February 21, 2007
As long as it is trapped, the Russian bear will growl
The Russian bear is awake. But this is not a Russia restored to past greatness. It is caught in a failed transition. So long as this continues, Russia will disturb its neighbours and disappoint its citizens. Is there a chance of something better? Yes, but it is a small one. Vladimir Putin expressed the attitudes of the new Russia, at once assertive and aggrieved, at the 43rd Munich conference on security policy this month. “I think it is obvious,” the president stated, “that Nato expansion does not have any relation with the modernisation of the alliance itself or with ensuring security in Europe. On the contrary, it represents a serious provocation that reduces the level of mutual trust. And we have the right to ask: against whom is this expansion intended?” Mr Putin knows the answer to this question, but does not address a deeper one, because the answer would be too painful: why do Russia’s neighbours trust it so little? For it is they who wish to join Nato, not Nato that has forced itself upon them. This is because his country brought oppression and mass murder upon them, as it is doing now in Chechnya. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.
Charles Wyplosz: Martin’s piece is right on the spot. Two points might be emphasized. To start with, Russia’s superb economic performance is a Banana Republic’s one: the prices of gas, oil and other mineral resources have been high since the late 1990s and so have been the rents collected by Russia as it depletes its natural resources. Other than that, its industry generally remains unable to compete not just with the West but also with Asia. Income is barely trickling down and public services, including health, remain as backward – and as much a source of inequity – as in the old Soviet system.
In short, the Russian economy has not gone far down the transition process. Why such a massive failure in a country where the education level is reasonably high, where entrepreneurs are as numerous as anywhere else and where freedom of enterprise is, in principle, the rule? The answer is, as Martin notes, corruption and the ability of the bureaucracy to challenge elementary property rights. Its economy is therefore entirely dependent on natural resources. Russia will do well as long as natural resource prices remain high and more can be dug out. So far, so good, and it can last much longer, but not forever.
The second point concerns the “back to the future” shift from Yeltsin to Putin. For all his flaws, Yeltsin was committed to democracy and a market economy. To be sure, many of his associates were mostly interested in using power to amass personal wealth, but the direction of change was toward a rules-based market economy and political opening, both internally and internationally. During most of Yeltsin years, the prices of natural resources were at historical lows and the Russian economy never recovered from the sudden collapse of central planning. This is why Yeltsin and his team of reformers looked inept and became highly unpopular. Then, as soon as Putin settled in the Kremlin, oil and gas prices started their ascent and have remained high. Economic growth, and the popularity that comes with it, was offered to a man whose instinct never was to establish an open-access society. Luck matters in history and Russia seems to have a knack for being unlucky.
Posted by: Charles Wyplosz | February 21st, 2007 at 8:29 pm | Report this commentBy invitation - Anders Aslund: Martin’s article on Russia was excellent. What he describes in the catchy phrase “as individuals you are nothing; but as Russians you are great” is a fascist state, like Germany in the 1930s. I think he is just to the point.
While his description of the current is just right, I am more hopeful than Martin in two important regards about Russia’s development. First, I think that the Russian economy and society are outgrowing the political system, which is becoming ever more over-centralized and therefore anachronistic. Putin’s ideal is not Soviet but tsarist, and his ideal tsar appears to be Nikolai I, 1825-55, and that is a very outdated system.
Second, I do not share his view of Chubais and the oligarchs. They were modernizing and gentrifying. We are seeing the same process taking place in Ukraine. The problem with Russia was that the KGB survived intact and that the KGB has taken power. I do not think that the KGB will be able to maintain its current power. I see a divisive elite struggle that can break the whole political system to the benefit of Russia. Russia has bred a tremendous new middle class that is wisely keeping its heads down right now, but it will not forever.
Thus, thanks to the healthy processes of privatization, capitalism, proliferating higher education, and globalization, Russia is likely to eject its current anachronistic political system. In any case, the comparative evolution of Russia and Ukraine will pass an important judgment on privatization and oligarchs. Personally, I believe that competitive oligarchy is likely to be fruitful, though naturally it can go astray.
The author is Senior Fellow, Peterson Institute for International Economics
Posted by: FT Forums | February 23rd, 2007 at 1:26 pm | Report this commentRobert Wade: I agree with Martin that Russia should want “a stable, law-governed, open and prosperous society”; and that Russia may well “choose irredentism and resentment, instead”; and that “that would be a disaster, for everybody, not least for Russia itself”. I have a disagreement and a qualification.
I disagree that the West, and the US specifically, is as benign an actor viz a viz Russia as Martin implies. Since Foster Dulles and the Eisenhower administration US foreign policy has been steered by the conviction that the US is a uniquely moral nation and providentially empowered to lead the world and bring democracy to others, through forced regime change if necessary. President Bush’s instant framing of 9/11 as a global threat to freedom, and Condolezza Rice’s call for the Westphalian principle of balance of power among sovereign states to be replaced as the world authority by an alliance of the democracies are in this spirit.
It is understandable that when the Russian state looks west and south and sees proliferating US military assistance agreements and US bases around its perimeter it gets very nervous, knowing the US drive for, in President Bush’s words, “ending tyranny in the world” (and its elastic notion of “tyranny”) and knowing the US willingness to use military force in the name of this objective. These are just the circumstances likely to provoke sentiments of “irredentism and resentment” among Russians, just as they would in the US if Russia somehow managed to make Mexico its base of military operations in the Americas or if China took to flying spy planes up and down the US coast. Yet the western reaction to Putin’s speech in Munich earlier this month seemed pre-programmed to slot it into a “resumption of Cold War” framework, ignoring that Putin was speaking at a multilateral security conference and taking hostile questions and ignoring the disingenuousness of US claims that missile defence bases in Poland and the Czech Republic are only concerned with countering Iranian missiles-to-come.
One of the big questions of our time is how to get the US back on a relatively non-interventionist track (as it has been at times in its history). On this track, it would accept the existence of an international system of states with different economic and political orders, and promote international rules which do not force a “one size fits all” economic and political order but minimize the costs of the differences for others (a more general version of the principle underlying the Bretton Woods order).
On the question of whether Russia will evolve into an open-access society with friendly relations with the open-access societies to its west, Martin, following North et al., emphasises the need for certain changes in the structure of state authority and the social base of the state, including “perpetual organizations for the elites” and “effective political control over the military”. By way of qualification I would emphasize the third and more fundamental factor, “a rule of law for the elites”, and recast it as, “property rights and taxation”. A state able to operate a property rights and taxation system which provides a stable legal environment and other public goods to investors and citizens is likely to have the necessary - but hardly sufficient - condition for stable relations with neighbors.
Here there is good news from Putin’s Russia. One of the most difficult tasks of a property rights system is to keep the expropriation power under public and rule-bound control (for there must be expropriation power if property rights are to be enforced). Today in Russia the legal environment of most (but not all) corporations is fairly stable, much more so than 10 years ago. Property rights have been institutionalized beyond the relatively easy stage of “authorizing” claims, to the much more difficult stage of “defending” claims (to use the distinction of LSE Russia expert David Woodruff). There is certainly still slippage between the authorizing and defending functions, slippage which makes loopholes through which corporate raiders can refuse to accept repayment from a willing debtor and strip him of his property, for example. But on the whole, the outcome of property rights and taxation disputes is now determined mostly by rules rather than by case-by-case bargaining or coercion. Yukos was a clear case of confiscation; since Yukos there have been few others.
The second piece of good news for state capacity is that unlike many other oil states, Russia has not blown away its oil revenues, and the taxation system is not atrophying due to oil revenues. Oil revenues are being segregated from other revenue sources, so as to get an accurate measure of the budget deficit net of oil. With a value added tax, flat income tax and other taxes, the budget is becoming less dependent on oil rents. As direct taxation becomes more important, one can expect a growing sense of social compact between rulers and citizens, such that the state is less likely to be tempted to provoke external enemies in order for those in power to stay there. While these inevitably slow processes of institutional evolution are occurring, it is important that Europe and the US desist from belligerency, including military bases near Russia’s borders.
Having said all this, I still consider it an interesting puzzle as to how Taiwan and South Korea - and now China and Vietnam — developed as much as they have on the basis of property rights systems which look to have been very “weak”, by western notions of property rights. And likewise, how they developed as much as they have on the basis of distinctly “limited access” political orders (Taiwan and South Korea up to the late 1980s) - “an order based on a balance of power among insiders and the exclusion of outsiders”, as Martin paraphrases North et al. I describe both these puzzles in my Governing the Market (2004), but I give only pieces of an answer.
Posted by: Robert Wade | February 23rd, 2007 at 6:11 pm | Report this commentMartin Wolf: I have no disagreement with Charles Wyplosz, who has provided an excellent comment. But I would like to respond to Anders Aslund’s defense of the wild privatisation of the 1990s.
I can understand the “Coasian” logic behind the idea that any owner is better than none (after Ronald Coase, the Nobel-laureate who argued that it does not matter who owns property, so long as property rights are well specified). At least resources were likely to be more efficiently used than in the hands of the state even if vast inequalities opened up. Yet there was also a political side to a decision to hand over a large part of the world’s natural resources to a few individuals. The theoretical benefit was that it might have created independent centres of power, as Mikhail Khodorkovsky believed. The actual disadvantage is that these centres of power were entirely illegitimate, as Mr Khodokorvsky discovered. The Russian public felt (rightly) that these new billionaires were no better than thieves. That hostility gave legitimacy to the Putin-era counter-attack upon the oligarchs and restoration of state power and state ownership of natural resources. Worse, it made the market economy illegitimate, by cementing the idea that property is theft, rather than the result of entrepreneurial talent. So my guess is that the way privatisation worked has delayed, if not destroyed, Russian movement towards prosperity and freedom.
I hope I am wrong and that Mr Aslund’s optimism proves right in the years ahead.
Posted by: FT Forum - Martin Wolf | February 23rd, 2007 at 6:17 pm | Report this commentBy invitation - Anders Aslund: I do not have much quarrel with Martin’s points, but I do think that almost any privatisation is better than no privatisation. This is a discussion of second or third best options.
If the real alternative to Chubais’s privatisation was a Lukashenko-like dictatorship under Zyuganov, the Chubais privatisations were much better. In Ukraine, it appears as if the oligarchs are able to maintain their property rights, which were acquired approximately as in Russia. Now the top oligarch groups have allied themselves with different political forces and they are balancing one another, while securing their property rights. The result is both economic and political pluralism. The Ukrainian oligarchs, primarily Pinchuk and Akhmetov, are indulging in large-scale charitable donations, doing what the government fails to do in education, health care and culture. Their donations are directed to what people appreciate, while the Russian oligarchs to a great extent obediently donate to what the Kremlin wants – palaces and cathedrals.
With regard to the best form of privatisation, I am convinced that politics is far more important than economics, because private enterprises work much better on average than public enterprises, especially if public enterprises are dominant. That means that the best form of privatisation was mass privatisation through vouchers plus insider privatisation, which is exactly what Chubais did until 1994, but then all privatisation was blocked, forcing him to go for loans-for-shares or no privatisation. I think in hindsight that he did the right thing – I did not so when we met in Moscow in 1996. The most legitimate property rights appear to be those acquired on the secondary market. You see that nobody complains about Deripaska’s or MDM’s property rights, because they have bought virtually everything on the secondary market.
The real problem in Russia today is the KGB group around Putin and I think it is less important what arguments they use. They are benefiting from post-revolutionary stabilization and its weariness of politics, the critical mass of private enterprise and market reforms, and most of all the oil revenues. The loans-for-shares privatisation can at most gain the fourth place in a causality ranking, significant but not decisive in itself.
Posted by: FT Forums | February 26th, 2007 at 1:26 pm | Report this commentMartin Wolf: I want to thank Robert for his thoughtful contribution to this (and other) discussions on this forum.
Robert argues that the west has not been a benign actor vis a vis Russia. I would not insist that the US is consistently benign. That would be naïve. I also share his dismay over the behaviour of the present administration and would certainly not want to defend US actions in its own “near abroad”, to the south, particularly in the Cold War. This said, I think the differences between the US and the Russian empire are pretty clear. The Soviet Union, in particular, really was an “evil empire”, albeit less evil than the one it defeated in the second world war. Russia’s neighbours have good reasons to be suspicious of its intentions, vastly more suspicious, I would insist, than Canada or Mexico needs to be of the US.
I do not know whether Russia has moved to a credible regime for the protection of elite property rights. I think BP and Shell would doubt that. I do. But Robert is certainly right that the Russian state has been quite disciplined in its use of its vast oil revenues. That does not surprise me, though. It is consistent with my view that the aim of the Russian state is now (and always has been) its own autonomy and power, rather than the welfare of its citizenry.
I think Robert is quite right to ask how east Asians, with what look like “limited access orders”, have done so well. It is an important question. Maybe one of the answers to this question is that these are resource-poor countries. So when the state decided to promote development it had to reward those who used their ingenuity and the labour resources of the country effectively. This automatically pulled a great many people into economic activity, including some significant new entrepreneurs. Thus, these were “open access” orders of a kind. In resource-poor countries, rents must be created before they can be redistributed, after the fact. In resource-rich countries, this is not the case.
Posted by: FT Forum - Martin Wolf | March 4th, 2007 at 7:01 pm | Report this comment