The Curse Of State-Controlled Capitalism
/Actually, let's start with the blessing of not having state-controlled capitalism. Here in the U.S. our free-market economic system erodes little by little with the ongoing expansion of government micromanagement, but we still have the basics in place. And thus when the price of a major commodity like oil suddenly falls by about half -- as it has over the course of about the past four months -- this is actually a net positive for the economy and very likely for the stock market as well. Granted, it's not so great if you're an upstream producer of oil who just sank millions of dollars into drilling a few wells and now you're only going to get about half the revenue you expected. But the smart drillers sold much or all of their output long ago in the derivative markets, at prices that locked in profitability, and they won't be hurt much at all. Lots of other entities in other parts of the oil business -- like refiners, shippers, and retailers -- don't really care much whether oil prices are high or low. And throughout the rest of the economy, lower oil prices mean lower costs of energy inputs and therefore increased profitability and/or lower final prices. Consumers get cheaper gasoline, cheaper electricity, cheaper heating fuel, cheaper everything that has energy as an input -- and that's pretty much everything. What's not to like? A few incautious upstream oil producers will likely go bankrupt. Hey, that's capitalism!
Over in Russia, things don't work quite the same way. There, if you are an ambitious young risk-taker, don't think that you can just go out buying up oil rights and drilling some wells. These things are the privileges of the big companies, who need the patronage of the big kahuna to keep away from government predation. So you can be big in the oil and gas industry if you are Rosneft (69.5% owned by the Russian state) or Gazprom (50.23% owned by the Russian state). Or you can try being a fully private company like Yukos, by having your chief (Khodorkovsky) be a well-connected ex-member of the Communist Youth League. But that's only good enough until the day he crosses Putin. In case you didn't keep track of the story or don't remember, Khodorkovsky, up until then the richest man in Russia through being CEO and part owner of Yukos, was arrested in 2003, charged with fraud, convicted, and then spent 8 years in jail through 2013. Meanwhile, Yukos was charged with tax crimes and was broken up by the government. Just a few months ago the former owners of Yukos won an arbitration award of $50 billion against the Russian government. The basis for the decision was that the alleged tax crimes were not real and the whole government prosecution was just a disguised uncompensated taking. Good luck collecting on that award! There are other nominally private oil and gas companies in Russia, but you'd better believe they have learned their lesson about staying on the right side of the big guy.
Anyway, with government functionaries in Russia directing the allocation of capital either overtly or behind the scenes, Russia has done what seemed like the obvious thing of getting deeper and deeper into oil and gas as the sole driver of their economy. The economy is remarkably undiversified. According to Bloomberg News here, the oil and gas sector accounts for about 25% of GDP (in the U.S., it's 2.5%), and for about 50% of government revenues. On the pure business side, it has seemed like easy printing of money. On the geopolitical side, it can be loads of fun periodically to use your oil or gas weapon to put the squeeze on a Ukraine or even a Germany.
It all seemed to be working brilliantly until the price of oil suddenly dropped by half. Now what? It's not just that GDP is taking a sharp hit. The biggest immediate problem is that the ruble is collapsing. The Wall Street Journal reports this morning that the ruble fell a full 20% just yesterday, even after the large declines of the past several months. The people have cleaned the banks out of all foreign currency. And it'll be a while before we even learn of the effects on Russia's budget, which can't be pretty.
And it's not just Russia, not by a long shot. Wouldn't you think that the United States would understand what makes its own economy a success, and after spending hundreds of billions of dollars to liberate and stabilize a country, would at least take the trouble of establishing a real capitalist economy? Well, Iraq is about as bad a case of state-controlled capitalism as exists. Of course, this is another country totally dominated by the oil and gas sector, in fact even more so than Russia. And essentially all of it is government-owned. And the same state control extends into much of the rest of the economy. Here are some quotes from a three-year-old article from Megan McArdle. I can't find newer numbers, but I have no reason to think that things have changed much:
Half of the labor force works for the national government, either directly or indirectly, and another 20 percent or so is unemployed. “Iraqis believe that the only real job is a government job,” [Lehigh University Professor Frank] Gunter says. It “pays more, has benefits, you can’t be fired, and the work intensity is lower than in the private sector.” Gunter estimates that if the price of oil falls below $40 a barrel, the government is in serious trouble: below that price, it will not have enough revenue to pay salaries and pensions, even if no services are provided at all.
And you could really go on all day listing the countries getting terribly burned by going the route of state-controlled capitalism: Iran, Venezuela, Argentina . . . . Quite a collection of rogues! It's really hard to feel too sorry for them. Oh, and did I mention that the U.S. has recently gone into state-controlled capitalism in the health care sector?