Russian Economic Reform

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1992 Article: “Russian Reformers and the IMF Get It Wrong.”

I first visited Russia in October 1991, after also visiting Hungary, Poland and Czechoslovakia. I again visited Poland and Russia in April/May 1992, and wrote the text below. In 1992 I met with Richard Layard, the British economist, who was then an adviser to the Russian Government. He told me how he and a fellow economist (who was Polish) boarded a Moscow-based plane in London with the idea that reform needed to be carried out gradually and with care. However, by the time they arrived in Moscow they had decided that it would be best to implement reform as quickly as possible, including the use of “shock therapy”. Layard told me that they thought there was a “less than 50% chance of this working, but it was worth a try”. Such—“worth a try”—was the low standard of economic advice being offered to Russia at that time.

Text of my May 1992 article:

“The economy of the Russian Federation will almost certainly deteriorate over 1992 and 1993. In particular, industrial production is likely to decline significantly in the state enterprise sector and both unemployment and underemployment will rise. Given the breakdown of much of the system of relationships that made the centrally planned economy, there is probably little that can be done to prevent this fall.

What economic policy makers can do, however, is influence the extent of the fall. Unfortunately, the Government’s pronounced economic policies (as outlined in the ‘Memorandum on the Economic Policy of the Russian Federation’ which was agreed with the IMF in March) are likely to exacerbate the difficulties. If implemented, they may even carry some risk of pushing the economy into an abyss.

The essential flaw in the stated economic policy is that it is one that is designed to appeal to the West in the pursuit of international financial help. Moreover, this appeal to the West is really to that side of Western opinion that believes that markets can solve all problems if only governments would get out of the way. Thankfully, for the West at least, not all Western opinion makers and governments have such an extreme view, let alone act on it.

The Russian Government’s program would be tough and ambitious even by Western standards. In particular, a program of the Government’s type might impede structural reform in a Western country by putting too much emphasis on fighting inflation and not enough on keeping the level of demand and production high enough to ensure that both existing and new enterprises have an incentive and an ability to invest to produce market goods and services.

This is precisely what happened in New Zealand in the late 1980s and the early 1990s. In the early 1980s New Zealand had a reputation as one of the most government controlled economies in the OECD. A comprehensive and effective program of privatization and micro-economic reform (eg by reduction of subsidies) was undertaken and there has been little criticism of this. Unfortunately the heavy emphasis on fighting inflation (which included the use of a very tight monetary policy) led production to stagnate and the level of employment in 1992 to be lower than in 1986.

Yet, for all of its government controls in the early 1980s, New Zealand was a long way from being a Russia. It already had a very large and experienced market sector. But even here, the lessons were clear. Structural reform takes a lot of time and effort and the macro-economic policies must be appropriate.

Closer to home, for Russia, is Poland. After much bravado about the success of its economic policies in 1990, the Polish economy has deteriorated significantly.

A number of experts on the Polish economy now point to three main lessons that should be learnt from the Polish experience. Firstly, too much emphasis should not be placed on reducing inflation and achieving currency convertibility. (The inflation issue lesson is the same as for New Zealand.) Secondly, a very great degree of focus needs to be given to basic issues such as the taxation system, banking system, legal system etc. which allow market economies to function effectively. Thirdly, there needs to be greater recognition that privatization is necessarily a slow and complex process.

If the Government’s ‘Memorandum on the Economic Policy of the Russian Federation’ is to be taken literally, Russia is to repeat many of the Polish (and New Zealand) mistakes.

Firstly, the ‘Memorandum’ says that it is intended to reduce the average monthly level of inflation to between 1% and 3 % in the last quarter of 1992. This is a fairly low and precise target and might be possible given the reversal of excessive price rises in the first part of 1992.

Evaluating the stance of monetary policy is difficult in any country. Monetary policy was not tight enough in 1991 and this is one of the factors contributing to very high inflation. However, there has been a significant risk that the tighter monetary policies in early 1992 in the pursuit of very low inflation would combine with attempts to tighten fiscal policy to crush the economy. This would impede the process of reform and recovery. Not only do existing enterprises need bank credits to restructure, and new enterprises need credits to begin, but budget deficit reduction inspired large decreases in government expenditure may launch a vicious circle of lower expenditure, weaker economic activity, lower tax revenue, increased budget deficit, lower expenditure etc.

There are some signs, however, that the ‘Memorandum’ will not be taken literally in this area. After a very tight monetary stance in the first two months of 1992, there has been as easing of monetary policy and an increase in central bank credits to commercial banks (and thus industry and agriculture). While this has probably increased the risks of higher inflation, it was probably necessary to avoid an almost complete industrial collapse in late 1992.

Secondly, while the ‘Memorandum’ discusses structural changes there is too little emphasis on the need for rapid and vital reforms in the accounting, banking and legal spheres, including anti-monopoly legislation. It is almost as if this very important component of an effective market economic system will rise by itself.

This criticism also applies to an aspect of macroeconomic policy. It would be acceptable to all but the most ideological anti-government Westerners that a larger than suggested Budget deficit (in the memorandum it is suggested that the deficit should be 1% of GDP in the first quarter of 1992, down from over 20% in 1991) would be acceptable if it could be financed by selling ruble denominated government securities into the domestic market. Even recognizing the difficulties, an insufficient amount of attention is being given to developing a market for such securities.

Thirdly, the mooted rapid pace of privatization in the ‘Memorandum’ is unachievable and dangerous. According to the memorandum, the ‘programme for 1992 envisages the privatization of 50 % of enterprises (organizations) in the building materials industry, wholesale trade and public catering, of 60 % of enterprises in the food industry, agriculture and retail trade, as well as 70% of enterprises in the light industry, construction, automobile transport and repair.

The pace of privatization is unachievable because of the lack of an existing market and institutional framework to support it. This pace is dangerous because of the massively disruptive effect that ownership changes and reorganization will have on the already mangled process of production in medium and large enterprises. Small enterprises and some service sectors, of course, may be privatized rapidly with less disruption. The other danger with rapid privatization of larger enterprises is that its lack of control may deliver many state assets into the hands of only a few groups who will then exercise monopoly powers and control over the economy. This appears to be a particular danger in Russia.

Having made these points, it should be emphasized that the Russian Government should not change its basics policy direction.

Rather than changing the direction of reform, the Government should slow the overall pace of policy change and re-orientate towards the building of mechanisms and institutions that will allow a market economy to function. This would reflect a recognition that one economic system (irrespective of how badly it is functioning) cannot be replaced by another “overnight”. In practical terms, this means that the Government would need to continue to play a significant role in determining both production and prices in parts of the economy. Some State plans would still be needed not only to ensure the continued production of many useful goods and services, but to ensure that as massive defense production is wound down the freed resources (both man and material) are put to some productive use. The market itself, will not be able to handle this huge task.

Finally, it is worth putting the view that Russia needs to find its own way of reforming. It may be that countries such as Hungary or those of East Asia provide more appropriate examples of what to do than the very “free-market” approach. It is more likely, however, that they will only provide bits and pieces. A very thoughtful and pragmatic approach is needed, for the risk remains that economic reform policies orientated excessively toward acquiring international financial help may end up doing more harm than good.

Past Articles on the work of each of the 21 Expert Groups can be accessed here:

Ukraine’s Poroshenko is going to Australia: WHY?

Ukraine President Petro Poroshenko will speak in Sydney on 12 December at a Lowy Institute function:

Why is he doing this?  And why it is a bad idea!

Whatever one’s view of the actions of Putin and Russia in the Ukraine conflict, the authorities in Kiev have continually acted with considerable stupidity – and, effectively, invited some of the Russian responses!!

My own view is that Putin would have got away with the annexation of Crimea without too much trouble if he had stopped there. Kiev should have recognized that Crimea was permanently lost — and used the occasion to extract considerable concessions from Russia.

But, both Kiev and Moscow then played their card-hands badly; both got carried away by events, and too easily resorted to force.

It seems to me that Poroshenko (like Putin) is continuing with that stupidity.

First of all, at least some of Poroshenko’s early December appointments will inevitably cause considerable problems with reform efforts in the Ukraine.

Ukraine has granted citizenship to Georgia-born Aleksandr Kvitashvili, US-national Natalie Jaresko and Lithuanian Aivaras Abromavicius – so that they can serve as ministers in the government!

Kvitashvili was appointed as Ukraine’s health minister after serving in the same role in Georgia during 2008 and 2010. Jaresko, who will serve as the country’s finance minister, has spent a lot of time in the Ukraine over the last two decades, including working in the US Embassy. Abromavicius, who will be economy minister, has been a investment fund manager concentrating on eastern Europe.

I know much less about the Ukraine than I do about Russia, but basic political psychology says that these appointments will put many Ukrainian political noses out-of-joint, irrespective of any qualities that these particular foreigners may have. Indeed, the reaction of some Ukrainian political noses will be so great that they will work to ensure that these foreigners fail in their appointed tasks – even if it damages the Ukraine!!

But, that still leaves the question of why Poroshenko chose foreigners in the first place?

The obvious answer is that he wants to demonstrate to the “West” that he is serious about economic reform. That is, he has put marketing of a product before he actually has a product. He wants up-front financial and political support to counter Russia; which certainly means some toughening of sanctions against Russia and some lethal military supplies!

And, what better place to gain some extra support for this than the Lowy Institute in Australia!

Thirty eight Australian lives were lost when flight MH17 was shot-down. The Australian mass-media, lacking any real knowledge of the ex-USSR and subsequent events in the region, will hardly ask Poroshenko a single difficult question.

Moreover, the US-subservient Lowy staff will frown upon any attempts to do so at their 12 December function. This is the pro-US fakery of the Lowy Institue’s executive director:

Australian prime-minister Tony Abbott and the Australian security-defence establishment are not particularly knowledgeable or sophisticated in their thinking about much of the world; they let the US do much of their thinking for them! And, what is the US now thinking? What does the US now want?

Answer: a tough attitude toward Russia (with the added benefit of providing a lesson for China, so that it knows who is “boss” in the world!)

Rightly or wrongly, both Poroshenko and the US will get what they want from Australia!

Poroshenko is on a “road-show” in Australia, and Australia will sign up for what-ever quota (of stupidity) that the US allocates it.

In my view, Poroshenko should be staying in Kiev to ensure that Ukrainian economic reform and prosperity becomes a reality; and there would be no better way to win back support in the eastern-part of the Ukraine than by doing this.

While he is away from Kiev, infighting involving the newly minted ministers (not much more than a week ago) will surely set-in! The chances of successful reform will be significantly reduced.

Neither Putin nor Poroshenko are now handling the issue well!  So, conflict in some form will continue!

Published on December 09 2014

What do Chinese trade/investment people think about Russia (and vice-versa)?

During the first few weeks of November, I conducted two surveys regarding the attitudes of Chinese and Russians to closer economic and financial relations between their two countries. The surveys were conducted in Shanghai and Moscow, and showed an overwhelming desire — over 90% of respondents in both cases – for closer relations between China and Russia.

The Moscow and Shanghai responses to other questions in the surveys showed more divergence, and in particular seemed to point to the effect of the events in the Ukraine and of US led sanctions on Moscow attitudes.

Only 10% of the Moscow respondents nominated the US as the country with which Russia should have the closet economic and financial relations (the number was even lower for the UK, with London’s financial center activities often seen as “hurtful” to Russia). For China, over 90% of Shanghai respondents nominated the US as the country for closest relations.

This stark difference in the in attitudes toward the US was not repeated in the case of the EU. After the US, the Shanghai respondents nominated the EU and Russia (almost in equal numbers) for closest relations (followed by Japan, and with India and Australia a very distant last). The Moscow respondents ranked the EU and China almost equally.

So, it seems that the EU has basically managed to be the common second favoured area for relations, while China and Russia have quite favourable attitudes toward each other (basically ranking a little behind the EU).

Unless events in disputed parts of the South China Sea cause a rupture in China-US relations, those relations will be much better than Russia-US relations for quite a few years. Russia will not return the Crimea to the Ukraine, and Eastern Ukraine is unlikely to see real peace anytime soon.

This would seem to give China more options than Russia in dealing with the US and its allies (including the EU and Japan). Russia’s options are now not much more than China, but even this is not all good news as the Chinese probably feel that they are in the stronger bargaining position.

I asked the Shanghai respondents the following question: “When thinking about economic and financial relations, do you think that ‘Russia needs China’ more than ‘China needs Russia’”? The responses were equally divided between “yes” and “don’t know”. Hardly anyone thought that China needs Russia the most.

I lived and travelled in Russia for several years and always thought that Russians (apart from those living in the Far East regions) were paying insufficient attention to the Chinese economy and the possible trade benefits. That now seems to be changing, both at an official level and business level.

As well as turning to the East, more generally Russians are turning inward because of the US-led sanctions.

This may partially account for what I thought were surprising responses in the Moscow survey on the issue of Moscow becoming a true international financial center (IFC) by 2020. In my view, this has never been likely to happen for a variety of reasons, including corruption and the dominant role of state owned banks.

Two supposed advantages of Moscow as an IFC were as a center for CIS financing and (as a survey of financial market participants reported) Moscow is where “East meets West. It is a blend of different cultures and nationalities. It will be easy for everyone to come to do business.”

I have never really believed in either of these two advantages, and the events in the Ukraine should have killed-off the CIS idea. Yet, the idea of Moscow as an “IFC by 2020” was supported by nearly half the Moscow respondents in my survey.

I interpreted this as partly an emotional reaction to US-led sanctions and as a desire for more autonomy from US dominated world financial markets. Yet, there may be an element of rationality in the “East meets West” view if Russia can play on the desire of China for the RMB (or yuan) to become a more internationally used currency (ie like the $US) and work to make Moscow a major hub for this; on this I am doubtful, but it might be partially possible.

The Moscow survey covered a LinkedIn based sample of people who reported that they spend 50% or more of their work-time thinking about financial issues. The Shanghai sample covered students at the University of International Business and Economics (formerly called the Foreign Trade University), where the studies are concentrated on international issues. Neither survey was extremely large, but the respondents were people who understood economic and financial issues and were internationally orientated.



Published on November 25 2014

Moscow, London and Shanghai “money” !

In the first week of November I conducted an emailed survey of Russian (mainly Moscow) “educated middle class” attitudes to (mainly) financial issues in Russia and attitudes to Russia’s financial relations with China, the US, Europe, and the UK. Most of the over 1,000 people to whom I sent the survey were my LinkedIn “connections”. (I cast the net quite wide even though I suspected that many of my “connections” would have little interest in such financial matters.)

I wanted to get “financial expert” Russian feedback so, for the purposes of this article,  I subsequently pruned the data to remove all non-Russian respondents and also remove any who did not indicate that “about 50% or more” of their work time involved “thinking about financial issues”.

This left me with a relatively small, but solid, set of 42 respondents — the majority of whom worked in the “banking/financial” sector. The remainder worked in the “advisory”, “academic” or “government” spheres.

In designing some of the questions in the survey, I had in mind the “sanctions” imposed on Russia because of the Ukraine issue (and the possibility of more) but did not want to directly mention this issue because of its (for most Russians) very emotional character.

A massive majority, 39 of the 42 respondents, were in favour of Russia having “closer financial relations with China”. Only 6 indicated that they would not put deposits (work or personal) in Chinese banks if these banks operated in Russia in a similar way to Citibank. The attitude to holding the Chinese renminbi (RMB) was more mixed, perhaps reflecting a lack of knowledge about it compared to the $US and the Euro.

18 of the 42 respondents indicated that China was the country that Russia should have “the closest financial relations”, while 16 indicated continental Europe. Only 4 indicated the USA, and a tiny 2 indicated the UK.

In fact, London as a financial center was perceived poorly, with only 8 indicating that its activities “help Russia to become a better place to live”. Of the 42 respondents, 19 indicated that London “hurt” Russia. (What I had in mind with this question was the tendency of the UK to give safe-haven status to any number of Russian “crooks” such as Andrei Borodin of Bank Moscow fame, as well as the fact that “honest” Russians also have assets there.)

These numbers do not mean, however, that the respondents thought Russia should strengthen its financial relations with China at the total expense of “Western countries”. Even those who wanted closer financial relations with China, on the whole did not want to see a downgrade of financial relations with the West (thanks, mainly, to the favourable view of continental Europe).

I suspect that if I had conducted this survey before the events in the Ukraine, the results would have been quite different. As I indicated in the previous article on the site (Russia and China: what sort of “relationship”?  See:, Russia had been very tardy is attempting take advantage of the great developments in the Chinese economy. Things are now changing, although Russian knowledge of China remains very patchy (and, this is certainly the case in comparison to Australia).

In part this relative lack of knowledge reflects the fact that most “international” coverage of financial events in China is written in English. Nearly half of the respondents in my survey indicated that they get most of their knowledge about China from Russian language sources.

The final question of note in the survey for the purposes of this article concerned Moscow as an “international financial center”. The results were a little surprising, and will be included in an article which I am writing on this topic for the “Baltic Rim Economies Review” (to be published in December 2014).

Published on November 09 2014

Russia and China: what sort of “relationship”?

In June I spent some time in Moscow talking to Russian banks about financial developments in China,  where I am conducting research on “Opportunities and challenges in developing an international financial centre (IFC): Learnings relevant to Shanghai” for the Shanghai Institute of International Financial Centre (SIIFC), Shanghai University of Finance and Economics.

I decided to go to Moscow for several reasons.

Firstly, I had just presented an “interim report” at a conference in Shanghai which included quite a bit of material on the failure of Moscow to develop as an IFC (as a “learning” that Shanghai should take note of), and there were some issues I wanted to follow-up on for the “final report”.

Secondly, I knew from my time living in Moscow that people at all levels of society know very little about China other than that they can buy Chinese goods (often on-line). The contrast to Sydney, for example, is very striking. There are virtually no Chinese people (except for a few tourists) to be seen on the streets of Moscow, and Russian language business newspapers have very few articles about China (whereas Australian business newspapers each day have many articles). Moreover, I think that Russians in general feels less comfortable with Chinese at an individual level than Australians; perhaps a reflection of little personal contact and the antipathy often felt by Russians to Asian faces from Central Asia. Indeed, one morning in early 2013 my native Chinese Mandarin teacher in Moscow (living there with her boy-friend who was studying Russian) called me to say that she could not come to give me a lesson because there was a police operation near her apartment and she did not want to leave it because the police “target Asians”.

Thirdly, Russians and Chinese generally (leaving aside border zones and places like the Russian Far East) have tended to almost avoid looking at each other (“both sides have their noses in the air, looking down at the other”, in the words of one Moscow banker). Educated Russians tend to look to Europe and its individual countries as examples of the life that they would like to live, while educated Chinese are more focused on the USA. However, it seemed to me that following events in the Ukraine and the seas around China, both Russia and China are to some degree falling out of love with Europe and the US respectively. Thus, there would seem to be opportunities for neutral parties, such as myself, to help Russia and China come closer together in the financial services sphere.

I found that many Russian banks are indeed interested in financial developments in China, but are even more confused than Australian financial sector participants about where things may be going. (Having said this, many people working on financial sector issues in Shanghai are also confused.) Thus, they are struggling to understand how to take advantage of the opportunities in China that they instinctively feel must be there.

From what I have written so far, it should be clear that I do not expect Russia and China to easily cuddle up to each other – except where it results from their increasingly negative attitudes to Europe and the US!

Of course, Russia is rich in resources, but apart from energy the relationship is unlikely to become particularly strong. Indeed, it is only in recent years that Russian policy makers have started to seriously think about selling Russian resources to China (and the development of the Russian Far East). While Australian economic policy makers have been thinking about the rise of China for several decades, Russia in the 1990s and the early years of this century has been consumed with the fallout from the collapse of the USSR. But, as China continues to develop its growth will become less resource intensive; thus, in my view, Russia has basically missed the boat when it comes to the China boom.

However, this does not mean that Russia should be written-off as a “declining power” that “will only get weaker with time”, as John J. Mearsheimer has written is an article, “Why the Ukraine Crisis Is the West’s Fault”, for “Foreign Affairs” magazine.

I keep reading this view in various articles and commentary, although I suspect that very few people who make this claim know much about the workings of the Russian economy other than it is very commodity dependent, has significant demographic issues, and has many “oligarchs”. However, the reality is that in many ways the Russian economy now has many institutional features and economic structures similar to successful economies such as Australia (which also has a significant, although less, dependency on commodities).

There are reasonably well structured Russian banking, taxation, commercial law, and competition law systems – with the always ongoing debate about these similar to the debates in Australia. Where these structures are deficient is usually the result of corruption.

The expenditure side of the budgetary system is too opaque, and massive amounts are needlessly spent on unproductive prestige projects such as for the APEC Summit and the Winter Olympics. Once again, corruption makes this expenditure even more wasteful than it would be in a place such as Australia.

Cronyism in securing government sector jobs is rife, with few penalties for incompetence at the highest levels.

Corruption and cronyism, combined with an increasingly rigid political system under Vladimir Putin, mean that many talented young people want to leave Russia. Private sector investment, both domestic and truly foreign, is similarly impeded.

Good government, even over a period of five years, could markedly reduce the scale of these deficiencies and bring quite painless improvements in productivity and GDP. A further five years of good government could radically transform Russia.

Unfortunately, I do not see it happening while Putin remains president. As I have argued on this site (and on, Putin’s first two terms as president brought net benefits to Russia (after the disastrous Yeltsin years), but he is now a hindrance to Russia’s economic (and political) development. This is particularly the case given the events in the Ukraine (although, in my view, the annexation of Crimea – but not subsequent events in Eastern Ukraine – could be justified on both Russian national security grounds and the wishes of the population to escape the perpetually incompetent and corrupt Ukrainian government).

But, longer term, Russian should not be considered a “declining power” to the extent that Mearsheimer suggests.

Mearsheimer also wrote that “current U.S. policy … is only driving Moscow and Beijing closer together” and that the “United States will also someday need Russia’s help containing a rising China”.

I certainly agree with the basic thrust of the Mearsheimer article: that the expansion of NATO towards Russia’s borders was a major contributing factor to the present events in the Ukraine.

And, I agree that about the general effect of “current US policy” on the relationship between Moscow and Beijing.

However, I have some trouble understanding what “help” Russia will give the US as it pursues its (unwise, in my view) policy of “containing” China. Just as there will be limits to how close Beijing and Moscow will become, any Russian “help” for the US will only be a side benefit of Russia’s own attempts to preserve its sphere of interest in Central Asia.




Published on September 06 2014

Effect of languages (Russian, English, Chinese) on economic and political power

The Russian Liberal Democrat party is reportedly seeking legislation to stop the “conquering march” of foreign words into the Russian language. It wants to punish those responsible for any violation of the norms of the contemporary Russian language”.

But it might be that the Russian language — and economy — needs some help from the Chinese language!

On my first trip to Russia many years ago I realized that I would need to learn Russian if I wanted to seriously understand the Russian economy and its politics. I put more emphasis on learning to read Russian than to speak it.

The Chinese language, however, is a different matter! Learning to read Chinese is extremely difficult and time consuming. Thus, I have concentrated on learning to speak Chinese rather than read. Fortunately, Chinese spoken grammar is simpler than either English or Russian grammar.

For example, the simple Chinese expression “wǒ” (written 我 ) is equivalent to “I” and “me” in English, and equivalent to each of “Я”, “меня”, “мне” and “мной” in Russian.

In reality, except for the rules of grammar, the English “I” and “me” are completely interchangeable – ie they mean exactly the same thing. The Russian case system means that “Я”, “меня”, “мне” and “мной” do often convey different meanings, but in my view Russian could be somewhat simplified (particularly in the presence of prepositions). For example, instead of “У меня” could have “У Я” !!!

What are the consequences (economic and political) of language differences?

Read more »

Published on February 21 2013

Russian “middle class” psychology

David Brooks (“The New York Times”) and Gillian Tett (“Financial Times”) have each produced a useful article on the relationship of individual psychology (or personality) to the wider world of government policy – although the articles do it by heading in different directions from essentially the same starting point. The Brooks article suggests that not enough attention is presently paid to the effect of individual psychology (personality) on leadership decisions – and thus on personality when choosing leaders. The Tett article, largely based on the work of Prof. Dennis Smith (a “historical sociologist”), relates individual psychology (personality) concepts to the whole populations of countries. Taken together, the articles act almost like a circle with the two directions eventually meeting each other and encompassing a lot of wisdom that is all too often overlooked when considering issues of public policy.

The motivation for the Brooks article seems to have been the US presidential election, while the motivation for the Tett article is the Euro-crisis and the effect of subsequent policies on the populations of countries such as Greece.

To some degree, the concepts covered in the Brooks and Tett articles might also be applied at the intra-country group level.

For example, the humiliation that Putin and Co. are willingly to attempt to inflict on the aspiring Russian “middle class” (for want of a better word) may result in some of the responses mentioned by Tett:
“Typically, it occurs in three steps: first there is a loss of autonomy, or control; then there is a demotion of status; and last, a partial or complete exclusion from the group. This three-step process usually triggers short-term coping mechanisms, such as flight, rebellion or disassociation. There are longer-term responses also, most notably “acceptance” – via “escape” or “conciliation”, to use the jargon – or “challenge” – via “revenge” and “resistance”. Or, more usually, individuals react with a blend of those responses.”

But Tett also wrote that Prof. Smith believes that “Ireland already has extensive cultural coping mechanisms to deal with humiliation, having lived with British dominance in decades past. This underdog habit was briefly interrupted by the credit boom, but too briefly to let the Irish forget those habits. Thus they have responded to the latest humiliation with escape (ie emigration), pragmatic conciliation (reform) and defiant compliance (laced with humour).”

Thus, the responses of the “national psychologies” of Ireland and Greece to their “humiliation” resulting from the Euro-crisis may exhibit significant differences.

The Russian “middle class” is certainly using Irish-style escape, pragmatic conciliation and defiant compliance to cope with its humiliation—- but in the longer term the coping mechanism could become more “pathological”. If this were to happen, I suspect Putin’s response would largely be determined by his personality.

Read more at:

Published on October 22 2012

Russian pension reform – a long road!

I have up until now avoided writing much about Russian pension reform (mainly because of the very long-term nature of the calculations, which means that it is generally not a very exciting issue as well as having a high degree of uncertainty), but both recent events in Russia and a useful recent IMF Working Paper entitled “Reforming the Public Pension System in the Russian Federation” mean that it is time to tackle the issue in more depth – at least in terms of giving an overview of the situation.

Read more »

Published on October 08 2012

Sechin, BP and Rosneftegas

At this time Igor Sechin seems to be facing defeat in his attempts to increase the influence of Rosneftegas (and himself) in the privatization of government owned assets in Russia’s fuel and energy sector. Prime Minister Medvedev (and his economic ministers) are demanding that Rosneftegas hand over most of its accumulated cash to the official budget in order to help pay for President Putin’s pre-election expenditure promises.

This has further stimulated Sechin to seek to develop a relationship between Rosneft and BP.

Are these developments good or bad for “Russian economic reform”?

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Published on September 24 2012

APEC, Russia and Australia

Both Russia and Australia are experiencing some sort of increase in official interest in Asia. There is nothing cultural in this, as Russians would in their hearts prefer to look toward Europe and Australians would prefer to look toward the US and UK.

Despite the fact that in many ways Russia is geographically better placed to take advantage of the economic growth of China, Australia is likely to continue to outperform Russia in taking advantage of the economic rise of Asia. But with one proviso – which I will address later!

In Russia, the most obvious manifestation of the interest is the huge spending (and often stupidly excessively, a la bridge to Russky Island) on the APEC Summit in Vladivostok and recent creation of a “Far East” Ministry.

In Australia, the most obvious manifestation of the interest is an “Australia in the Asian Century” report being prepared by a team led by former head of the Australian Treasury, Dr. Ken Henry. See:

Read more »

Published on September 09 2012

It’s time to sack Andrei Belyaninov!

At a forum last week, Prime Minister Medvedev was questioned by a German businessman about Russia’s notoriously bad customs procedures.

Medvedev replied:

«Когда я разговариваю с руководителем нашей таможенной службы [Андреем Бельяниновым], он мне задает вопрос, на который не так просто отвечать, он говорит: вы сами определитесь, чего вы от нас хотите, чтобы мы просто контролировали порядок ввоза и вывоза товаров, чтобы законы соблюдались — это одна цель, или вы хотите, чтобы мы зарабатывали для государства большие деньги — это другая цель, и мы [сейчас] этим занимаемся».

“When I talk with the head of our Customs Service (Andrei Belyaninov), he asks me a question that is not so easy to answer when he says: you decide what you want from us; that we just control the order of entry and export of goods so that the laws are respected – this is one aim; or do you want us to earn big money for the state – this is another aim, and we are (now) doing that.”

Medvedev went on to say Russia needs to get the “proportions” right between “opening the road for business” and raising revenue. While too much can be read into Medvedev’s choice of words, I am tempted to ask whether the choice being offered by Belyaninov is really between enforcing the law or acting as a “by any means” revenue raiser for whoever can get their hands on it!

Read more »

Published on July 15 2012