Yves here. A reader who has been living in Russia for a decade, teaching at what is called a pedagogical university, gave a detailed response to some questions we posed about how Russians are faring under the sanctions. He stressed that the sanctions are fresh and domestic conditions could easily deteriorate, potentially in the classic “gradually, then suddenly” fashion.
He flagged an issue we has pointed out early on: access to car parts. This could become a significant choke point, particularly for delivery trucks and agricultural equipment. However, Russia has started selling oil to Indian in rupees. So one route (admittedly with a lot of frictional costs no doubt attached) had opened up for getting some Western products laundered into Russia. Will Russia be able to make sure that any such purchases go to the highest value uses?
Another area of concern is pharmaceuticals. We didn’t flag this as top priority given that over 80% of the key components and even the actual compound of drugs sold in the US come from China and India. However, there are presumably quite a few specialty medications that are of solely Western origin.
But at least for now, pharmaceutical companies have not pulled out from Russia. From Kaiser Health News:
Even as the war in Ukraine has prompted an exodus of international companies — from fast-food chains and oil producers to luxury retailers — from Russia, U.S. and global drug companies said they would continue manufacturing and selling their products there…
But drugmakers, medical device manufacturers, and health care companies, which are exempted from U.S. and European sanctions, said Russians need access to medicines and medical equipment and contend that international humanitarian law requires they keep supply chains open.
Of course, with the rouble having plunged in value, any medications and devices sold into Russia might be catastrophically expensive.
By Sibir, a reader in Russia
Hi Yves,
Here’s a quick response to your questions (in italics):
There’s a widespread assumption (even among some readers) that Russians are suffering because sanctions…
First off, I think it’s good that sanctions are perceived (accurately or not) to be devastating since that lessens the pressure to take military action. Economic war is better than nuclear war.
Second, it’s too early to tell at this point what the full effect and ramifications of the sanctions will be.
Another point to always keep in mind (of course you know this, I’m just stressing it): Moscow and St. Petersburg ≠ Russia. (I live in a big industrial city in Siberia, surrounded by small towns and villages.) Economic inequality in Russia is very high, therefore a class and regional analysis is needed whenever discussing effects of these sanctions.
… like shortages of necessities level suffering.
So far, no shortages of necessities, afaict. No general suffering or panic.
They conflate the collapse of the rouble and the shuttering of the stock market as = to the collapse of the economy.
There is no “collapse of the economy” at this point. Obviously the ruble crash means a lot of foreign products will now become super-expensive, and Russians will have to return to buying Russian-made substitutes. (A process which, as you know, already began in earnest after 2014.)
The life-styles (consumption, vacations to Europe etc.) of upper-middle class and elite Russians have changed drastically. There’s no doubt that many wealthy Russians have been hit hard. SWIFT cut-off and Visa/MasterCard cancellation makes it very difficult/impossible for anyone in Russia to get funds from foreign accounts or use foreign-issued credit/debit cards.
As foreign companies leave, air travel cancelled, etc. there will no doubt be folks put out of work (e.g. foreign brand workers, Aeroflot employees, airport workers, tourism industry people, et al.) But I’m sure you’ve read about government actions to keep workers getting paid, and even talk about nationalization.
Is Russia facing a 1998-like default?
https://www.intellinews.com/is-russia-facing-a-1998-like-default-237696/?source=russia
… Axios has an updated list of major global businesses across multiple sectors which have abandoned Russia since the start of the invasion…
I personally know some individuals who are worried about continued availability of medicines they rely on. Others are worried about car parts running out. There are no widespread shortages yet, though.
The small band of pro-Western, Europhilic, Russian “liberals” are in state of total shock and psychological collapse, many attempting to flee asap from their long-hated homeland.
See Masha Gessen’s terrifying (and often intellectually dishonest) account:
Thousands of Russians have fled, afraid a new Iron Curtain will fall
I’m not an economist, so I can’t speak to critical imported parts for specific industries. In any case, there does seem to be a widespread popular enthusiasm for import-substitution and economic patriotism, and for a decisive, world-historical re-orientation toward the East.
20% interest rates are hurting mortgage borrowers and I assume a lot of businesses.
Yes, absolutely. Quite a few Russian politicians, analysts, commentators etc. have been attacking Central Bank policies (not a new thing, but getting intense now.) I think we need to see how government responses develop before we can assess the full impact of the higher interest rates.
However, I don’t want to be dismissive.
I agree; that would be a mistake. I’m seeing a lot of probably over-optimistic predictions of both military and economic outcomes. For example, this MMT-type economic analysis:
https://new-wayland.com/blog/the-russian-fiscal-toketa/
https://new-wayland.com/blog/the-unreasonable-ineffectiveness-of-sanctions-on-russia/
To me the outcomes of both the war in Ukraine and the economic war on Russia are still uncertain.
On a personal note, let me say the following:
1) Ever since I came here, I’ve noticed a strong Russian fascination with foreign brands, even on products that can easily be produced in Russia, like oatmeal, or candy bars, etc. (and the label “новинка” is put on just about everything, even the most run-of-the- mill product!)
2) This attraction to everything foreign and new is rather superficial; Russians easily revert back to old habits. People I talk to usually just laugh it off when I ask how they feel about losing all these imports–”We’ll just eat our potatoes from the dacha, and drink our homemade kvass! ”
3) Every Russian I ever spoke to has conveyed to me deep and dark memories of the 1990s. Understanding the social and economic devastation that occurred during that period is absolutely indispensable to understanding everything about Russia today. It’s fundamental. I obviously can’t go into all that now, but suffice it say that every Russian family knows what true economic collapse is. And they know they got through it. Russians are resourceful. Russians are survivors. (See attached file with an excerpt from Paul Klebnikov’s book, “Godfather of the Kremlin”―highly recommended.)
Potatoes are no joke:
[1990s]With Russia in a slump far worse than the Great Depression, people tapped an old survival instinct. Amid rumors of crop failure and impending food shortages, millions of city dwellers traveled to the countryside to plant cabbages and potatoes in their garden plots. The arable land just outside Moscow was swarming with people digging and planting. It was back to medieval agriculture. Chubais and Gaidar were proud of the fact that mass starvation had been avoided. But it was avoided not because prices had been liberalized, but because the Russian people had returned to the countryside. It was with a shovel and sack of seed potatoes that Russians escaped starvation in 1992 and 1993. (Klebnikov)
For many Russians, the 1990s will be the benchmark against which the “economic collapse” caused by the current sanctions regime will be measured. If that is true, then it seems unlikely that those sanctions will have the devastating psychological impact that so many in the West are hoping for. Time will tell.
I am thinking now that it’s probably not sanctions that could reverse Russian actions, or foment broad opposition to the Putin administration, but rather military failure in Ukraine. From the very beginning of this “operation”, I have had strong doubts about the end goals and their achievability.
00 Death of a Nation
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I’ve always marveled at Cubans keeping so many cars running for decades. How do they keep the parts supplied and functional? Ingenuity and potentially more mechanically simple cars is my guess. I’m already up against car part shortages in the fully open US. I can’t get a sensor replaced that is part of the air bag mechanism. The car is 13 years old, but the salesman at the dealership admitted they’re having a severe shortage of parts that would normally be easy to source in a week or two. I can only imagine how much worse a parts shortage gets with sanctions on top of that.
I know that some of the Cuban cars have had engines replaced with tractor engines. My impression from visiting Cuba (several times) was that there were substantial numbers of cars from Europe. If you were a tourist and wanted to rent a car (No don’t even think of doing this! – in case of accident you will not be able to go home until everything is sorted out – a slow process. If someone is injured and it is your fault I shudder.) it would be a new car or newish car. Airports and the like all had lots of cars for tourists to rent.
The place we stayed at in Havana was middle class. The woman who ran it wanted a manicure, so she hired someone who came to her house and spent 2 hrs with her. They had a routine. Looks like she did this regularly. They had a crew of labours gussying up the grounds. The car she and her husband owned – don’t remember the type – looked like something you would find in any lower class neighbourhood in Canada. Beat up, still running but something is always wrong. Owning a car definitely placed her as successful. Most of the taxi drivers I talked to did not own the cars they drove. Things are expensive, labour is cheep. Hand machining parts when necessary is a viable option – creativity is essential.
The really fancy old cars that you see in pictures are valuable as taxis for the tourists. Who knows what you would find under the hood.
The car we rented at the Havana airport was Chinese, new, compact. Very nice. We drove all over, visiting tobacco farms, mountain parks, and beaches. When we popped a flat driving over a pothole on the highway, a crowd of people stopped to help us change the tire.
One of the funny consequences of the Cuban “museum of 1959 US cars still in operation” is that the value is now driven by tourists wanting the experience. As a consequence one of the largest “off the books” Cuban imports is old, pristine US cars from the late 1950s, which are worth more in Cuba than in the US. I hear the ratline runs from parts of the US via Canada and Mexico. So if you go there, enjoy the ride. The car was probably in California or Connecticut three years ago.
Was chatting to my insurance agent. Seems that the repair shops have never had it so good. You cant buy a new fridge so best to repair what you have.
An old time amateur mechanics here, I find it easier to fabricate or repair old (70s and earlier) car parts so as to keep the car running. For newer cars, some parts (mostly electronic sensors and fuel injectors) just cannot be fabricated or repaired. For some defective sensors, the cars can still work but perform poorly. But without a crankcase sensor for example, the car cannot run unless you can rewrite the software (not sure if that is ever possible). Anyone with some perspectives or enlightenment?
There are several guys on youtube who go into great detail about their repairs, which almost always involve some kind of code reading in the troubleshooting phase.
I like Watch Wes Work – https://www.youtube.com/channel/UC2kEuLCRUrWAvHlupobn4aw/videos
but Pine Hollow Auto Diagnostics and South Main Auto are good as well.
From them I’ve learned that its possible to reprogram some/many of the control modules, though they find it cheaper to just buy a new/used one. In the case where there isn’t a new/used one available they have it reprogrammed.
“20% interest rates are hurting mortgage borrowers and I assume a lot of businesses”. This is a big mistake economically IMO. With so many opportunities for Russians to step in and replace foreign products, this calls for availability of capital not contraction. Interest rates should be cut not increased or at least held steady.
Ironically, Russia is the perfect lab to MMT/universal basic income. Low government debt. Low unemployment. Little leakage of domestic stimulus to foreign imports, near autarky.
agreed, that is when a UBI will work, under protectionism and a solid safety net.
Protectionism imposed by outside enemies is still Protectionism, and if Russia survives and then thrives, it will be yet another demonstration of the effectiveness of Protectionism. The International Free Trade Conspiracy will not be happy about that.
The central bank raised rates to defend the rouble. This move had zero to do with domestic markets.
Russia said it planned a lot of economic support measures (and gave a high level description of various programs getting going), but we have yet to see how much spending is involved.
Nabulina has for long been called a stooge for western interests and I would not only sack her, but put her in prison and forgetting the key. Leaving 300 billion USD of Russian central Bank in western accounts was sensless. My 83 years old mother would not have done that.
And Nabulina was not sanctioned:
http://johnhelmer.net/the-majority-in-russia-supports-putin-for-them-the-war-is-a-form-of-resistance/
Nowadays almost all mortgages in Russia are ruble-denominated, and usually fixed rate. So ruble collapse is a big giveaway to mortgage holders. Not sure how banks will fare though.
There is a government program for mortgage payment holidays being currently rolled out – I believe if you can document that your income is down 30% or more since 2021 you qualify for 6 month payment freeze.
“So ruble collapse is a big giveaway to mortgage holders.” How do you mean? This is true only if they have an income in foreign currency or substantial savings in foreign currency. If they pay the interest and installments on their mortgage with an income in rubles, the dollar-ruble exchange rate is irrelevant. They don’t gain anything at all by the ruble being worth less in dollars.
Ruble fall will be followed by inflation (since a lot of goods are imported), and that will be eventually followed by salary rises. So right away nothing will change, yes, but in a year or two it will, and mortgages are usually for 10+ years
I am at a loss to understand why a reader like you, in Russia, would make such a misrepresentation. One of my very close contacts from the mortgage crisis in the US was an adviser to the Russian government on how to create a securitization market in Russia, and he took great pride in steering Russia clear of all of the defects of the US product.
I never suggested they were not in roubles (and it should separately be obvious because the central bank’s interest rate hike would have no impact but the currency collapse would).
Not only did several parties who live or have lived in Russia since the time my contact was working in Russia say the exact opposite, I had to waste time on Google proving out what they told me. This article is from mid 2021, as in current except for the war period:
https://www.expatica.com/ru/housing/buying/mortgages-in-russia-758273/
More generally, long-dated fixed rate mortgages are rare outside the US because they put all of the interest rate risk on the lender/investor. Where they exist, it is due to government subsidies, notably our Fannie and Freddie.
I wrote my comment before seeing yours, and my point was that damage to mortgage owners from ruble swings and central bank rate changes would be limited, not to deny your points (with which I actually agree).
As for floating-rate mortgages, I am afraid you are wrong, and so is the article (or perhaps it applies only to expat niche). Here are a few recent articles from major Russian news sites with google translate
Vedomosti.ru 2021: The Bank of Russia has prepared a draft law on the regulation of loans with floating rates, including mortgages. Although not a single bank in the country currently offers such loans…
RosBusinessConsulting 2021: The Central Bank is in favor of limiting the issuance of mortgages at a floating rate. Although such loans are almost never issued now, the regulator is proactive in order to prevent citizens from defaulting…
P.S. And to double check I just called a realtor friend here in Moscow. She also said that the only time when the mortgage rate changes is if you renegotiate the mortgage.
I have e-mailed my two sources with your comments. I am prepared to concede that I was wrong, by virtue of the unfortunate cliche, “a journalist is only as good as his sources” and apologize if they backtrack.
But more generally, fixed rate mortgages are ticking time bomb for banks, witness our S&L crisis. Fannie and Freddie engage in massive interest rate hedging to offset that risk, to the degree that it is economically pro-cyclical. Do Russian banks have the depth of medium-long dated interest rate derivatives, or the ability to nimbly manage short-term hedges?
About 40% of enterprise credits are floating rate, and after central bank raised its rate from 10% to 20% overnight they are in trouble and require support as well.
We are at economic war (in addition to real one) and “let everyone manage his risk responsibly” is good for peacetime but not a war-winning formula. Government has to take lead, use its resources to protect sectors of our economy under attack and plan on how to inflict harm on theirs.
Almost all French mortgages are at fixed rates for 20 years and the government does not compensate the banks for interest rate risk, at least not formally.
Denmark have them. With no government subsidies!
The way they work is that the mortgage companies, like Nykredit (there are several), collect mortgage applications to create a large block of mortgage bonds at a certain price and interest rate, then sell them off on the stock exchange. There is a fee for this kind of mortgage and one can only borrow up to 20% of the value of ones home with these, the rest will be a bank loan because Danes are really poor savers. However, these bonds are convertible, home owners are holding short positions in these bonds.
Like this one: http://www.nasdaqomxnordic.com/bonds/denmark/microsite?Instrument=XCSE3NYK01E30DA53 – that is a 3% mortgage with expiry in 2053.
We can see that the effective interest rate have gone up quite a bit quite recently, this bond used to sell at 100. What happens now is that home owners will be getting offers for converting to a higher rate mortgage in return for a lower principal, locking in the gain in their short position. Conversion of mortgages is the most popular Danish national sport. Of course there is a fee for that.
The people who buy these bonds are people and institutions who have financial obligations at some specific time in the future.
—I think it’s good that sanctions are perceived (accurately or not) to be devastating since that lessens the pressure to take military action. Economic war is better than nuclear war.—
Europeans and Americans are in the middle of the First Financial World War. No one has gone on TV and said it though.
Yves, thank you for the embedded doc: The Death of a Nation. That should be required reading for every American and European.
Helluva story but you want to know the worse of it? It was never necessary. This was Capitalism with a capital C let loose to run rampant in a society that trusted in the west too much. It didn’t have to be this way. But I do wonder. If I was a Russian, would I suspect that the purpose of all these sanctions was to re-create the conditions of the 90s all over again in Russia to achieve regime change in Moscow? The French and the British have let slip that this is what they want to see happen in Russia. They are being hit with sanction after sanction but I get the impression that they are reaching the bottom of the bag of what they can do. And if the Russian people soldier through and cut back on luxuries, choose local products instead or even start to make a local equivalent if a substitute is not available, what then? Whose people will tolerate worsening supply issues longer? Because we in the west are getting blowback from this war and unless things wrap up earlier, it promises to get harsher and harsher.
And we, certinly in Europe, dont have smallholdings to fall back on. If food runs out at the supermarket, the fast majority of the poputlation will starve.
Its scary times.
It was a choice by Chubais and Gaidar to make sure it would be impossible to return to “socialism” even if the communists won in the elections. As far as I know it’s also the main reason liberals will never (as in very, very long time) again get more than 5% support in Russia.
If Russia, China and most of the other countries of the Shanghai Cooperation Organization re-orient their economies and societies to producing for eachother and consuming from eachother more and more, they will need the outside world less and less. They can all become a great big One Belt One Road Co-Prosperity Autarkasphere, happy together on Mackinder World Heartland Island.
WHAT IS THE POINT?
All of this pain. Disruption. Deaths. 2 million-plus refugees.
Why?
What he hell sense did the invasion make? How can anyone possibly believe Russia is better off after it?
None of this is rational. The one rule of war everywhere – when the body bags start coming home people start to ask why. Putin has no answer to that question.
Don’t thread on me?
Existential fear of a “NATO” (USA) first strike coming out of Ukraine.
And also the potential ethnic cleansing in the east.
“Death of a Nation” is an astonishing book; Russia 1991-4 and Germany and Austria 1920-28, complete with potatoes in the Garden, disastrous inflation, old people rooting through the garbage and 15 year old boys in makeup with their daddies in the nightclubs. And the repressed fury of the population against it all.
Each got a revival, a return to primitive, self-absorbed, idealistic nationalism. The Austrians and, may I say, the Russians, lucked-out. The Finns, the Hungarians and the Portuguese did OK too. The Germans didn’t. And we got Roosevelt instead of Huey Long or Father Coughlin. A lucky country.
Putin is not Hitler. A bit Salazar, that Portuguese “Government of National Salvation” economist/Catholic mystic; a bit the Finnish Marshall Mannerheim; a little bit Hungary’s Admiral Horthy (Hungary; the only landlocked country ever run by an admiral).
A quick look at what 24 cruise missiles did to the NATOish training base 15 miles from the Polish-Ukrainian border two days ago should tell you what the first day of this war might have looked like if Putin had been Hitler. Instead he’s a non-Hitler, like President Clinton, who convinced the Serbs to toe the line in 1999 at a cost of only 500 Serbian civilians’ lives. If truth is always the first casualty of war the civilians are usually second in line. Remember that the next time you hear some US Senator bloviating about what “The US must do.”
And the sad part is that Senator Bloviate is sometimes right.
One may wonder how WW2 had gone, at least in Europe, if not for FDR getting a third term.
after all, if one slant US history just right it borders on both apartheid and fascism.
Thus it may well have been content to slap Japan silly for being an upstart in the Pacific. As in a sense the Pacific is as much covered by the Munroe doctrine as the Americas.
About car parts: before Covid I ran an outdoors business in Central Asia with cross border trips into Russia. A must was a viable 4 wheel drive van. It was a perennial occupation as modern 4WD are useless in the wilds (to much electronics) and the Russian alternatives were extremely tough but very thirsty and you always had to have a whole lot of spare parts along as they were so unreliable. We went through Nissan Patrol, old Landcruisers and finally stuck to old Mitsubishi van L300. The last one we bought ten years ago in Germany for 2000€. It was a lucky buy as at that time the road thru the Sahara was closed and there were no Africans looking for the same vehicle. It had a gas engine which was priceless as the gear box practically lasts forever on the gas engine. Today the same vehicle (now 30 years old) can´t be found for less than 10 000€
Of course when you run a fleet of basically old timers you also become an expert in spare parts and the situation is the same in the stans as in Siberia. In fact when we ran out of options we tried to get what we needed in Siberia. We always tried to get used Japanese parts first. Super quality and you could actually order them at online auctions in Japan if you knew somebody who could write Japanese. Second choice would be Korean spare parts. Mostly used but some new. The third option was new Chinese spare parts. It boggles the mind what is produced in China. There´s practically nothing that the Chinese will not churn out if there is even a tiny market. The problem is quality. For instance suspensions. We´d try to get usesdJapanese ones as they would reliably last thru the season. But if we couldn´t get them we´d always find new shiny Chinese ones which we ´d buy always double the amount needed. Just in case.
I am sure with new cars its the same. Add to it the fact that anybody with a knowledge of Russian will find the latest VW, BMW and Mercedes diagnostic software on yandex and then run it on cheap Chinese hardware I doubt that car spare parts will quite be the problem. On the long run I expect though the numbers of accidents will go up as Chinese spare parts will work for a while but not very long and then fail often quite suddenly
This is a central point, and it is something most Americans are clueless about: “Every Russian I ever spoke to has conveyed to me deep and dark memories of the 1990s. Understanding the social and economic devastation that occurred during that period is absolutely indispensable to understanding everything about Russia today. It’s fundamental. I obviously can’t go into all that now, but suffice it say that every Russian family knows what true economic collapse is. And they know they got through it. Russians are resourceful. Russians are survivors.”
Yet Russia was one of the main cases in Naomi Klein’s Shock Doctrine. You’d think that someone in the U.S. chattering classes could borrow the book from a library or even call up notorious Canadian Klein.
Between the revenge of Shock Doctrine, and the avengers wanting Putin’s head for “overturning the 2016 election and imposing Manchurian Candidate Trump on the freedom-loving U.S.A.,” I’m detecting a whole lotta What Goes Around Comes Around.
Those few westernized “liberals” fleeing would very likely be doing Russia a favor.
The attached chapter explains why most Russians think that the West has continued to wage war on Russia to this day. (Spoiler: because it’s true)
We waged a similar war on Mexico by way of the Peso continually going down in value in the 1980’s until the Nuevo Peso (1,000 of old =1 NP) came out in the early 1990’s. NAFTA passed a year later.
It corresponds with when the floodgates opened for Mexican immigrants to do all of the work Americans don’t want to, and some they could if the immigrants didn’t outwork them while being willingly underpaid, as their $ bought so many Pesos in a remittance down under to their family to keep on going in a world where over a decade, money died on a country in slow motion, going from 12.5 Pesos to the $, to 3,300 Pesos before it was all said and done.
We bitch & moan about how we don’t get any interest on our savings, but imagine the plight of a middle class Mexican with 100,000 Pesos in the bank in the late 70’s which was worth US $8,000 then and by the end in 1993 it had the buying power of thirty pieces of paper, i.e. greenbacks.
The author doesn’t say, but what do all the Russians who survived the awful 1990s see as the cause? I would think that if they saw the Yeltsin folks as doing the West’s bidding and Putin as having put an end to that, such an understanding would increase the likelihood of folks standing by Putin in the current crisis.
Mearsheimer says the Liberal Economic Order has collapsed/is collapsing. I remember when Russia collapsed in the 90s there was talk that it was because the West could no longer subsidize them. I’ve never understood exactly what that meant except perhaps the world economy was liberal-military. And without hot wars eventually the whole thing collapses because there is no engine pulling it. (We definitely need an engine to see us through – preferably a renewable one, no?) This post by Sibir and the except from Klebuikov’s ‘The Death of a Nation’ was so revealing I’m not sure how to interpret it. Stereotypes fail me. It was shocking. I knew at the time that the USSR had fallen and that Russians were dying young – but I didn’t have any sense of the hard truth. It was a TINA apocalypse. We are seeing some of it here in the US on a slightly slower scale. The culprit? I think the only reason anyone believes that there is no alternative to Liberal economics must be because of the very conservative (almost eternal) idea that money has value. I apologize for harping. But what else allows this sort of nihilistic collapse to occur? Repeatedly? So, searching for some optimism, I’m looking at Russian resilience – they lived through it. And Putin was there from the beginning. In 30 years, a full generation, Russia seems to be back, strong and tempered. Putin himself is looking a little consumed, so is Lavrov. But if I were betting, I’d bet on them. And a well designed Toketa.
Revenge is a dish best served Cold War.
“I think the only reason anyone believes that there is no alternative to Liberal economics must be because of the very conservative (almost eternal) idea that money has value.”
I believed that myself until 2008. Hah! What a dolt was I.
https://tomluongo.me/2022/03/13/ins-outs-whose-money-is-it-anyway/
Banking and finance basically.
I think there is a passage in one of the later volumes of Das Kapital (that Engels put together after Marx’s death) that place the blame squarely on finance capital. And suggested that industrial capital really should join with the workers against finance during a crisis. But also lamented that when they had done so historically it was usually far too late.
And in modern terms look into the economic modelling work of Steve Keen. His findings suggest that once the debt burden of the private side of the economy hit some 200%+ shit will hit the fan. And only in the wake of that will public debt rise. Thing is though that by keeping public debt low the government effectively chase households and companies into the hands of finance.
As for money, it is effectively an accounting system. You take the total economic activity of a culture/nation/group/whatever, and then divide that across an arbitrary total of money. If you want to keep the value of money stable, the total has to align in some sense with the total economic activity of the using it for their accounting. Too much and it will drop relative to the activity. Too little and it will rise.
And as long as private banks can issue loans, they are the ones that adjust that total rather than the central bank. Because the multiplier theory is a sham and distraction. Even the Bank of England acknowledge that private banks are not limited in any way regarding the amount of loans they can issue, as long as people are “willing to” get into debt.
‘We are seeing some of it here in the US on a slightly slower scale.’
Like this?
https://twitter.com/Pinko69420/status/1503846285442486277
Here in the US I kept an old car alive for many years, not out of necessity but just because I liked it. We have stores like Autozone and your account sounds true. Such stores tend to sell rebuilt OEM or flat out made in China parts. The Chinese parts are functional but may have fit issues. The rebuilt can also have issues with things like replacement CV boots that will never last as long as the originals.
But I drove that car for a long time and if I can do it I’m sure the Russians can as well, and they certainly have access to China (which if this keeps up we may not).
A bit of perspective on the ruble’s recent decline vs the USD/EUR. I was living in Moscow in August 1998 when the default occurred. The ruble went from 7 to the USD to 28 or so almost immediately (2-3 days IIRC). Many banks failed (including ours). Visa/MC stopped working, not due to sanctions but because the whole banking system froze up. Supermarket shelves were near-empty and stayed that way for a month. I had an Amex card back then and I was glad I did, as Amex had its own payment network and functioned just fine.
The ruble/USD rate has recently dropped from about 80 pre-war to about 110. The equivalent in 1998 terms would be 320, and I just don’t see that happening this time around. Visa/MC still function inside Russia for cards issued by local banks, and I’m not aware of any bank failures or empty supermarket shelves. Time will tell, but so far this is much tamer than the events of August 1998. For Russians, anyway.
I have long feared that the Russians would view the Western looting of Russia in the 1990’s as the Germans came to view the Versailles Treaty. The Russians have reason. It was so unnecessary, kicking an enemy while down instead of giving a helping hand, a piggish looting and swilling that enriched only a few piggish oligarchs, and no one else. But I am insulting pigs by comparing them to Larry Summers.
But…….. the US had to teach them a lesson that communism is bad and capitalism is good. Never mind most of the Russians weren’t card carrying Communists. Never mind that US economists strongly suggested to do what Naomi Klein describes as shock doctrine.
As an American I am embarrassed ? at what we’ve devolved into since I was born, therefore also part of it since it is done in the people’s name and my tax dollars.
What an eye-opening post!
I completely agree with the above comment about the 1990’s “Shock-Therapy” being the Russian equivalent of Germany under the Versailles Treaty — this is why I will repeat the quaint term revanchism for the attitude of the Russian government toward NATO expansion and U.S. Black Sites in “Ukraine” and the former Warsaw Pact and SSR’s.
I run a 1988-model car of German manufacture. My mechanic, a bright fellow raised in Quezon City, is very good at organizing parts for it. There’s a hierarchy of manufacture: Poland/Slovakia/Portugal for plug-and-play; then the stuff from China that doesn’t always fit but that can be made to work. Just about everything needed is still available, although sometimes there’s a delay in the supply chain. Ironically, the maker’s current new vehicle production is on pause due to most of their wiring-harnesses being loomed by low-wage workers — in “Ukraine.”
Let the western mis-leadership believe in the fairy-tale that their sanctions will be effective. I agree with Sibir that it beats the dickens out of the other options!
Thanks for this post.
Thank you Sibir! And thank you Yves!
I suspected as much …
I saw a story about people in Moscow upset about losing McDonald’s and it made me wonder why, but this post explains it a bit – re: “foreign brands” … :) And short memories. Besides, Kvass goes well with Chebureki … if US style hamburgers aren’t around … ;-)
As I’ve said before, I hope this accelerated endgame gambit by Putin does not result in irreparable animosity between the two countries. If only de-nazification abroad could be followed up by de-oligarchation at home. I know … one thing at a time.
All the best to you, Sibir.
To add to Maxwell’s statement, I arrived in St. Petersburg in August 1999. It was a failed state and what functioned was a mafia state. As i was studying, my dorm had the classic, soviet “floor lady” and they were all pensioners but their pension payments generally ran 6+ months behind. Their jobs at the university paid about $20/week (2, 24 hour shifts). The instructors at the university were similarly paid. Granted, a loaf of bread cost <$0.10 and the same for a bottle of beer while many still lived in apartments that had been state owned with public (no cost) utilities. It was still the age of the dacha garden and absolutely crushing poverty. A little old lady outside a metro station in the winter selling individual, cheap plastic bags for a fraction of a cent. People attempting to sell what were clearly the contents of their kitchen cupboard on the sidewalk.
I agree with the piece that Russians remember this time viscerally. What should have been a time of hope was one of crushing despair for the majority. Anyone over the age of 25 will have vivid memories of that time. And, yes, Putin's popularity is directly tied to him mitigating the worst of those years. Even when it doesn't lead to people truly liking him, agreeing with him or wanting him to be president, there is at least respect. Granted, his greatest failure as a leader has been his lack of developing the internal Russian economy, although since 2014 he's been forced to address that to some degree.