December 8, 2014

By: Kelly Diamond, Publisher

Economists have tried to bridge the gap between what people are feeling and what is happening on a macroeconomic level. Often times, people living in one particular geography convince themselves that their economic experience is pervasive: that because their economy is booming then all economies are booming or vice versa.

Economics can be rather mundane if typical indices are not your cup of tea. However, there are other metrics now that are far more relatable. As a kid, I used to equate a dollar amount with how many things I could buy that I enjoyed or wanted. So someone said “$20”, I thought two CDs. Someone said “$100”, I translated that into what I could buy at the local craft store. Now we have the Big Mac Index: a simple, relatable measurement for the purchasing power of a given currency.

Well, perhaps it might be time for another index: The Russian Hooker Index!

Okay, not exactly, but when prices go UP and neither quality nor quantity follow suit, it is time to question what the men behind the curtains are doing.

Sanctions

“Prostitutes in the Russian Arctic port of Murmansk have unexpectedly hiked prices for their services by up to 40%, blaming the tumbling ruble exchange rate for their decision, it seems.”

“The ruble has lost more than 40% of its value against the dollar and 60% against the euro since the start of the year, as a result of Western sanctions over Russia’s involvement in the eastern Ukraine insurgency and a fall in oil prices.”

And there you have it: “as a result of Western sanctions over Russia’s involvement in the eastern Ukraine insurgency and a fall in oil prices”.

I don’t know why they do it, but politicians have and still do sell the notion of sanctions being an act of diplomacy, when history has proven quite unequivocally that they are only acts of war.

Such was the case in the lead up to World War II. The U.S. imposed blockades on Imperial Japan, Japan pleaded with FDR to at least enter into discussions about lifting them, FDR ignored them, Japan warned they would have no choice but to strike, and again FDR deliberately ignored them.

The US apparently believes that sanctions are only immoral when other countries do it because they are going even further in their latest resolution to involve themselves in the Ukraine/Russia conflict, on grounds that are about as shaky as the ones that ushered the US into Iraq after 9/11. (Beyond the call for sanctions, however, that is a completely different story for another day.)

The economic imposition upon an entire country of people brought on by a few elite government tough guys is so cruel and tyrannical I hardly think it even falls in the same general vicinity as “diplomatic”.

Is Vladimir Putin some wonderful, benevolent, cuddly teddy bear? No. By no means. When I write about places like Russia or China, it’s not to extoll the virtues of their leaders, as much as it is to show the economic picture: for better or for worse. But, the US is hardly in a position to judge Putin’s actions as imperialistic or self-serving, given their track record.

Debt

Where there is economic turmoil, there is undoubtedly going to be debt. Russia, being no exception, has some serious debt with which to contend; and they were doing fine until the Saudis dropped the cost per barrel on crude. Russia’s ruble is tied to oil, and they can’t compete in a price war with the Saudis. That was the left cross.

“A weak ruble also makes servicing foreign debt more expensive. Russia’s sovereign debt is just $57 billion, but its corporate debt is ten times as high. Some of it has been racked up by state corporations and national energy companies, which gives it a quasi-sovereign status. And by the end of 2015 Russian firms will have to repay about $130 billion of foreign debt.”

The upper cut is the sanctions which prohibit Russia from exporting, along with Putin’s face-spiting nose chop: refusing to accept some imports, such as food. For now, this has stymied the rate of collapse by preserving the value of their reserves, as they are still operating at a surplus, but it also means limited competition. Contrast Russia’s current predicament with that of Estonia’s, and this becomes patently obvious.

But put into terms we can all understand: if you no longer have an income, and you have a savings… the only consolation to slowing the rate at which you burn through the reserves is that the inevitable is delayed until such time as the lack of income situation is solved.

Inflation sucks. Literally. It sucks the value right out of money and hurts producers the most.

Cronyism

Russia is wrought with cronyism and corporatism. From bailing out banks after the Olympics for loans that won’t be paid back to bailing out friends who might’ve made a few bad investments to the tune of $30 billion, Vladimir Putin is sorely lacking the one thing that could turn his economy around: competition.

Granted, sanctions don’t help, but nor does the stale, recycled, false indicators produced by cronyism. Russia’s reputation of being a poor investment precedes it, which is why much of their money isn’t THERE… in Russia. It’s offshore. Surprise, surprise! While the Russian government might be a little slow in economics, the private investors aren’t. If you recall Russia’s little role in the Cypriot collapse, they had advance notice and permissions to pull their money OUT of Cyprus, while the citizens were forced to lose nearly everything.

Then there are the manipulations by Russia’s central bank:

“Since the central bank was known to intervene regularly to keep the ruble within a currency corridor, the banks could place one-way bets on the devaluation of the ruble. As a result the Russian financial sector expanded by 11.5% in 2013, although GDP grew by only 1.3%.” (Source: The Economist)

Economics isn’t very exciting until people begin to relate to it. Like any other issue, until it becomes personal, it’s just a story about other people. Whether it’s losing your job or the hike in price for a burger and hookers, the economic policies of the political elite will get you.