Yulia Latynina
The Government is busy: it is implementing a mammoth project to separate the country from its revenues. Outgoings in Russia. Incomings in Switzerland
There is no crisis in Russia. As Prime Minister Vladimir Putin has said, "the crisis has hit the world financial system, while Russia is only experiencing its after-effects." He is right. There is no crisis in Russia. Industry in the Urals is at a standstill; the Magnitogorsk Iron and Steel Works has cut production by 70%; the Central Bank's reserves are melting away at the rate of $3 billion to $7 billion per day; Russian bonds are selling at a 20% discount - they are the least credible sovereign debt in the world today. Who said, it's a crisis? No, the word is different, it is curtains. As for a crisis, Russia has none. Here I agree with the Prime Minister.
If you look back at the Russian economy as it developed over the past five years of Putin's rule, the first thing that catches your eye will be companies set up by administrative fiat who subsequently kept revenues outside Russia. RosUkrEnergo is registered in Switzerland. Gunvor is also registered there. The earnings of oil-exporting Gunvor, owned by a friend of Putin's, are estimated at $70 billion. If this money flows back to Russia, why take it out so strangely? Throughout the breadth and width of Russia, a major project is under way - to separate the country from its earnings. Spending in Russia. Profits in Switzerland.
Or take Gazprom. Since 2005, its loans have tripled. But so have its production and service costs. Deliveries for Gazprom are the job of Gazkomplektimpex, a structure inside Gazprom, while its general contractor is Manasir Ziyad's Stroygasconsulting.
In terms of capital movement, Gazprom can be described as a black box which receives loans from some Western banks at one end and transfers them to private accounts in different banks at the other. Try to guess where are these banks: in Russia or the West?
The second thing that leaps out at you is the fantastic sums spent on projects that have ended in failure or proved corrupt. Two billion dollars for Glonass? There you are. The result is nil, but the money is gone. One billion dollars for a bridge to Russky Island? No trouble. Ten billion dollars for a university in Vladivostok? Take it. Tens of billions for the Olympic Games? For God's sake. Now the question: where did money go? To Russia or the West?
There has not been a single contract to build warships for the Indian Navy which we have delivered on time or not at an inflated cost. Where did the money go? Is it to the mythical Ust Uryupinsk?
Loans from the West
With stealing on such a grand scale, the necessary money had to be somehow procured, and it was loaned from the West. Russia's corporate debt reached $520 billion - as much as the Stabilisation Fund and Central Bank reserves combined. Private Russian companies were borrowing in the West what they were paying into the Fund. Was the contributed money spent more effectively than in Gazprom? No.
The money borrowed by private companies from the West was used above all to buy up assets in the West.
BasEl's investment programme was pitiable, and the plant's workshops still have a gas chamber atmosphere. But its owner, Oleg Deripaska, bought Austria's Hochtief and Canada's Magna. Over the past two years, LUKoil has purchased a thousand petrol stations in Belgium, Finland, the Czech Republic, Hungary, Poland, Slovakia, Bulgaria and Turkey. A network of 75 stations in Bulgaria, for example, was estimated at 237 million euros - it could be interpreted not only as a hedge against Russian authorities, but also as the export of capital.
Evraz, which is still regarded as a Russian company in Russia, first bought South Africa's Highveld Steel and Vanadium for $678 million, then Oregon Steel in America for $2.3 billion, tried to purchase Canada's IPSCO giant, but bought only its core business for $1.25 billion. Evraz's revenues from foreign investments are now about equal to its Russian revenues.
Russian business could swear its allegiance to the Kremlin until it was blue in the face, but its policy showed: business was perfectly aware of what was happening. The Russian oligarchs were diversifying risks and at the same time exporting capital.
The oligarchs were not dupes. The dupes were foreigners who gave them loans in the naïve hope that the Russian economy was in order.
The tale of the golden fish
The mechanism by which any Russian soap bubble bursts is simple and well-known. It was described long ago by the Russian poet Alexander Pushkin in his Tale of the Golden Fish. First a greedy old woman demanded from the fish: "Give me villas in Nice and bank accounts in Switzerland." The fish complied. Then the woman requested: "Give me loans to make my economy run." The fish complied again. Then the woman said: "Fish, oh fish, I want to call you a Third Reich and tell my people every day that I will fry you on a golden pan and stick my Iskander missiles up your golden American ass." The golden fish was surprised, but said yes. This routine was repeated day in and day out: the old woman would take money out, deposit it with the golden fish, borrow the balance from the fish and then threaten to fry it on a pan.
The Kremlin thought it could keep its money in the West, borrow from it and at the same time curse it in company of people like Lukashenko or Chavez. And its reckoning was absolutely right. The Kremlin knew that despite its warhead threats no one believed that Iskander missiles would target the property of Russian functionaries in Karlovy Vary or Gunvor's offices in Switzerland. That no one would care for the accounts of Russian functionaries. That America would not send its troops to Georgia, and French President Nicolas Sarkozy, when hearing Putin say: "I am going to hang Saakashvili by the balls," would try to joke and talk his partner out of the idea, because what else could Sarkozy do?
The problem is that politics is one thing, and the economy, another. It is possible to employ Gerhard Schroeder, to look into the eyes of George W. Bush and agree with Nicolas Sarkozy. But when, at a crisis moment, Western banks, which alone re-financed the Russian economy with money withdrawn from it into the Stabilisation Fund or the West, find they are losing buoyancy, Russian stock is the first to be thrown overboard.
What is the price of Russian companies?
"Severstal cannot cost more than the balance on its books," I am told. But I will retort: "How much did a refinery cost in Grozny on December 30, 1994?"
The answer is: "Not a penny." It had assets, workers, and oil, but it had no state to guide and oversee it. An economy does not exist without ground rules. A refinery in a country where a doctor is sent to Mechel and tanks to Georgia costs nothing.
When the market discovers this, the government of a country sending a doctor to Mechel is able to buy up depreciating companies with the money they once paid into the Stabilisation Fund and the budget.
Dutch disease affects powers that be, not the economy
Dutch disease - excess money in the economy - is not a disease of the economy. It is, above all, a disease of authority, because with such an illness the price of erroneous decisions is nil. Roughly speaking, the authorities are free to make as many mistakes as they like, and live under the illusion that these mistakes cost nothing.
Our authorities' response to the crisis suggests the worst scenario. The country is in a free fall, yet they still experience euphoria.
The Kremlin had a lot of behaviour patterns to choose from as the American crisis struck. The most ingenious one was to buy Lehman Brothers. You may remember that it was the collapse of this investment institution in America that sent the country into a panic: the Bank of America refused to buy Lehman Brothers for $1.2 billion - one-fifth of what flowed out of Russia during one day, November 11, and the bank's bad debts were unlikely to be higher than the assets Russia held in Lehman. Even if you plan to be nasty to America, buying Lehman looks more sensible than deploying missiles in Kaliningrad.
But decisions of this sort are strategic. Authorities infected with Dutch disease are incapable of strategic decisions. When Lehman Brothers was teetering, the Kremlin was preoccupied with a search for genocide evidence in South Ossetia and Russia's Arctic shelf rights.
The Russian market fell, and the oligarchs rushed to the top boss for money, while economic management became piecemeal.
Pyotr Aven accompanied Putin to Novosibirsk and upon his return Alfa Bank, the first of non-state banks, got massive injections. Then followed Iceland's epic: a kind soul told us that one good Swiss trader pledged the shares of some good company with some good bank, and would be grateful if he got a carryover loan.
The market is full of hearsay that the UBS Bank's bad debt will be bought out for an immense sum. The reason seems to be the same: the UBS accepted the accounts of good guys and deserves a good turn. The hearsay is impossible to check: no one knows where our Stabilisation Fund is parked.
The crisis has made it plain that any overloaned Russian oligarch can be swallowed up with the amount of money he once paid in taxes. Currently, Deripaska is facing payments on a $4.5 billion loan which foreign banks issued him against RusAl's exports and which he spent to buy Norilsk Nickel stock. The banks are refusing to extend the loan. Deripaska wants to get loaned up with Vnesheconombank (VEB). Now Potanin makes a beeline for the Kremlin, he wants to buy out this loan. Who will be swallowed up first, Potanin or Deripaska? A last-minute decision says: Deripaska will get a $4.5 billion loan from VEB collaterised with a 25% stake in Norilsk Nickel. This means Deripaska is safe, and next in line is Potanin.
It is easy to see that all these decisions are one-offs. Who makes the choice between Potanin and Deripaska? Certainly not VEB. Why is everything decided within hours of an extension? It is for everyone to know who the real decision-maker is. Generally, these are not strategic decisions, like the purchase of Lehman Brothers. These are on-the-spot decisions. But the most dangerous thing about them is that they create the illusion of control over the situation.
Actually, there is no control
Money is the language spoken by the economy. A liquidity crisis, on the other hand, is when everyone suddenly begins to doubt the meaning of every word.
So when a liquidity crisis hit the world, central banks drove their refinancing rates down to make money cheaper and ease its movement through the arteries of the global economy. A liquidity crunch can be likened to a clot in the blood-circulation system, and the lowering of the interest rate, to a blood-thinning drug. The drug may later affect the kidneys or the liver, but if the clot breaks off, it will cause a heart attack.
The Fed lowered its refinancing rate to 1%; the Bank of England, from 4.5% to 3%. The European Central Bank in 15 countries of the European zone set the rate at 3.25% instead of the 3.75%. Only Russia, which has "no crisis," raised the Central Bank rate to 12% at the time of the liquidity squeeze.
Russia, it appears, knows a simple trick: as soon as money enters the banking system, it immediately converts to the dollar and goes west. If you stop it, there is an immediate infarction. Money cannot be ordered about. It pays no heed to what the Prime Minister or the President says especially if this money belongs to the Prime Minister's friends and the President's comrades. You can reach an agreement with Schroeder, crack a joke with Sarkozy, or decide whom to eat up first - Deripaska or Potanin, but you cannot make a deal with money held in accounts.
It has emerged that money flees a country where a doctor is sent to Mechel, and tanks to Georgia. What's more, money is withdrawn by ones closest to the administration. Who, do you think, is now the biggest buyer of dollars: the man-in-the-street's bank or VTB? What can a hemophiliac do when threatened with a heart problem? How to communicate with an economy where the main securities are court rulings and appointment decrees?
What's next?
The answer is obvious: look for the culprit. And Medvedev's proposal to amend the Constitution and extend presidential powers to six years seems to me to pursue precisely this objective.
While the amendments are being taken, the rouble will crash, raising the question: who is to blame?
Answer: Kinder Surprise No.2.
Dmitry Medvedev will admit his guilt for the crisis and propose to the nation that in such difficult times the country should be led by the person who has guided it for the past eight years.
Another culprit will be America. It is common knowledge that America is to blame. The anti-American feeling we have observed until now, the stories of Iskander missiles in Kaliningrad and the war in Georgia engineered by Senator McCain are peanuts compared with an hysteria that will erupt when every granny will have to be told why her savings have gone up in smoke and why the funds Russia has amassed in the past eight years have fled to the dollar with a speed defying the laws of the special theory of relativity.
Internal enemies will also be blamed. All those who do not understand that the State Department, not the doctor to Mechel, is responsible for Russia's ruin.
The problem is that during the first eight years of Vladimir Putin's rule quasi-totalitarism in Russia joined hands with quasi-freedom on the surfeit of petrodollars. One was free to sign letters against Khodorkovsky, march in the serried ranks of Nashi and blame Senator McCain for the war in Georgia, or not to do anything at all.
With Dutch disease, the price of a mistake for the authorities was negligibly small. As also were the costs of an opposition. Quasi-totalitarian regimes - such as in Venezuela, Saudi Arabia, Iran and Russia - exist only when there is plenty of oil money. In a crisis they either turn into a North Korea or a Cuba, or return to freedom. The likelihood of Russia going back to freedom in the near future is very small.
