The Kremlin is manipulating statistics to disguise the damage being done by sanctions
Source - Daily Telegraph 18/08/22
The venerable New York Times, Wall Street Journal, Bloomberg, and even global financial institutions such as the International Monetary Fund (IMF) seem to have succumbed to Putin’s paraphrasing of Mark Twain: “The rumours of my demise are greatly exaggerated.
These institutions did so by echoing last week’s official GDP release from the Kremlin, which stated that the Russian economy shrank a less-than-anticipated 4pc from April through June compared to a year earlier.
Strangely, while Western journalists question Putin propaganda suggesting that Jewish Ukrainian President Volodymyr Zelensky is really a Nazi in disguise, that Russia is liberating Ukraine from the Ukrainian Nazis who massacred innocent civilians in Bucha, or that the 82 bold Russian journalists murdered who questioned President Putin’s rule were merely careless around open windows, they uncritically swallow his false, unsupported GDP pronouncement.
Pro-Russian commentators have rushed to trumpet this figure as a supposed triumph proving the “resilience” of Russia's economy in the face of sanctions and business retreats. Of course, a 4pc decline in GDP should hardly be worthy of celebration in any case, as the invasion has now knocked off four years’ worth of economic growth, returning the Russian economy to 2018 level
As the European economist Janis Kluge points out, the time lag distorts 2022 GDP measurements given the back-loaded nature of decline, especially when accounting for inflation and currency volatility.
But the more important caveat is that these citations reflect a disturbing, persistent bad habit by western media and commentators on both sides of the Atlantic of unquestioningly echoing official Russian economic releases as fact when they are often anything but.
By reporting these without scepticism, reputable publications and institutions are inadvertently playing into Putin’s hands and parroting his cherry-picked economic propaganda while missing the red flags in plain sight.
Data released by the Kremlin, and specifically the Russian Federal Service for State Statistics (Rosstat), have long been held by the economic community to be largely if not always credible – until the start of the invasion, at least.
In the months since, the Kremlin’s economic releases have become increasingly cherry-picked: partial, and incomplete, selectively tossing out unfavourable statistics while only divulging select data which portray the Kremlin in the most favourable light.
The Russian government is no longer disclosing certain economic indicators which prior to the war were updated on a monthly basis
These now-vanished metrics include foreign trade data, including those relating to exports and imports, particularly with Europe; oil and gas monthly output data; commodity export quantities; capital inflows and outflows; financial statements of major companies, which used to be released on a mandatory basis by companies themselves; central bank monetary base data; foreign direct investment data; lending and loan origination data; and other data related to the availability of credit
Even Rosaviatsiya, the federal air transport agency, abruptly ceased publishing data on airline and airport passenger volumes. As a measure of comparison, prior to the war, the only economic statistics which have historically been classified and quarantined by the Kremlin are sensitive metrics related to the trade of military goods, aircraft, and nuclear material
The selective withholding of data is an ongoing process. After a collapse in domestic value added during the first quarter across sectors by up to 60pc, the Kremlin withheld detailed breakdowns in the data in the following quarter, making it impossible to access a more granular measure of economic activity.
Does anybody really think that these sectors miraculously recovered during the second quarter and Putin suppressed this information for no apparent reason
But the methodological integrity of even those favourable statistics which are released are questionable, if not downright dubious, given the political pressure the Kremlin has exerted to corrupt statistical integrity.
Indeed, Putin has on several occasions shunted aside heads of Rosstat who produced statistics which were not to his liking, and he personally transferred control of the agency to political appointees at the economic ministry.
Outside observers ranging from international organisations to foreign investors have sounded alarm bells over the "reliability and consistency” of the Kremlin’s economic release
Concerns over meddlesome political interference must be given even more weight after Putin appointed Sergei Galkin, the former deputy economic minister and the most blatantly political pick in recent history, as head of Rosstat in May
The propensity of Kremlin economists to “switch to new methodologies”, with rather alarming frequency, raises serious concerns over how macroeconomic data calculations are apparently worked over, with genuine methodological wrinkles exploited to serve political aim
In addition to a sordid history of blatantly recalculating GDP growth directly on multiple occasions, Rosstat has repeatedly changed the methodology for calculating income, inflation, and other key macro indicators
No detail is too small to escape notice, even down to forced recalculation of granular single sector activity in the remote, sparsely-populated Yamalo-Nenets Autonomous District.
Kremlin statistical creativity extends far beyond methodological recalculations. Take the artificially low official unemployment rate, for example, which has supposedly decreased since the invasion began to record low levels, reflecting the strongest economy ever, in the words of one Putin lacked.
In actuality, the Kremlin resorts to a veritable menagerie of dirty tricks to press the unemployment count down, including pressuring companies to send employees on “mandatory unpaid vacations” of infinite duration in lieu of layoffs and excluding recently laid-off workers under the guise of “temporary downtime
Furthermore, the unemployment rate does not even include the hundreds of thousands of skilled workers who have left Russia altogether.
The Kremlin would never admit to any exodus, but using Eastern European and Central Asian sources such as local newspapers, we estimate that no less than 500,000 technical workers have fled Russia, with as many flocking to newfound IT hubs in Finland, Estonia, Georgia, Kazakhstan, and Uzbekistan. More talent exodus is coming as these neighbouring states continue to pick Putin’s pockets from the borders
Our business acquaintances from Central Asia advise us that, as one example of successful targeted recruitment of Russian talent, Uzbekistan’s flagship Tashkent IT park has multiplied in size thanks in part to a new three-year multiple-entry business visa scheme for Russian tech companies which relocated to the site. Meanwhile Kazakhstan is tripling its state-backed business development efforts, targeting erstwhile Russian manufacturer
Furthermore, standard economic data do not capture the unusual contextual circumstances. One of Putin’s favorite propaganda talking points, the appreciation of the rouble, is an artificial reflection of unprecedented, draconian capital controls, which make it effectively impossible for any Russian to legally purchase dollars or even access a majority of their dollar deposits, while artificially inflating demand by 80pc through forced purchases by major exporter
The official exchange rate is misleading, anyhow, as the rouble is, unsurprisingly, trading at dramatically diminished volumes compared to before the invasion on low liquidity, with significant migration to unofficial black markets where the rouble is trading anywhere from 20-100pc weaker than the official rate.
Given these well-documented red flags, it is downright irresponsible for any credible media outlet to echo statistical releases from Rosstat without at the very least mentioning their dubious methodological integrity. Better yet would be verification of Kremlin data by triangulating against other data sources when possible, measuring against cross-channel checks and alternative benchmarks
Indeed, when we did so, the actual economic results which emerge are far less rosy, as our research team found in one of the first comprehensive analyses of the Russian economy, which can be freely accessed on SSRN. We examined data from Russia's trading partners and used third party industry-sources including trade associations, consumer high frequency data, ancillary data such as leasing, ports, shipping, and data from financial institution
Thus, even beyond taking Kremlin statistics with a grain of salt, in analysing the Russian economy, media and economic commentators cannot simply rely on the shorthand, traditional macro measures such as GDP, inflation, and exchange rate
Any single macro indicator is pliable to distortions and data manipulation from clever Kremlin stooges, and provides a skewed, incomplete prism through which to understand the economic morass facing Russia right now.
Furthermore, forward-looking forecasts for any single measure, such as GDP projections, are built on a set of assumptions which cannot capture the full range of possible outcomes amidst higher-than-usual uncertainty.
Rather than attempt to boil down these uncertainties into a single measure such as GDP, it is crucial to capture what is going on within the Russian economy holistically, to reflect, in the words of the Russian Central Bank, the “structural challenges facing the economy”. When we did so, the verdict is clear – beyond any single measure, and no matter how much the Kremlin tries to distort the numbers, the Russian economy is reeling.
Jeffrey Sonnenfeld is Lester Crown Professor in Practice of Management and Senior Associate Dean at the Yale School of Management and Steven Tian is Director of Research at the Yale Chief Executive Leadership Institute
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