March 20, 2014
It'll take more than an absence of Remy Martin to dislodge PutinPosted in Economic History · 37 comments ·
Every month you’ll hear about the number of new cars that are sold. This is usually taken as a bellweather for the health of the economy. Cars are expensive and the more that are shifted in any one month, or indeed year, the healthier the economy. Also because so many people use their car to get to work, an upswing in the demand for cars indicates an upswing in activity across all sorts of areas.
Last year, while the second-hand car market moved ahead, Irish new-car sales dropped 6.6pc in 2013. This was despite a sales surge after the introduction of the new bi-annual ’132′ registration on July 1. Sales fell to 74,303 from 79,574 in 2012.
Contrast falling new-car sales in Ireland with the situation in the UK, where the end of the recession, the availability of credit and an unemployment rate almost half of ours, has seen new-car sales go through the roof.
Last year, there were 2.3 million new cars sold in Britain. That’s a lot of motors and it compares to 2.9 million cars bought in Germany. It also marks a 10.8pc increase in UK car sales on the year.
Car purchases in Britain are now higher than at any time since the 2007/08 crash. So yes, the British bought 2.3 million cars last year but did you know that the Russians bought 2.7 million cars in 2013, not far behind Germany? There seems to be an impression among those who have not spent much time in Russia that it is still a Cold War country, with few retailing opportunities. This is very far from the truth. For example, Russia is already the largest telecoms market in Europe. Russia’s retail base is powerful. In fact, Russia will soon be a bigger retail market than Germany.
In contrast to the maxed-out consumers of much of Europe and the US who are up to their gills in debts, Russian consumers are sitting on vast housing equity. There is almost no personal debt in Russia. And with just 260 cars for every thousand Russians – compared to around 540 cars per thousand in Germany – this massive eastern market of 145 million people is far from saturated. The demand for cars will grow and grow in Russia and that’s why leading carmakers such as Ford, VW, Renault and Peugeot-Citroen have invested heavily in Russia. At the moment, Russia is being portrayed as the Cold War evil empire of John McCain’s imagination. For those with similar mindsets, the consumer image of Russia is still of a man smoking a raspy fag, driving a Lada. In reality, it is something very different.
Years ago when I studied Russian in Ruza, 80 miles to the west of Moscow, Russia was just beginning to emerge from Communism. This difficult period was followed by the crazy Yeltsin years, culminating with the 1998 default. Thereafter, the country began to show signs of becoming a more “normal” economy. Granted, it is still too dependent on resources and admittedly the oligarchs have robbed the country of its money and ploughed Russian mineral wealth into fancy property all over the world, but we are still talking about Europe’s soon-to-be second-largest retail market. Russia is already Europe’s biggest market for food, telecoms and white goods and it will soon surpass Germany to become Europe’s largest retail market overall.
The West’s tactic today, as outlined by William Hague and John Kerry, is to target individuals as well as the general Russian public with sanctions in order to force Russia to leave Crimea. We know that Russia, under both Yeltsin and Putin, has witnessed the single biggest transfer of a country’s wealth from the state to about 400 families at the very top. The West’s hope now is that by choking off the Breitlings, Bentleys and Bugattis, the oligarch’s wives and leggy mistresses, shocked at having to “rent” their skis rather than bring their own top of the range models to St Moritz – will lean on their men to lean on Vlad the Expropriator, to give Crimea back to Ukraine! It will take more to dislodge Putin from Crimea than an absence of Remy Martin, and therefore sanctions against Russia won’t affect political power in the Kremlin that much. Russians have put up with a lot more than not having access to iPhones and the like for a while and anyway, there is always China for sanction-busting. Don’t tell me that the country that counterfeits everything, will not open its massive land border with Russia for sanction-busting business. And who loves a bit of sanction-busting? Why the mafia and illegtimate business of all sorts.
So who will get hurt? Sanctions will hurt European exporters big time which is why the German stock market has fallen 6pc since the Ukrainian crisis began.
Irish firms export goods and services worth about €637m to Russia every year, making it one of our more important trade partners outside the EU and US. Irish exports of goods to Russia grew 183pc between 2004 and 2012, with growth potential for bilateral trade in services and goods estimated at around €3bn a year out to 2020.
Russia, with its population of 143 million, is the second-biggest trading partner for Ireland among the so-called BRIC (Brazil, Russia, India and China) economies.
Therefore, Irish companies, particularly food and drink companies which have made inroads in Russia, will be badly affected by sanctions. Interestingly, the history of sanctions is not a particularly bright one. When a regime is entrenched, where the violating country is self-sufficient in energy and where the opportunity for sanction-busting is so enormous, what tends to happen is that bad business drives out good business. The South African apartheid regime survived for 30 years under sanctions. Russia is not Serbia or even South Africa, but it is Europe’s biggest neighbour and biggest supplier of energy. As a result, the reality when seen from Berlin is very different from the reality sitting in Washington. Does Europe have the economic stomach or the financial muscle to endure this war of attrition with Russia over Crimea – a place many Europeans believe is Russian anyway? I have my doubts.
David McWilliams writes daily on international economics and finance at www.globalmacro360.com