Deep Structural Problems Threaten China, Russia

Both China and Russia suffer from deep, structural problems which threaten the long-term viability of their respective governmental organisations. Many of China's problems can be symbolised by the ongoing spate of collapsing buildings, bridges, tunnels, power lines, railways, and other types of hasty construction and engineering.

Business Week

Nearly every month brings news of an infrastructure failure, dramatic or mundane. In August a new $300 million eight-lane suspension bridge in Harbin collapsed, sending four trucks tumbling and leaving three dead. In 2009 a nearly completed building in Shanghai toppled like a domino because its foundation was inadequate. The U.K.’s Telegraph reported that within months of opening last year, the $210 million Guangzhou Opera House began to shed its glass window panels and developed large cracks in its ceiling. Last year writer Evan Osnos chronicled on his New Yorker blog the premature decline of his courtyard house: “When the rainy season hit Beijing, our house began to show its age. About four years old, to be precise.”

All of this is at odds with the image overseas of China winning the “infrastructure race,” as the headline of an Aug. 24 online story from Foreign Policy put it. China’s structural woes stem in part from the government’s focus on quantity of growth over quality.

...Poor materials can cause problems: The collapse of school buildings in the wake of the 2008 Wenchuan earthquake was due in part to the use of low-quality cement, resulting in so-called tofu buildings. “When cement is mixed inadequately or when other materials are mixed in, it’s not very strong, so any major storm or stress on a building could make it fall down,” says Francis Cheung, author of brokerage firm CLSA’s 2012 report, China’s Infrastructure Bubble. _BW

China's problems go much deeper than corrupt and sloppy engineering, of course. China's banking system is choking on bad loans to state-owned and state-connected enterprises. Every part of China's government is tied up in the massive corruption -- from the military to civil security forces to local governments to top and mid-level political officials.

Built on such a shaky foundation, China's future as a going concern should be open to question -- at least in its present iterative form.

Putin's Russia -- a neo-fascist enterprise corrupt from top to bottom -- is beginning to suffer for its over-dependence on energy prices and profits:

Gazprom, the natural gas company controlled by the Russian state, is in crisis. It is likely to fall victim to the shale gas revolution that is under way across the US. The shale gas revolution will probably have telling consequences for Russian state capitalism and President Vladimir Putin’s power....

...Gazprom’s demise looks likely. With its demise, Russia’s revenues would dwindle. Mr Putin‘s model of state capitalism would suffer a devastating blow from Gazprom’s fall. If not even Gazprom is viable, which Russian state company is?...

...Curiously, in 2011 Gazprom was formally the most profitable company in the world with purported net profits of $46bn, but these profits were hardly real. Investment analysts opined that no less than $40bn disappeared through inefficiency or corruption. Gazprom’s cash flow was barely positive.

In their 2010 booklet Putin and Gazprom , Boris Nemtsov and Vladimir Milov, the opposition politicians, detailed how assets were being stripped from Gazprom through large kickbacks on pipeline construction and cheap sales of financial and media subsidiaries to Putin cronies. Since shareholders have realised that only their dividend yield is material, Gazprom’s market value has plummeted by two-thirds from $365bn in May 2008 to $120bn today.

For years, many analysts have said that Russia will reform only when the oil price falls because Gazprom seems to be the Kremlin’s main slush fund, which is now being drastically reduced. The Kremlin will have little choice but to forsake its mega-projects. It has already abandoned the mastodon Arctic Shtokman field. The next steps should be to back out of South Stream, the superfluous and exceedingly expensive pipeline project, as well as the planned gigantic sky-rise headquarters in St Petersburg. But that will hardly suffice. This dysfunctional former Soviet gas ministry will have to be cut up into real companies, which need to be privatised.

_FT

h/t The GWPF

Both China and Russia are nations of great ambition. But no matter how ambitious a government's goals, if the foundations of its very existence are cracked and crumbling, the Potemkin Village is unlikely to remain standing long enough to bluster its way to the final goal.