A Tale of
Two Nations: Russia vs USA Economic Prospects
By F.
William Engdahl
July 21,
2017 "Information
Clearing House"
- Taking
the extraordinary USA and EU economic sanctions
against Russia and low oil prices since 2014
into account, Russia’s economic outlook looks
excellent going forward while that of Trump’s
America looks bleak, to put it mildly.
Paraphrasing the memorable 1992 Presidential
candidates debate between a then-young William
Jefferson Clinton and George H.W. Bush, “It’s
the debt, stupid.”
In the
past few years too many US economists and
analysts such as Moody’s Credit Rating have
tried to dismiss the economy of the Russian
Federation as a near-bankrupt Soviet-era oil and
gas-dependent economy, devastated by the 2014
collapse in oil price. This is a grave mistake,
especially so as military calculations of NATO
in many cases depend on such poorly-informed and
dated judgments. Here are just a few select
examples of what is really going on in terms of
cutting edge and even bleeding edge technology
R&D and commercialization in Russia in the
civilian sector. The West’s neo-colonial smug
arrogance has no place.
Yes, the
physical economy Russia has great problems. I’ve
traveled throughout Russia many times since
1994. I have seen much beyond the breath-taking
beauty of the Czar palaces of St. Petersburg or
the spectacular Moscow Kremlin fortress
constructed in the 1480’s. I’ve seen dilapidated
infrastructure and streets with New York-style
potholes in Russia’s smaller cities.
I grew up
and for some time worked in proximity of slums
and poverty in cities such as Boston, New York,
Newark, or Dallas as a young man in the United
States during the 1960’s and 1970s and after.
The differences with Russia’s economic deficits
are enormous. The growing poverty in America
since the beginning of the 1970’s was as a
deliberate economic policy consequence of Wall
Street policies and notably so after the
decision to abandon the Bretton Woods Gold
Exchange Standard in 1971.
By
contrast, the poverty in Russia today is a
residue of the seventy years of Soviet
conditions during the military necessities of
the Cold War and the fatal flaws of its rigid
central planning that suppressed individual
initiative and creativity, or rather penalized
it. That was aggravated in a devastating manner
by the Gorbachev Perestroika monetary mistakes
and the criminal CIA-backed looting of Russian
state assets by the Yeltsin mafia in the decade
of the 1990s.
In brief, the
United States, when the falsified US Government
economic data are stripped away, is falling
deeper into debt and decay as money and Wall
Street mega-banks reign supreme like Gods of
Money. Russia in contrast is growing slowly but
definitely out of its economic and
infrastructure deficit of the past decades, in
fact of the past century since the
Western-backed Lenin coup d’etat of
1917. While the
United States over the past five decades has
been tearing down its once prospering cities,
infrastructure and industry, Russia is building
up its national economy on an advanced
technological basis with some of the most
creative scientific and engineering minds on
Earth. As Moody’s or S&P language might put it,
“USA economy: Outlook Negative going forward;
Russia economy: Outlook Positive going forward.”
A Debtors’
Prison
The
difference between the present economic
prospects of the United States and that of the
Russian Federation is fundamental. To begin with
we need to examine the relative debt structures
of the West versus the East. In the United
States debts are soaring and the slums and
homelessness are spreading, hidden behind United
States’ Potemkin Village ultra-wealthy
gentrified urban areas like Manhattan in New
York City or Washington D C and its wealthy
suburbs.
Household
debt in the USA, almost nine years after the
financial collapse of September 2008, and after
more than 8 years of near-zero Federal Reserve
interest rates, is alarmingly high, higher than
almost any time in the postwar period at almost
80% of GDP.
Of that
household private debt, student loan debt for
college education is more than $1.3 trillion, or
an average debt of $48,000 a student.
Astonishingly, students’ indebtedness for higher
education has passed Americans’ legendary credit
card debt in dollar terms. In early 2017
according to Federal Reserve and other data more
than 44 million Americans held a total of some
$1.3 trillion in debts for higher education. In
1997, only 20 years ago, total student debt was
less than $30 billion, hardly a drain.
One reason for the
explosion of debt is that total costs of a
higher education in America today are soaring,
notably at state-supported colleges. Costs rose
41% from 2002 to 2012. At the same time the
incomes of the families of the households
sending their children to college has stagnated
and after 2008 declined in
real terms.
For most
of the immediate postwar period until the great
economic crises of the 1970’s, higher education
in the United States had a tradition–most
especially at state universities– that tuition
costs were minimal or state subsidized so that
higher education could be open to anyone “with
brains” as Harvard President Charles W. Eliot
once charmingly put it. Higher education was
seen by states and communities as an investment
in the nation’s future. Those were the days
before globalization and the great labor
outsourcing. Now Federal government monies to
support low-cost state college tuition have been
severely cut, and state budgets across the
country are still bleeding from the 2007-8
financial crisis.
Total
private household debt in the United States
today is over $12 trillion for combined home
mortgage debt, college loans, car debt, credit
card debt. That’s a huge burden weighing on the
growth potential of the US economy.
Add to
this the exponential growth of the US national
debt, now just under $20 trillion, and it
becomes clear that the campaign rhetoric of the
Trump Presidency to “make America Great Again”
requires emergency economic measures and
effective and well-thought-through Chapter 9
type bankruptcy-reorganization of the nation’s
debt in order to allow the United States to
again become a real manufacturing economy not
merely a financial speculator in debt.
In 1980 at
the start of the “debts don’t matter”
irresponsibility of the Reagan-Bush era, the
level of Federal debt was a very manageable 30%
of GDP. By the end of Bush Senior’s term in
January 1993, it stood at more than double or
63% of GDP. It was beginning to “matter,” but
Wall Street and bond traders loved it. When
George W. Bush, took office in 2001 it had
fallen back to 54% through no fault of Bush but
rather to Baby-boomer demographics. From there
US national debt took off like a ballistic
missile, doubling by March 2017 to more than
104% of GDP today, just a whisker below a
staggering $20 trillion.
This debt
in the USA, private and public, is the true
reason the Fed, more than eight years after the
worst financial crisis in world history, still
fears to bring interest rates much beyond the
historically low 1.25% at present for fear of
triggering a domino debt default collapse of the
entire economy. Russia faces nothing remotely
comparable in terms of such a debt prison.
The situation for
the EU countries is only slightly better. The
Eurozone countries have an average of 90% debt
to GDP, far beyond the 60% ceiling of the
Maastricht Treaty. In Greece it
stands at 179 %
, followed by Italy at 133 %, Portugal at 130 %,
Cyprus at 107 % and Belgium at 106 %.
Russia
looks quite healthy
By contrast
Russia’s state debt is almost miniscule at 13%
of GDP in 2016, the US dollar equivalent at
present exchange rates of $190 billion.
Inflation is currently measured between 4-5%.
The Ruble is stable since the sanctions crisis
and oil shock of 2014. And foreign investment is
coming back into Russia’s
economy.
Moreover, despite the collapse of world oil
prices after September 2014, Russian oil exports
have held firm or grown and gas exports via new
pipelines to China and elsewhere in east Eurasia
are about to give added revenue to state-owned
Gazprom and other Russian oil companies. Russian
domestic production costs for oil and gas are
priced in Rubles and sold for dollars so the
impact of a significant Ruble fall versus the
dollar after 2014 was hardly severe as US
Treasury financial warfare jockeys might have
hoped.
Russia’s Central
bank reserves today are more than healthy. In
addition to a major restocking of its gold
reserves the total reserves today stand at $406
billion, higher than in 2014 when it stood at
$385 billion. In addition the Finance Ministry’s
Sovereign Wealth Funds total another $90 billion
at current exchange
rates. Moody’s
and S&P, tell me where is the ”risk“ of
sovereign debt default that you still insist
rating Russian state bonds as “junk”?
Political
Bias Against Russia?
A note
here is in order about the political nature of
select sovereign credit risk ratings by the
dominant US credit rating agencies Moody’s and
S&P. During the depth of the ruble crisis in
2014 when plunging oil prices and US and EU
sanctions forced Russian companies to repay
foreign dollar or euro loans, as the West was
threatening cutoff of SWIFT interbank lines to
Russia, capital outflow reached $151 billion for
the crisis year 2014, most in the last quarter.
In 2016 capital
outflows out of Russia totaled a mere $15
billion, most to Russian companies overseas and
the ruble remained stable. Despite the absence
of any hint of a possible Russian sovereign debt
default as in the Soros-linked ruble default
crisis of August 1998 under the chaotic Yeltsin
era, both Moody’s and S&P still keep Russian
government debt rated at “below investment
grade,” or “junk” grade, meaning that
international pension funds and other major
investors are prohibited by their own regulators
from holding Russian state debt despite very
attractive interest rates
compared with
the EU or USA or Japan.
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Critics of
the political bias of certain Moody’s and S&P
sovereign debt ratings see the giant Wall Street
rating companies who hold a de facto monopoly on
world credit ratings, as too often operating
with political bias. They cite the example of
the spectacular bankruptcy of Enron in 2001 and
the fact the two US rating companies continued
to give Enron top ratings until the eve of
bankruptcy. Enron’s CEO Kenneth Lay happened to
be a close friend of the Bush family which some
believe played a role in the ratings blindness.
Similarly, Moody’s and S&P did not warn of the
largest financial collapse, that triggered by
the meltdown in the bond-rated Mortgage Backed
Securities market in so-called sub-prime real
estate loans in the USA beginning in March 2007.
They should have. They rated the Mortgage Backed
bonds behind the crisis.
In effect
it would appear that Moody’s and S&P (less so
Fitch the smallest US rater of the three) act as
an integrated adjuvant of the US Treasury
economic warfare sanctions unit, using a
blackmail of lowered credit rating to pressure
Russia into destructive liberal economic reforms
it does not at all need.
Let’s look
briefly at some positive industrial areas of the
Russian real economy instead of the virtual
reality of Western ratings games. Here it looks
anything but bankrupt or junk.
Civilian
Sector to Gain from Military
The very
advanced military technology that Russia’s
intervention into the Syria war has demonstrated
to the world confirms that Russian science and
technology are world-class, and often far more.
In a speech July 9
at the opening ceremony in Yekaterinburg in
central Russia of the International Industrial
Trade Fair INNOPROM-2017, Russia’s President
Vladimir Putin stated, “Another key issue is to
boost volumes of hi-tech production for the
civil purposes by the defense industry complex.
The Ministry of Industry and Trade is actively
engaged in this issue
now.”
This
represents a sea change in Russian attitude
towards its military technology sector. During
the Cold War, a heritage of Stalin-era obsession
with security, the military industry was
completely sealed from any possible interaction
with the civilian economy, resulting in huge
imbalances in technology spread into the
domestic economy to the present.
Civilian
Advanced Aircraft
An
instance of the kind of innovation and
technology potential of this policy of
supporting high-tech manufacture drawing on
Russia’s extraordinary military aircraft
experience is the rollout this May of the first
test flight of Russia’s Irkut MC-21 narrow-body
commercial jet. The development reportedly sent
shock waves through the boardrooms of Boeing and
Airbus.
The Irkut MC-21 has
the widest fuselage of any narrow-body jet in
the market giving more passenger comfort
compared with the “sardines-in-a-can” passenger
space on comparable Boeing 737 and Airbus A320
models. More attractive, especially for many
developing markets in the Middle East and Asia,
is the fact its price is some 15% below the
A320. More interesting is the technology in the
construction. The MC-21 has Russian-developed
unique carbon fiber wings, giving the plane a
30% composite content. The wings were developed
using a revolutionary new resin transfer
infusion process created by AeroComposit in
Ulyanovsk, Russia. Boeing 737 Max and Airbus
A320 use metal
wings.
Notably,
the Irkut manufacturer is part of a new state
aircraft group United Aircraft Corporation or
UAC. It was during his first Presidency that
Vladimir Putin merged the former military
aircraft makers from Ilyushin, Irkut, Sukhoi,
Tupolev, and Yakovlev to form a single aircraft
group, UAC, which is 80% state-owned.
In addition to the
MC-21 narrow-body passenger medium-range jet,
UAC has developed the regional Superjet-100
aircraft, certified for international routes in
2012. UAC subsidiary company, Sukhoi, claims
direct operating costs to be 6–8% lower than its
key competitor, the Brazilian Embraer 190/195
and can accommodate 22 more passengers. I can
personally attest the aircraft is very
comfortable.
Russia’s entry into
the strategic civilian passenger jet market has
recently taken on another new dimension in terms
of creation of a Russian-Chinese joint venture.
In June, 2016, the UAC and the China state
aircraft corporation Comac created China-Russia
Aircraft International Co, Ltd. (CRAIC), based
in Shanghai. CRAIC is responsible for product
and technology development, manufacturing,
marketing, sales and customer service,
consulting, program management. The two
companies are creating a new generation of
long-range wide-body commercial aircraft to
compete with Airbus A380 and Boeing 787. The
Sino-Russian jet will have a range of up to
12,000 kilometers (7,500 miles) and seat 280
passengers with operating costs 10-15% less than
its rivals. UAC expects the new joint jet will
take 10 percent of a market
dominated by
the Boeing 787 and Airbus A350.
Advanced
Railway Equipment
Another
sector of infrastructure manufacturing
excellence from Russia is the extraordinary
development of Russia’s United Wagon Company.
Russia’s Putin, then-Prime Minister, attended
the opening of the highly sophisticated new
cutting-edge rail car factory of United Wagon’s
Tikhvin Railway Car Building Plant in 2012 at a
cost of almost $1 billion. Since then United
Wagon has grown to be a major world-class
builder of advanced specialized rail wagons, and
is larger than any European freight wagon
producer with 22,000 wagons a year.
The company took
best practice experiences from the automotive,
aerospace and rail industry around the world in
the design of the factory. It combines foundry
production and vehicle assembly on a single site
giving it flexibility and productivity rates
“several times” in excess of established Russian
wagon plants. TVSZ can produce a wheelset every
4½ minutes and complete a wagon every 24
minutes. The factory outside St. Petersburg
features the most advanced automated equipment
and robots similar to equipment used by BMW and
Airbus. The only comparable casting machinery is
used by Daimler in Germany. TVSZ rail wagons are
50% cheaper to maintain than established Russian
designs, and more
track friendly.
During
their recent talks before the Hamburg G20
meeting, Russian President Putin and China
President Xi Jinping discussed incorporating
Russian rail car manufacturing capacities in the
development of the vast high-speed rail
infrastructure that is being built across
Eurasia today including Russia and the Eurasian
Economic Union. Clearly United Wagon was
uppermost in Putin’s mind.
Unlike the United
States which to the present day has managed to
not build one single mile or kilometer of
high-speed rail track capable of speeds above
140 mph, Russia is expanding its high speed
rail, now officially in coordination with
China’s vast One Belt, One Road Eurasian
infrastructure project. Russia and China are
jointly developing the priority project of a new
high-speed rail link from Russia’s Kazan to
Moscow, ultimately to be a key link in the OBOR
Beijing to Moscow line. The Moscow-Kazan
high-speed rail link will be 770 km long, with
trains moving up to 400 km/hr and stops every
50-70 km. The high-speed journey from Moscow to
Kazan will take 3.5 hours compared to the
current 14 hours, revolutionizing economic
relations all along the
line.
With an eye to its
growing trade relations to her East, Russia
announced last year that it will build a new
railway corridor in the Russian Far East for a
faster connection between the Trans-Siberian
railway and the Pacific Ocean via a new port on
the Sea of Japan to be completed by 2025. The
new transport corridor will be able to serve
most of the ports of the Russian Far East, as
well as Japan, China and Korea, and cuts the
distance to the Trans-Siberian railway by 550
km, allowing much faster transportation of cargo
to the European part of
Russia.
Truly
prospects for a dynamic, economically growing
Russian real economy today is more positive than
at any time in the past two centuries or more. I
can’t help but feel it would do our world far
more in terms of the good to end with the silly
losing wars everywhere and return to building up
our nations and civilization. The energy of war
is a no-brainer. Building up is exciting as
China and increasingly Russia realize.
F. William
Engdahl is strategic risk consultant and
lecturer, he holds a degree in politics from
Princeton University and is a best-selling
author on oil and geopolitics, exclusively for
the online magazine “New
Eastern Outlook.”
The
views expressed in this article are solely those
of the author and do not necessarily reflect the
opinions of Information Clearing House.
