics of former USSR states which a ran into the ground (my favs are russophobic Baltic states where most of young people just took off and competetive industries were dismantled inc. perefectly good nuclear plants), look at shattered Yugoslavia and Lybia at last.

And we also learned hard way that merely our existence as unified state is considered threat by West – and West DO meddle in our internal affairs.

Games are over.

Posted by chyron | Report as abusive
 

“70% of Russians brainwashed” how did you measured that?

maybe CNN told you!

Posted by stathis | Report as abusive
 

If Russia is in economic trouble, she is more dangerous than not. A wounded and ill bear is a dangerous bear.

Posted by Kahnie | Report as abusive
 

Mr Lloyd has a point. Putin has blown the hydro carbon windfall, and probably not got good value for money.

The demographics are truly awful, and unbalanced. European Russia is declining relative to the more eastern parts of the empire.

The only thing that can save Russia from imminent economic crisis is a war between Iran and Saudi sending oil prices to he sky. They can probably fin allies for that.

Posted by Urban_Guerilla | Report as abusive
 

How is the description of the Ukraine –

“…private companies are harassed to give a cut of profits to local and central administration and their owners take many of the subsidies, especially on energy, designed to assist the poor.”

significantly different from an honest description of the USA? The only observable difference is that in the USA the group “harassed to give a cut” to politicians and government are the laboring people. The cut from companies goes directly to the pockets of politicians via so-called “campaign contributions” that are very, very difficult to distinguish from what everyone else calls “bribes”. Quid pro quo.

Of course, it is easy for an attorney to twist the payoffs into “free speech”, as happened here years ago. Now elections are mostly a waste of money. Nothing can change for the sheep without major structural changes.

Posted by usagadfly | Report as abusive
 

usagadfly, I think you are correct, major structural changes is the way to go. L.

Posted by 2Borknot2B | Report as abusive
 

@usagadfly: The difference is, you’re mixing apples – companies – with oranges: Joe Average – the employee. The best analogy is the mob, not the U.S. government. It’s the amount you get leaned on. A ‘cut’ for social security or school taxes or whatever representational government decides, is far different than the TYPE of corruption in the countries under discussion. Agree about ‘campaign contribution’ but you obfuscate the point: it’s the corporations that are calling the shots. Not the other way around. Or have you been living under a rock for the past 30 years?

Don’t even get me started on ‘Corporations are people too’. Thanks to “conservative” (cough, choke) appointments to the top bench our country is DOOMED. There is no way to turn back, no do-over.

Agree TOTALLY re: election largess and the people are powerless to intervene. Until everyone, in unison, demands all pol’s fundamentally change how elections are financed. I for one think broadcast stations should ‘give’ some time freely. It’s not as if they own the airtime, they mine it because they received a license. The time I’m thinking of wouldn’t break them, it probably would raise viewership.

Unfortunately major structural changes are beyond the grasp of any significant % of our population. Too comfortable. It’s like idiots yelling that another social program amounts to “Communism” when they couldn’t even FIND Crimea on a map unless they happen to have the initiative to google map it. Let alone know what Communism is, anything about economic theory, the history of Eastern Europe or take in factors such as the impending financial crisis averted by the “overthrow” and new government.

Posted by Mac20nine | Report as abusive
 

What a depressing bunch of realists. Wish I had a solution, but I tend to agree that the trend is going to be towards more suffering for the 99%. Eventually, they will rise up, but most of them need some more suffering, and here it comes.

Now that we know that a new dark age will soon descend upon us, it is time to recognize that all of these problems would be alleviated by legalizing recreational marijuana and the recreational use of opiates. I realize that Marx believed that it is religion that is the opiate of the masses. But even the religious folks are so upset these days that they deserve some of the good stuff.

Posted by JeffHB | Report as abusive
 

one interesting theme here is the unwillingness of political leaders to interest their electorate in unpleasant news

it is shared by putin netanyahu hollande and cameron

and they may all soon have to do just that

Posted by ed_martin | Report as abusive
 

“Alone among the former Soviet republics, Ukraine has made no post-communist headway. It’s as poor now as it was in 1989.”

I have lived in Kiev since 1993, and can say clearly this is completely false. The economy has grown hugely since we moved here. This is patently untrue. Yes, the economy is suffering, but more freedom has brought changes.

Posted by b-J-k | Report as abusive
 

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