Doug Casey on the Russian Bear

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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 diffrence. 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. They are, 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 £1,000." Boris replies: "You should have asked me first; I could have shown you a place where you can get the exact same tie for £2,000!"

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.