Jeff Sonnenfeld’s Bombshell About the Russian Economy
My friend Jeff Hummel sent me a link to a recent 28-minute interview that DW News did late last month with Jeffrey Sonnenfeld of the Yale School of Management. Jeff asked me to evaluate it. I find it highly credible.
The big bottom line: Russia’s economy is in the tank and the reason many of us have thought differently is that Putin literally makes up the numbers.
Here are some highlights:
2:00: Rosstat, Russia’s official agency that estimates GDP, stated that the economy contracted by only 2.1% in 2022.
2:14: The interviewer says that the IMF expects the Russian economy to grow by 0.3%.
3:00: Sonnenfeld says that the World Bank and others get their information from Rosstat. One little problem is that Rosstat has had a change of leadership 3 times. Why? Sonnenfeld says it’s because Putin is looking for lackeys (my word) who will state the data he wants stated.
3:30: As a member of the IMF and the World Bank, Russia is required to submit data to the IMF and World Bank. “They are not submitting.” By the second quarter of 2022, Russia stopped submitting the data.
4:00: Putin wakes up in the morning and decides what the GDP should be.
(My economic historian’s mind clicked in here. I remember reading, in John Flynn’s book on FDR titled The Roosevelt Myth, that after FDR took the U.S. off gold, he woke up in the morning and decided what the price of gold would be. Here’s the relevant segment from that book:
Thereafter each day Morgenthau and Roosevelt met, with Jesse Jones, head of the RFC, present, to fix the price of gold. They gathered around Roosevelt’s bed in the morning as he ate his eggs. Then “Henny-Penny” and Roosevelt decided the price of gold for that day. One day they wished to raise the price. Roosevelt settled the point. Make it 21 cents, he ruled. That is a lucky number- three times seven. And so it was done. That night Morgenthau wrote in his diary: “If people knew how we fixed the price of gold they would be frightened.”
Why do these things seem to happen in the morning?
4:45: The Russian economy is in a tailspin.
5:40: Every key industrial sector is down. The auto industry is down 99%.
6:30: The work force is even more of a government work force than it was before the war. While Sonnenfeld doesn’t say it explicitly, it is clear that he understands that that’s not good.
7:10: Thousands of refrigerators are being torn apart to harvest chips that can be used by the military. [I had recently heard this from another friend who follows the Russian economy.]
9:45: Russia is losing money on energy. He goes into this later in detail after about the 19:20 point.
10:45: Ruble (not ruple—his pronunciation) is not being traded.
12:10: Yellen, Raimondo, and Blinken all say that Sonnenfeld’s team has informed them on this.
12:40: Companies that have pulled out of Russia.
16:14: Koch Industries has pulled out and gone from a grade of F to A.
17:30: Companies should not only accept a loss but should accept a complete write-down and “it won’t cost them a penny.” In case you think Sonnenfeld is pulling a Kramer (the Seinfeld character) and saying they “write it off,” he’s not. What he’s getting at, without using the term, is sunk cost. They recognize that an asset that is valued on their books at $X is really worth approximately 0. And by getting out, they avoid further losses.
18:14: Doing good and doing well are not antithetical.
19:20: The economics of Russia’s oil supply. Why Russia is at best breaking even.
20:30: Russia’s economy is smaller than that of Chile.
21:15: Russia cannot gain back its business in Western Europe even after all this is over. Fascinating story about liquefied natural gas. The market comes through.
23:20: Putin can’t sell natural gas to India and China because he doesn’t have the pipelines he would need.
25:25: The mayor of Moscow, until he was silenced, admitted in April that hundreds of thousands of idled workers “were in the streets with nothing to do.”
25:50: 3 million highly sophisticated workers have fled Russia. [DRH comment: Biden should allow a bunch of them in. They wouldn’t go on welfare and would help us.]
This is one of the most informative videos I’ve seen in months.
I have one concern, and it’s not about the truth of Sonnenfeld’s statements. I put a high probability on the idea that he’s correct.
No, the concern is that he seems to celebrate implicitly the destruction of the Russian economy. But Putin’s not suffering. It’s Joe Six-Pack, or maybe Sergei Vodka Bottle who’s suffering. Also, Sonnenfeld and I both agree that Vladimir Putin is an evil man. What does an evil man with nuclear weapons do when he’s going down? That concerns me.
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