I've written much on Eurasian Integration, and it's really gone into overdrive with the Ukraine crisis. Here's a new piece for Russia Direct on how Ukraine is killing integration... and how China is benefiting.
In a world where fiscal "austerity" means the growth of government is slowed from 6% annually to 5%, it was perhaps inevitable that governments would still be in dire straits fiscally... and, of course, this means that there need to be new ways to fund Leviathan. The latest approach, pioneered by Central and now Eastern European governments, is a pension grab - either changing the laws to channel private pension fund money into government coffers (as in Poland) or... this.
Prime Minister Dmitry Medvedev told ministers Thursday that the government needs to check that the money Russians channel to private pension funds is safe. To do this, it will seize 244 billion rubles ($7.6 billion) from non-state pension funds and put them into the state pension fund.
So to recap, the Russian government is going to "inspect" the money by taking it away, booking it as part of their money for a year, and then possibly giving it back. Does this remind anyone of a Simpsons episode? Also remember, New England Patriots' owner Bob Kraft already claims that Vladimir Putin took his Superbowl ring to "look at" and never gave it back. What is the chance that this money will ever be returned?
Even beyond that basic question is a more fundamental one - in what universe this is even considered a half-way decent idea? This shows that the institution of the government only ever operates for one institution, and that is government. In the middle of an economic slow-down such as the one Russia is facing now, the government has decided that keeping the government going is more important than investor confidence, contracts, or any of those either issues that come with a market economy.
Here, let me just take that for you!
The ramifications of a naked money grab such as this are myriad: decline in the stock market, further deterioration of (admittedly already fragile) property rights in Russia, financial volatility, and a further pallor of economic policy uncertainty. The upside? The government's budget numbers look good for one year. The shortsightedness of government never seems to amaze me.
With apologies to Foxy Shazam
Living in Russia, working for an emerging markets think tank, and being paid in rubles, makes you acutely aware of geopolitical tensions, emerging market ripples, and Russia-specific factors. This has been especially true over the summer as, to be polite about it, the ruble plummeted against the US dollar. Now, there's usually a good amount of seasonality for the ruble/USD exchange rate, with drops in the summer due to the lower price of oil and, of course, the fact that the Russians book it out of Moscow as fast as their private jets will take them (meaning more demand for foreign currencies and less for rubles). But this summer, the bottom dropped out:
From just about the 29.8 mark in February, the ruble is now at about 33.40 and climbing daily (with bank premia for foreign exchange, you can sell ruble at about 33.85 this morning with Raiffeisen). That's a loss of 12% (hellooooo depreciated paycheck), not gigantic by historical standards but still a pretty hefty drop in a market where the price of oil hasn't seen major swings.
But is this an aberration? Well, yes and no - looking at the Ruble since it became "new" in 1998, we're basically part of a trend that started during the global financial crisis and shows no signs of abating:
So we're not as weak as we were, not as strong as we were, just somewhat bouncing around in the 30-35 range. And this is in line with a general sell-off from emerging markets, as the financial world starts to believe that Ben Bernanke's money spigot won't run forever and "quantitative easing" might actually recede from the US. Russia is just part of a general trend of emerging market pullback.
That's the no, this is not an aberration. But the yes is that, for some reason, the world seems to be waking up to the unsustainable nature of Putin's economy, and we have a big shift in momentum just over the past two months. Putin hasn't helped any, as his new Central Bank head is fairly similar to those in Western countries; i.e. looser monetary policy somehow grows economies magically! And Russia has always been willing to use its economic riches for geopolitical gain (although, as a colleague of mine detailed in RBK Daily earlier this year, the Russian stance on Syria actually caused it some problems with the Saudis, who retaliated by ramping up their oil production to depress prices). The question is, can the almost completely un-diversified Russian economy survive the next round of economic uncertainty?
The best part of this is also the bit that makes me so angry - the structure of the Russian economy has been basically frozen in place during Putin's reign, due to uncertain property rights, bureaucratic nightmares (one need only look at Russia's place in Doing Business), and a widespread perception of corruption. And, of course, the institutions needed for a market economy are still fledgling here, subsumed to the formal bureaucratic apparatus of the state. Transaction costs may not have been spawned in Russia, but by golly this place perfected them. So why are traders and the world starting to fret now about Russia? Why is the ruble sliding now? Why have Russia's revised growth estimates suddenly taken the world by storm?
Better renegotiate my contract, because I sense that 34-35 rubles to the dollar isn't far off.
A new study by Alex Nikolsko-Rzhevskyy, David H. Papell , and Ruxandra Prodan takes a very interesting look at the monetary policy regimes in the US over the past 40 years, looking for deviations from the Taylor rule. By itself, this isn't great news - John B. Taylor (whom I used to work with at Treasury) has been trumpeting the myriad of deviations from his rule for years now. However, the paper uses rigorous econometric methods (including a Markov switching model) to extrapolate the regime that monetary policy operated under: high deviations are indicative of a discretionary regime, while low deviations can be characterized as (Taylor) rules-based.
The great leap forward that this paper establishes is that yes Virginia, indeed the Fed went off the rails from 2001 onward (and, as many Austrians correctly suggest, was the major force behind the Great Financial Crisis), much as it was off the rails in terms of discretion from 1974-1985. I wonder what characterized both of those eras? Well, in the 1970s, of course, it was stagflation (which Keynesians still can't account for and which smashes the incidental correlations of the "Phillips Curve" to bits), while in the naughties it was over- (mal-) investment. So there wasn't exactly the same effect during the Fed's discretionary period, but this can also be attributed to the fact that the international economic world was different in the 1970s (protectionist, closed, far less integrated) than the 2000s were.
However, on the flip side, the boom of the 1980s and the 1990s appeared to be the real deal. More sustainable and not affected due to the Fed, mainly due to the lack of Fed volatility... and we all know how damaging policy volatility can be. The authors don't explore these corollary effects (they've really done enough with their econometrics), but it's an interesting area for future research.
And of course, the institutional angle on this is similar to what I explored in my Banks and Bank Systems paper last year - the institutional make-up of a Central Bank may matter less than the institutional goal of the Bank, or rather, what the inherent nature of the institution is (as someone mentioned earlier this year, an institution where you need to have a great leader not to screw up the economy is by definition not a good institution). To put it simply, Central Banks wield great power and abilities to muck up an economy, and the only way to minimize this may be via the proper policies - which, in this case, seems to be adhering to a rules-based mechanism rather than going at it willy-nilly.
Welcome to this beta version of the Institutional Economist web-log (or blog, as I believe the kids from 2001 are calling it). I hope to provide constant scintillating commentary on the various economic issues of the day in these pages, and hope you will follow it!