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L:
Doug, I'm in Belarus this week, a pit stop to help some of my students with
their various business ideas. I'm struggling with my Russian, but getting
along. And that has me thinking about Russia's role on the global economic
stage. I know this is something you've given some thought to… What do
you think? Is Putin out to take over the world? What do investors need to
keep in mind?
Doug:
Well, the first thing to keep in mind is that any time you're talking about a
large group of people, I think it's about 150 million in Russia's case, it's
hard to generalize. Russia makes headlines, being one of the BRIC countries
(Brazil, Russia, India, China), which are "emerging" economies seen
as a sort of wave of the future. But I have to say that Russia doesn't really
belong in this group. We may lose some Russian readers by my saying this, but
while Russia has a lot of resources and should have a bright future, I don't
think it will.
L:
Whoa, I didn't see that one coming. Why?
Doug:
There are many reasons, and it's hard to tease out which one is the most
important driver, but taking it all together, including Russia's history and
resulting culture, I just don't see that Russia has The Right Stuff. That
culture, which is transmitted explicitly, verbally, and more subtly,
attitudinally, is one shaped by centuries of state oppression. It has strong
streaks of isolationism, collectivism, and brutal authority. Russia's long
history is full of sadness, fear, and violence. It's been relatively calm for
the last few years, but that's a drop in the ocean of Russian tears.
L: Hm.
They suffered under the Tsars, threw them out, only to get a greater tyranny in
the form of a totalitarian socialist regime, which actively suppressed the
kind of individual creative virtues that make for success on the global
economic stage. I guess I could see that as a cultural handicap…
Doug:
Think of it this way – if you keep mowing down the tallest poppies in a
field of poppies, pretty soon you don't get many tall poppies. It's a not a
survival trait to stand out in a field like that. It would be politically
incorrect to suggest that various cultures have encouraged and suppressed
different character traits to such a degree that there are now subtle genetic
differences between people of different cultures – but I think it's
possible. It's like Darwin's finches in the Galapagos. And breeds like the
poodle, dachshund, and shar-pei – which are all pretty different
– that evolved in historic times. Vive la difference. Thousands of
years hence, when mankind has spread throughout the galaxy, we'll undoubtedly
evolve into different species. Just as there were numerous different hominids
on the planet until homo sapiens sapiens decisively started taking over
perhaps 40,000 years ago.
L:
Well, I could imagine decades of brutal selection under the Soviets resulting
in a greater incidence of timidity and acquiescence among Muscovites, and a
greater tendency towards independent, rebellious thinking among the survivors
in Siberia and other places the Soviets sent troublemakers they didn't kill
outright.
Doug: I
don't think there are any statistics on this sort of thing, but that's my
general impression. I first went to Russia in 1976, which was right at the
peak of the Cold War. At the time, the whole place had the feel of an armed
military camp. I've been back three or four times since then, and there have
been great improvements, at least in the big cities. But once you get out of
Moscow and St. Petersburg, it's really still pretty backward. Shiny new
buildings in the capital don't alter the fact that most of the people across
the country live in towns and villages that are aging, run-down, depressing,
and poor. It seems like most of the smart, upwardly-mobile Russians have
emigrated long ago. Or at least moved to Moscow.
To
make things worse, there's a big problem in that culture with alcohol abuse,
especially among the men.
L: I've
seen that in my travels in Eastern Europe, but you're such a bon vivant, it's
a bit surprising to hear you pointing to this as an important variable.
Doug:
You've seen me drink, but you've never seen me drunk.
L:
That's true.
Doug: I'm
far from a prude, but many of these people don't just drink too much, they
drink way
too much. I'm not talking about having a great party; I'm
talking about alcoholism, which is a real fault. And chronic, widespread
alcoholism is a serious social problem.
L: Sure
enough.
Doug: And
that's not all. The population seems to have fallen into a terminal decline
curve. It takes about 2.2 children per female to maintain a stable
population, and in Russia, the birth ratio is down to something like 1.2 -
1.4. This is not just a decline; the population is actually collapsing.
That's true of most of Europe, Japan and other relatively advanced countries
as well, so it's not just a Russian problem, but when you add this factor to
Russia's other problems – like a high death rate – the future
looks considerably less bright.
L: That
fits, I guess… I just hadn't thought of it. I'm told that in Belarus, I
would be considered a "Hero Father" by the state and eligible for
extra benefits because I have five children. Minsk isn't Moscow, and I find
Belarusians to be quite different from Russians, especially on moral issues,
but Belarus still has a very state-controlled economy – perhaps the
most Soviet-style economy left in the world today. It's hard to create new
businesses here and most young people simply don't see many opportunities. So
they put off having children… If that's the culture in Russia too, I
can definitely see the problem.
Doug: I
don't know how much the population collapse relates to perceived lack of
opportunity, the alcoholism, a remnant culture of fear from the Soviet era,
or any number of other variables, but it's a very serious problem.
L: And
this isn't a problem for which one can look to history for solutions. Effective,
widespread birth control is a recent innovation. And in the agrarian
economies we've known for most of history, having a lot of children was a
good thing; they helped on the farm.
Doug:
That's right, kids were financial assets then. They were your pension plan,
if you had enough that some might survive to look after you, if you were
lucky enough to reach old age. In an industrial, urbanized setting, they are
expensive liabilities – at least from an economic point of view. And in
the modern world, the state is supposed to steal money from everyone else to
take care of you in your old age. So, if people feel less economic necessity
and, perhaps subtly or not so subtly, that their world is not the nice place
they want to have kids in, it's hardly surprising to see birth rates falling
across the developed world.
L: Hm.
As you say, this doesn't apply to Russia alone. I wonder why we don't hear
more about this problem?
Doug:
Well, since Paul Ehrlich wrote his famous book, The Population Bomb, and perhaps farther
back, since Malthus' paradigm-shifting 1798 Essay on the Principle of Population,
overpopulation has been the bugaboo of intellectuals around the world.
L:
Radical environmentalists have taken up the cause as well; too many people
making too much trash. We're going to bury the rain forests in Styrofoam cups
– if we don't chop them down first to make toilet paper.
Doug:
Hysteria is the ruling psychological state in today's world. But population
decline is something intellectuals approve of because, I believe, they
basically hate people. The chattering classes want to see, but don't
particularly want to report on, terminal population decline in the developed
world. That might lead to the conclusion humans aren't going to destroy the
planet after all. It's the elephant in the room nobody's talking about.
And,
back to Russia, the other big issue there is that it's what's left of an
empire, put together by force, encompassing many very different people from very
different predecessor cultures. They lost the Baltic states and southeastern
Europe when the Soviet Union broke up, but whatever the odds are for Chechen
independence, and so forth, there's still a lot of stress within the Russian
Federation. Just a few days ago, there were those bombings in the Moscow
subway, perpetrated, I understand, by widows of slain Muslim rebels. This
sort of thing is likely to continue, and push the country towards further
disintegration, one way or another.
L: This
is not how I expected this conversation to go. When I asked you, I thought
we'd talk about Putin's KGB past and his probable desire to be king of the
world, etc. But with all these structural issues, what you're saying is that
it almost doesn't matter who's at the helm. Russia's in trouble going
forward, regardless.
Doug:
Another echo of Rome, perhaps. After a certain point – arguably about
180 A.D., and certainly by the 4th century – it wouldn't have mattered
who the emperor was; larger trends were going to take it down.
Demographics
are as important, or even more important, than any other megatrend you can
point to. It is, for example, the factor that will ultimately result in the
demise of Israel. One of the more shrewd things said by a leading political
figure in recent history was Yasser Arafat's comment that the most potent
weapon the people of Palestine had was the womb of the Palestinian woman. And
he's right, because, as in most advanced cultures, the rich, urban Israelites
aren't reproducing quickly, but the Palestinians are. There's really not much
they can do to overcome the demographic trend; it is what it is.
The
same is true for the Russians, who also have a rapidly growing Muslim
population, among other rapidly growing minorities.
Demographic
trends are huge factors that carry a lot of momentum; they change slowly over
long periods of time, and rarely respond to the feeble efforts of
officialdom. The whole world is going to look very different in 100 years
– even if we don't first go through something resembling World War III,
which I think we will.
L:
Sounds like "the dismal science" should be demographics, not
economics.
Doug:
Right. But no one will talk about this. It's partly because the chattering
class doesn't want to admit that it was wrong about the population bomb. Just
as the same people won't ever own up to the scam of global warming. But
also because the places where there is explosive population growth are among
the poorest populations, which goes beyond social and cultural to racial
implications. And it's a total no-no to even talk about that, as people like Charles Murray and Philip Rushton have discovered.
L: But
facts are facts, and the current trends indicate that the average skin color
will be much darker in each succeeding generation for the foreseeable future.
Doug:
That's just the way it is. During the 19th century, it seemed the whites were
going to take over the world. Now non-Europeans are in the ascendant. Some
people don't want to talk about it, but I don't see that as being a problem
in any way. The chances are good that races on this planet will meld
together. Who knows? Maybe people will speciate on different bases in the
future.
L: Not
being particularly white has only mattered a few times in my life, but I'm
glad it never mattered at Casey Research.
Doug: You
know I form my relationships based on what people's values, ethics,
spirituality, etc., are. And these things have absolutely nothing to do with
race.
L:
Okay, so back to Russia. I visited Moscow two summers ago, and I came to two
very strong impressions of the people I met. First, they were very hungry for
better lives. Everyone everywhere wants a better life, but apathy and sloth
are also common human traits. Russians impress me as highly motivated and
intensely focused on getting ahead. That's normally a very good thing.
But
their traditional ethics were paved over by the Soviets, and whatever
collectivist ethics they tried to instill have blown away on the wind with
the Soviet empire itself, leaving most of the people with no moral compass.
Many are turning to religion again, but the old Orthodox Church doesn't seem
to have much impact on moral choices made by modern Russians. This is not a
good thing; ambitious people with few ethical constraints on what they are
willing to do to get ahead can be very dangerous.
Added
together, this gives me an impression that feels like new barbarians at the
gates of Rome. It's no surprise to me that people fear new Russian military
expansion, Russian hackers, Russian pirates, etc.
Doug:
That's a good analogy, but these barbarians are highly educated barbarians.
They're using computers and mathematics, rather than clubs and swords. On the
other hand, I'm not sure they are much more thoughtful than the barbarians of
the Middle Ages.
Another
thing about barbarians; they don't manufacture much. Production is mostly in
natural resources, which is certainly the case with Russia. They do sell some
high-tech spin-offs of old defense industry research and development, but
that's nothing compared to the oil and gas exports, minerals and other
resources. There's a lot of truth to the joke that in places like Russia the
chief import is stolen cars, and the chief export is prostitutes. Did you see
anything else going on there?
L: That
was pretty much it. Gazprom rules. Lukoil is coming to America (I'm sure
we'll have more to say on the implications of all this in our energy
newsletters). Some people see a new world order in which Russia supplies the
resources, Chindia the labor and manufacturing, and the West the high-tech
applications. I suspect that may be giving the West too much credit, and
perhaps the Chinese too little, but the Russians should prosper regardless,
with all the resources they have to deliver to a hungry world, shouldn't
they?
Doug:
Well, there are groupings within the Russian Federation that may do well, but
for all the reasons we cited above, I think the whole cobbled-together
society won't last. But even among those groups, abundant natural resources
may not be a blessing. When such riches fall into the laps of people who
don't have a culture for putting them to productive use, the kleptocrats in
charge get rich while the masses continue to suffer. Look at Nigeria, for
example, or Saudi Arabia, for that matter. Oil is the worst thing that's ever
happened to Venezuela. Without a culture that respects individual rights and
productivity, upholds the sanctity of contracts, honors honest effort and achievement,
etc., inequality and misery just get worse. They'd be better off if all
anyone had in such a society were sand and rocks. And, in fact, that's why
Hong Kong and Japan, to name just two places, prospered. They had nothing,
except what they created.
Actually,
it was the commodities boom back in the 1970s that helped make it seem at the
time that communism would triumph. There were high metals prices, high oil
prices, and that was stuff they had. What little capital this accumulated was
directed into their space and military programs, which made them look like a
formidable power. But it didn't last, of course. Commodities cycled down, and
knocked the last leg out from under their stool.
L: What
about the barbarian propensity for plunder? Do you see no danger of renewed
Russian militarism?
Doug: No.
The chances of Russia going on the march in some sort of new effort aimed at
conquest are almost zero. They have enough on their plates, they're busting
apart at the seams as it is.
Another
thing: backward cultures don't usually understand the importance of
sustaining capital and the Russians were no exception. Most of their
submarines and other military hardware turned into junk shortly after the
collapse of the Soviet Union.
Putin
may want to be a new Tsar. That sort of thing is just natural for the kind of
sociopath who rises to the top in such political environments. But I don't
think it will go anywhere. For all the reasons we've been discussing, the
place is on a one-way slope downhill.
This
gets back to our starting point: Russia doesn't belong among the BRIC
countries. It's simply not headed in the same direction.
L:
Well, whether you like China or not, it's certainly true that they have a
powerful, almost Yankee can-do attitude that gets things done in a third of
the time it takes to do them in the West. And they certainly don't have a
collapsing population there, nor in India, nor in Brazil.
Doug:
Right, and the workers in those places will work two jobs, will save for the
future, and so forth. None of those productive Confucian values exist in
Russia. You mentioned that they are focused on getting ahead – but
that's not the same thing as having a work ethic and an appreciation for the
importance of accumulating capital through greater production than consumption.
The Chinese will eventually take over Siberia, demographically.
L:
So… In spite of the great wealth of resources Russia has waiting to be
developed, you're not investing in Russia. Not even a high-stakes
speculation?
Doug: No,
I'm not interested in investing in Russia. Maybe at some point in the future,
when the place has really melted down and the stock market gets very, very
cheap, it might be worth a punt. But I don't see the country as a growth
environment in which you can count on steady average growth rates. There
might be occasional hit and run speculative opportunities, but good ones will
be rare indeed. It's a place to watch, but not one to enter, financially,
without great caution.
L: If
that changes, I'm sure you'll let readers know in The Casey Report. What might you advise
our Russian readers who have not already stopped reading our obviously
hateful and slanderous conversation?
Doug: The
smart ones will take their education and training and leave. Russia just doesn't
have the capital to make the best use of them, or provide them with the best
opportunities. Most of the capital accumulation seems to flow to the
oligarchs, who don't reinvest it in ways that produce more; they just spend
it to consume more. That's why there are these jokes going around about
Russians, like the one about Yuri and Boris who go to London. Yuri tells
Boris, "Look at this new tie I bought for £1000." Boris
replies: "You should have asked me first; I could have shown you a place
where you can get the exact same tie for £2000!"
Look,
I had a friend, an American of Russian background. He decided to go back to
the old world and scrambled around for years trying to get into one business
or another. It's not easy. I don't want to be negative, but in general, I
have to say that trying to make any serious investments in Russia is a
mistake. The Russian stock and bond markets are worth watching, but you'd
need to dedicate yourself to becoming an expert in them, so you can identify
exceptional opportunities – it's like speculating on penny mining
stocks, but even riskier.
I'm
not really looking to buy in the current global economic environment, but I
could be talked into buying and holding select Chinese, Indian or Brazilian
stocks much more easily. Not Russia. They're just hot potatoes, and the
country is heading for trouble.
Time
to get out of Dodge.
L: Okay
then. Noted and logged. Thanks.
Doug:
You're welcome. Till next week.
Doug Casey
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