After finally admitting that Russia is in for a heavy crisis,
the propaganda has adopted the thesis that crisis is the time of opportunity.
Remember, they say, how in the nineties people were becoming millionaires in a couple years, now you have got such a chance too.
It is nice that they have admitted the fire, that things are bad,
but now we hear talks of looking for a phoenix rising from the ashes, for the signs of unprecedented renaissance.
Today we will talk about why an economic crisis is truly the time of opportunity, just not in our case.
If we consult a textbook on economics, we will see that recession is a normal part of an economic cycle, and that it is followed by growth.
There is a problem however:
unfortunately the authors of textbooks don’t usually describe situations in which a crazy dictator begins an aggressive war
and has sanctions imposed on the country, isolating it from the rest of the world.
The difference between the classic economic recession and the crisis which Russia has driven itself into with the invasion of Ukraine is huge.
To understand the difference it is important to know why recessions usually happen.
Modern economic theory explains the economic cycle with external shocks.
In other words, if we lived in a perfectly stable world in which nothing, from governmental spendings to exchange rates of currencies, changes,
the economy would always be producing at maximum capacity.
But this is unfortunately not the world we live in, so recessions happen.
During the lifetime of a market economy, inefficiencies accumulate,
imbalances grow, overvalued assets multiply, and new markets cannot grow and develop because the resources are unavailable.
The housing market would be the textbook example of this.
We know that a square meter in Moscow has risen in price in dollars over the first seven years of the 2000s by almost ten times.
If you’ve bought a one-room apartment in Vykhino in the beginning of 2000 for $20 000, then in the next one hundred months till the summer of 2008, it was,
by the most modest of estimates, bringing you over $1000 of passive income, simply due the growth of its market cost.
If you have also rented it all that time, then the real profitability becomes comparable only with some kind of criminal business.
This is the textbook example of a bubble.
When you have a super-asset that is only growing, then all the participants in the market can see the speed at which it is growing and invest in it,
because all other investments become pointless in its shade.
And at some point which is impossible to foresee, the asset becomes completely detached from its real value and now it only grows because everyone believes that it will keep growing,
thus creating an artificial demand for it.
You can see that the price of your apartment has doubled in the last two years,
and you assume that it will double in the next two years as well, thus buying it.
So the prices rise.
The overheated demand from investors gives rise to mass construction, and with it the demand for construction materials, loans, and workforce.
And all of this is based on an idea that now, in the summer of 2008, a one-room apartment in Vykhino costs $150 000, and in the summer of 2010 it will cost $300 000.
Whether this can really happen, whether housing on the outskirts of Moscow can cost money comparable to the center of New York
- no one asks such a question in the heat of growth.
Moreover, some may remember how boggled foreigners were with the prices of literally everything in Moscow, and how it was the cause for national pride even,
all while the overheated market kept sucking all resources, all investments, and all specialists.
And when the bubble naturally bursts,
then along with personal tragedies, lost investments and increased unemployment, a massive release of resources happen.
Factory machines, offices, warehouses are idle, and the people who used to work there now have no jobs.
Because factory machines and offices are now of not much use to anyone, their prices drop and they are sold cheaply.
Due to the high competition for jobs, people are forced to work for lower salaries.
In a situation like that it becomes incredibly profitable to run a business.
Surely you can no longer easily double your million dollars by simply buying some square meters of housing in Moscow,
but you still want to double them,
so instead of buying real estate you invest into an IT startup or open a chain of barber shops, thus creating new markets and new jobs.
In addition, recession stimulates exporting, because now your country can produce goods and offer services at lower prices compared to its neighbors,
which then are bought for higher prices.
This is a simplified model but it shows how this window of opportunity is created in times of crisis.
Previous equilibrium is gone and old assets have lost their value, but investors still want to profit
and people still need jobs, so those who can find a way to attract both may become incredibly rich.
That's it exactly - the window of opportunity.
Another classic example is the crisis of 1998.
It is hard to believe today, but at that time cafes didn’t exist in Russia.
Actually none of the service sector for the middle class that we’re so accustomed to existed back then.
The service sector mirrored the social stratification:
there are diners with cockroaches and expired sausages, and then there are luxurious restaurants in which a single dinner costs two average salaries.
No three-stars hotels, at all.
But there are crash pads that had seen their last renovation in the times of Brezhnev, and then there are “National” and “Metropol”, and nothing in between.
This is the natural state of affairs in transitional economies, it happened everywhere during the industrial revolution, and it happens now in the poorest countries in Africa:
it is either a crash pad or a five-star palace for wealthy foreigners.
As the outcome of this crisis that hit the rich the hardest, the beginnings of middle class,
the layer between the ultra-poor and the rich, was created, along with the demand for a different service industry:
I can no longer afford a $300 dinner, but i can still spend $5 on a business-lunch.
And this sphere has immediately appeared, attracted investments, developed, and to this day the service industry for working citizens with money
is, along with IT, the true source of pride for the Russian economy.
That was the time of opportunity. People made a new industry and got rich.
A classic ciclic crisis is the orderly forest.
Those who were doomed to die, die and make the space for something new and better.
For instance, the crisis of the 70th in the USA gave rise to modern civilian aviation,
flights ceased to be a premium service and have become available to the masses, planes turned from limos to buses.
It also gave rise to the modern IT sector, because money and human resources were looking for a use, having lost growth in the industrial sector.
So there it is.
And what about the current crisis,
The current crisis is different, the current crisis was not caused by economic reasons,
it was caused by the terrible external shock - a full-scale war.
The war that led to the most severe financial restrictions, the panic flight of foreign capital,
mass emigration of the most qualified of specialists, and most importantly
turned Russia into an untouchable for any new activities.
Today we see that it has become untouchable not only for American, European, or Japanese money.
Large Chinese companies who are usually willing to work all over the globe, they too keep distance from Russian jurisdiction,
because the scale of the Russian economy cannot justify the risk.
Did you notice how, following Google Play and AppSore, the applications of sanctioned banks started disappearing from AppGallery which belongs to Huawei?
Simply because Huawei knows all too well what it means to quarrel with the US government.
The last of such conflicts that resulted in the ban of google services,
turned chinese smartphones outside China from the leaders of the market into expensive pieces of plastic.
It is of no importance whether a company is a Canadian one, a Chinese one, or a Vietnamese one.
If the company is large enough and needs access to the global market, it won’t come anywhere near Russia.
Not because of its high morals, but because it would be extremely dangerous to do so.
Even before, an FSB colonel could take your billion and have all the managers jailed.
But today, a new Bucha can happen at any moment, and your billion will be under sanctions.
The specifics of this crisis will be such that without foreign equipment and components,
without emigrated specialists, with foreigners having no desire to have anything to do with Russia, not only the current production will decline, but even the potential one.
In other words, even if the economy will be working at its maximum capacity, it will no longer be able to produce as much as it used to.
The problems that Russia will have to face will not be about specialists losing jobs and factory machines standing idle
like it happens during a normal recession,
but about the absence of these very specialists and machines.
And when the economy of Russia reaches some sort of equilibrium, it will be at a much lower level,
with high unemployment and low production rates.
No officials from the Central Bank and the government will be able to do anything about it, competent or not.
A proper economic policy may help the economy to reach equilibrium,
but no Elvira Nabiullina can increase the production capacity of the country.
In some ways, this crisis, albeit on a disproportionately larger scale, will be similar to the coronavirus crisis.
The economy will not be able to stabilize itself to the previous level,
because the crisis was not caused by economic disparities, but by external limitations.
Before it was the ban on travel, the closure of trade and services, now it is the ban on working with Russia.
Does this mean that this crisis will have no winners at all?
Of course not. At the minimum, sanctions from both sides create support for a gray market,
because certain producers and buyers will be willing to pay generously for bypassing these trade restrictions.
If you happen to know of a shadowy scheme that would allow the transportation of sanctioned drilling equipment or bottles of champagne from the European Union through Kyrgyzstan,
then rejoice - you are among the winners.
However for those of my viewers who do not meet this criteria, things become less clear, to put it mildly.
It is possible that without the need to compete against western companies, some of our domestic companies may win some too.
It is hard to tell which ones, because alongside the reduced competition they will, like all companies, face the lack of equipment and components.
However even if all of our companies could benefit from isolation, the Russian society would still be the one paying for it.
And the damage caused by replacing imports would be much greater than the benefits.
To understand the scale of this disparity one could recall the events of recent history.
Since 2007, it has been forbidden in Russia to turn to foreign companies for genetic analysis.
A few dozen laboratories across the country, which received additional funding, benefited from it.
But entire industries have lost, from pharmacology to forensics, because DNA sequencing in Russia is still many times more expensive than abroad.
For example, if two teams of researchers, a Russian and a European, would be studying the genetic features of melanoma for instance, and both would have equal funding,
the European team would publish better papers, simply because they would be able to sequence more samples.
In the end, a crisis is a completely normal, unavoidable, and in many ways, positive feature of market economies.
A crisis allows you to quickly get rid of inefficiencies and thus transform into something better.
A market economy has mechanisms ingrained into its very philosophy that allow it to stabilize itself even after the worst of recessions.
And it is after the worst of recessions when new markets come into existence, people learn to profit off things that they couldn’t even think of before.
It now seems that contextual advertising, the ads that you see in search results that make billions of dollars today
is such an obvious thing for a search engine to have, like it has always been there.
But before the dotcom crisis of the 2000 they didn't exist at such a scale.
Care to know how Yandex intended to make profits?
On selling services for searching on corporate servers.
The Yandex.ru website was originally planned to be merely a free demo.
Without the tragedy of the 2000 that ruined the large part of the IT industry of the time, there would be no companies worth trillions now.
However. It is not the economic crisis that we are facing.
We’re dealing with the economic consequences of war.
With the fact that the largest economies of the world have decided to starve Russia of the money it needs for continued aggression and the murder of innocent civilians.
This crisis is not about creating new opportunities,
it is about working on a minefield where you never know what may happen next.
Which sanctions may still come?
Which money will you lose access to? Which sector will be banned from doing business with Russia?
All while all the problems that haunted us before,
like the impunity of security forces, the dangers to private property, the high and complicated taxes,
are here to stay and will in fact become worse.
Because the apparatus of the state, the apparatus of violence on which Putin rests,
will have to be given something in this time of crisis, their loyalty will have to be maintained somehow.
The waning budget incomes will have to be replaced at the cost of citizens and businesses.
There will be fewer obstacles for the security forces to seize property, and legislation will become even more repressive.
Remember that during all these talks about the “window of opportunity” the state has blocked Instagram,
leaving thousands of people, most of whom aren’t really billionaires but your usual SMM workers, copywriters, photographers,
managers, or I don’t know, cake bakers, small business that were using Instagram in their work, with no source of income.
This is how it always works: external restrictions always entail a tightening of the regime inside,
an increase in the power of the security forces and regulatory bodies, and a reduction in the already tiny space of freedoms.
The economy is hit from two sides: the stronger it is on the outside, the tougher it is on the inside.
Will this crisis become the “window of opportunity”?
Oh bet it will. For the FSB colonel, not for regular citizens.
For you and I, the economic possibilities will be reduced to the satisfaction of your primary needs,
to lowest-paying jobs that will be rising in numbers.
Basic food, basic clothing, minimal services —
this is the future of the Russian economy, and the outside world will try its best to ensure that this is what happens.
No positivity today. Like always, lately.
Till tomorrow!