February 13, 2008
Why Putin’s rule threaten’s Russia and the west
By Martin Wolf
At least he made the trains run on time. That was said of Benito Mussolini, Italy’s fascist dictator from 1922 to 1943. Much the same is now said of Vladimir Putin, Russia’s authoritarian president. He may have crushed the fragile shoots of democracy, but he has at least restored the economy, the state and his country’s place in the world.
This view is shared by Mr Putin himself. He stated only last week that: “We have worked to restore the country after the chaos, economic ruin and breakdown of the old system that we saw in the 1990s.” But it suffers from a drawback: it is false, as Michael McFaul and Kathryn Stoner-Weiss of Stanford University argue in a powerful article*.
True, between 1999, the year before Mr Putin became president, and 2007, the Russian economy expanded by 69 per cent. But the economies of 11 of the 15 former republics of the Soviet Union expanded by more than Russia’s. Indeed, only Kyrgyzstan did markedly worse. A number of the former Soviet republics did, it is true, benefit from an oil and gas bonanza. But so, too, did Russia: its oil and gas exports jumped from $76bn in 1999 to $350bn last year. Even so, the Russian economy expanded by less than Ukraine’s.
The remainder of this column can be read here. Debate from our panel of economists appears below.
William Easterly: Martin brilliantly cuts through all the nonsense about the allegedly effective autocrat that Putin is supposed to be. Enough with giving Putin a halo just because Russia is bouncing back from one of the worst depressions in history. According to that well known econometric law, “even dead cats bounce.”
But then, I wonder if Martin isn’t falling prey to a contradiction that was common during the previous Cold War - if Russia’s economic and political system is so dysfunctional, how can it be much of a threat to the West? Aside from nuclear weapons, which nobody views as much of a Russian threat at the moment, Putin is much more of a danger to his own people than he is to the West.
Posted by: William Easterly | February 13th, 2008 at 5:25 pm | Report this commentPranab Bardhan: Putin is a disaster for Russia. His high popularity Martin, rightly, finds depressing, but I think it is also worth pondering a bit more about its origin. Western errors, to which the “aggrieved nationalism” of the Russian people is partly a reaction, involve not just the matter of post-Soviet debt. The “market Bolshevism” (not just sensible market reforms) pushed by western experts and financial institutions, the looting of state assets by the oligarchy that they were, wittingly or unwittingly, complicit in, and American triumphalism and “in your face” Nato expansion right to Russia’s doorstep, did not justify but helped prepare the ground for Putin’s rise and popularity in a nation that felt humiliated. In the concerted policy that Martin advocates for the West an important element should be a bit of humility.
Posted by: Pranab Bardhan, Professor of Economics,University of California at Berkeley | February 13th, 2008 at 11:40 pm | Report this commentVlad Sobell: I must disagree with both the tenor and the main conclusions of your article. Instead of depicting him as a malign force, we should thank Putin for preventing the disintegration of the Russian Federation and a Yugoslavia-style mayhem that surely would follow, as this would have dire repercussions for all of us. If this achievement was brought at the price of selective, benign and, above all, transient “authoritarianism”, than this was “money well spent”.
Putin’s “authoritarianism”, or whatever we wish to call it, can be easily reversed - unlike Soviet totalitarianism, the phenomenon is not malignant and systemic. On the other hand a hugely destabilising disintegration of the resource-rich Russian Federation would have released forces impossible ever to control.
I am surprised that you do not give the regime - and its key economic policy figures such as Alexei Kudrin or Herman Gref - more credit. Russia’s spectacular recovery has been due (apart from the inevitable post-depression rebound) to the government’s consistently credible fiscal policy and a raft of structural “nitty-gritty” reforms on all fronts. This tends to be overlooked in the journalistic as well as academic output, precisely because it is so mundane. Your assertion that “under Putin little progress has been made on structural reforms” is, therefore, misleading.
I would also argue that, far from being rooted in “authoritarianism”, the fact that Russia’s economic growth has failed to match that of (some of) the other former Soviet republics is mainly the result of the very different structural features inherited from the USSR. And surely, much of it is also due to Russia’s very different size.
Can we really draw meaningful comparisons between the tiny Baltic republics and the sprawling Russian Federation? Can we really postulate a direct correlation between “authoritarianism” and the (small) differences in cumulative economic growth? Especially given that the differences in inherited structures offer a much more convincing explanation?
In any case, I strongly disagree with your concluding assertion that Putin is a “dangerous failure”. On the contrary, what is dangerous is the poisonous, but unfortunately now well embedded, notion that the “increasingly aggressive” Russia is about to menace us. I fear that your article has inadvertently contributed to a further propagation of this troubling but misleading message.
Vlad Sobell is senior economist, Daiwa Institute of Research, London
Posted by: Vlad Sobell | February 14th, 2008 at 10:04 am | Report this commentMartin Wolf: Let me make just three comments on Vlad Sobell’s interesting post.
First, the view that most of the reforms took place under Yeltsin is clearly the EBRD’s (as you will see from my chart). Furthermore, given the spectacular oil windfalls, achieving fiscal discipline was a simple challenge. To have failed to have achieved this would have meant incompetence on the scale of Mr Hugo Chavez. I certainly would not expect that of this regime. Russia is, after all, a serious country, if often a misguided one, alas.
Second, you are wrong on the question whether Russia’s relatively poor performance can easily be explained away. In general, the effects of the disintegration of a previously integrated economic sphere on a component part of that sphere will be larger the smaller that component.This is because the dependence on trade with the rest of the area is larger the smaller that component. Luxembourg is far more dependent on free trade within the EU than, say, Germany. That is just a special example of the general point that the gains from trade are larger the smaller the economy - they are much bigger for Iceland than for the US. All this is obvious. So Russia should have been less affected by the disintegration of the Soviet Union than any other former republic, not more, because it was less dependent on trade with the rest than most of the others. I made that argument back in 1991. The fact that Russia also enjoyed a huge oil and gas windfall in the 2000s, which solved its fiscal problems, makes this case even stronger. Indeed, if oil prices had risen in 1995, say, the 1998 crisis would surely never have happened.
So I would insist that Russia’s recovery under Putin is feeble even by the standards of the rest of the former Soviet Union. I do not find that particularly surprising, given the policies pursued by the government, particularly in its second term. This is not just my perspective. Consider the views expressed by Putin’s former adviser, Andrei Illiaronov. You may disagree with him, but you cannot claim that he is ill-informed.
Finally, let me add a personal note. Yes, I do regard the emergence of the Putin regime as a tragedy for Russia and the west. I accept that the west bears substantial blame for this. But it has also been Mr Putin’s choice. I do not see why it was a necessary one, even though it was always a plausible one.
Posted by: Martin Wolf | February 14th, 2008 at 10:05 am | Report this commentVlad Sobell: I think your argument regarding the disproportionate impact of disintegration cannot be applied in its full force in relation to post-Soviet economies.
The reason is the Soviet Union was not a market-based economy - in fact it was based on its anti-thesis, anti-market foundations. Therefore, the moment the tiny Baltic states escaped the monolith, they could not help but hugely benefit from re-directing their trade away from the massively inefficient intra-Soviet trade to much more efficient trade (based on comparative advantage) with the rest of the world, especially with the EU. Yet, at the same time, while being integrated within the EU, they continued to benefit from their privileged position between Russia and the Union. Using your own words (in relation to Russia), achieving spectacular growth rates under these conditions (and given their small size) was a “simple challenge”.
Needless to say, Russia, has not been in the position to benefit from these factors in an equivalent manner.
Regarding your point on fiscal discipline, I would suggest that, contrary to what you write, this indeed has been an impressive achievement, given the inherited weakness of the state (and hence the appeal of the populist temptation) and given the widespread poverty and other disastrous consequences of the Soviet system, which have cried out for extra spending. As you well know, a windfall from strong international prices (such as hydrocarbons prices) is a double-edged sword: while from providing extra fiscal revenue, it can also lead to more inflationary spending, thus wiping out any potential net benefit. I do consider the regime’s ability to avoid these pitfalls an impressive achievement.
Posted by: Vlad Sobell | February 14th, 2008 at 10:08 am | Report this commentJeremy Putley: Those who would excuse Mr Putin for the crimes for which he has been responsible are in the wrong.
As Martin Wolf correctly points out, President Putin is proud of the record of his period in office. Mr Putin probably supposes history will be kind to him. In explaining how wrong such a view is Mr Wolf understandably does not find space to enumerate all of the “achievements” of the Putin era.
It is a sign of the success of a deliberate policy of secrecy that the war in Chechnya, just a few years ago, which included the destruction of Chechnya’s capital city, Grozny, and the commission of grave war crimes and crimes against humanity by the Russian armed forces acting under Putin’s orders, does not take first place in the charge sheet against him. The suppression of the truth of the Chechnya war was deliberate Kremlin policy, clearly intended to hide the consequences of the Putin strategy for Chechnya, and what was in effect a mass murder of civilians.
Considering that membership of the G8 is not compatible with Russia’s retreat from democracy and the rule of law, it is a mystery to me that Russia has still not been suspended from the G8, as senator John McCain has proposed. What are the G7 nations thinking?
Sorry, I am not an economist, just an outraged observer.
Posted by: Jeremy Putley | February 14th, 2008 at 11:37 am | Report this commentDavid Feickert (guest commenter): I have three questions for Martin Wolf - concerning comparisons of like with like. Normally, he is very rigorous in such comparisons but I wonder:
1. How relevant is it to compare the economic performance of Russia and the former Soviet bloc countries which are now in the EU? West Germany pumped billions of euros into East Germany - another ‘valid’ comparison and so has the EU done in the cases of Hungary, Estonia and Bulgaria.
2. Comparing Russia and Former SU states is more relevant, but how relevant is it to compare the rapid de-industrialisation of the industrial powerhouse of the FSU with the others, which are primarily one or two resource exporting economies? The exception is Ukraine, of course; but what is the comparator between Russia and Ukraine on GDP/capita now?
3. Who gains from the conclusion Martin reaches? Where is the gain for West Europeans to define Russia as a kind of semi-rogue state, when its most nationalist and militarist rhetoric appears to flow not from Putin outwards but as a defensive reaction to the encirclement of Russia by NATO, the US (supported by UK) missile defence shield which Putin ofered a home in the south of his country, only to be rejected? Perhaps it is time to start from this proposition: as the real economy between the EU and Russia requires a constructive co-operation over energy (EU demand, Russia supply) why not try to model what kind of economic relationship would serve both best and what kind of political relationship would best serve the economic interests of both? Jacques Delors has called for a Common energy community between the two (and other states to the east of the EU), modeled on the founding European Coal and Steel Community Treaty of the EU. Why not, Martin, or an alternative, positive approach?
Dave Feickert is an independent energy and mine safety consultant based in New Zealand who works internationally.
Posted by: Dave Feickert | February 14th, 2008 at 2:36 pm | Report this commentMartin Wolf: I would like to respond to the generally supportive comments from Bill Easterly and Pranab Bardhan.
My response to Bill is that even a weak state is powerful if it not only possesses nuclear weapons, but is also a predominant supplier of natural gas via fixed pipe lines (and is determined to retain this quasi-monopolistic position).
I agree with Pranab that the West has much to be humble about. I am not so concerned here about the “market Bolshevism”, since I think the lesson of transition was that faster was better than slower (not least because it eliminated the huge arbitrage opportunities on which many of the so-called oligarchs made their initial wealth). Nor did the West help in creating the loan-for-shares privatisation, which was the biggest scandal.
On Nato expansion, I do understand the point. But I would repeat what I said in the column. Russians should ask themselves why these countries, which enjoyed the blessings of Russian rule for decades, or even centuries, have been so desperate to throw themselves into the laps of the Americans. Indeed, it would be immensely helpful if Russians examined their history (including the role of the KGB) in the way Germans have examined theirs over the past six decades.
Posted by: Martin Wolf | February 14th, 2008 at 2:57 pm | Report this commentYevgeny Goncharov (guest): 1) I’m surprised that the fact that all Soviet debt was inherited by Russia is not taken into account in the discussion. ALL the other countries (former Soviet republics) started with no debt… Before Putin came to power Russia’s debt was almost as large as its GDP. Would not it be honest to “correct” the Russia’s growth accordingly for the purpose of comparing to the other CIS countries?
2) If all Putin’s economic success is due to oil, then I would like to invite Mr Wolf to compare dynamics of the economic growth of Saudi Arabia and Russia (compare, in particular, reserves). Taking into account that oil profit has way less influence in Russia, this alone makes the conclusion about “ineffectiveness” of Putin very questionable.
Posted by: Yevgeny Goncharov, Assistant Professor, FSU (financial mathematics) | February 15th, 2008 at 5:12 am | Report this commentMartin Wolf: I would like to add another response to Vlad Sobell’s posts.
One of his most important points is that Mr Putin prevented what he calls a “hugely destabilising disintegration of the resource-rich Russian federation”. That, he argues, “would have released forces impossible ever to control”. Indeed, he claims that Mr Putin prevented “Yugoslavia-style mayhem”. I do not know what to make of this, not least because I cannot judge the extent of the danger. But several points need to be made.
First, the Soviet Union itself disintegrated remarkably peacefully, despite the obvious dangers of conflict. For this Boris Yeltsin and Mikhail Gorbachev deserve great credit. So the evidence from this directly relevant experience is that reasonably peaceful dissolution was perfectly possible. The point about Yugoslavia, after all, was that Slobodan Milosevic made “greater Serbia” the basis of his political programme. That, not some inherent feature of the situation, was why the break up of Yugoslavia ended up as mayhem. Fortunately, Yeltsin did not adopt a similar goal of a “greater Russia”. He could have done so. Many Russians might be happier now if he had done so. But he did not.
Second, Mr Yeltsin and, subsequently, Mr Putin did decide to prevent the dissolution of the Russian Federation in one particularly important case: Chechnya. Here we have “Yugoslave-style mayhem” indeed. There seems to be little doubt that tens of thousands of civilians and perhaps even hundreds of thousands have perished in the two wars waged in Chechnya. Note that this is not a case of mayhem that followed a peaceful dissolution of a land empire, but of mayhem following a refusal to accept such a break up. In other words, it is the direct result of the policy Mr Sobell lauds.
Third, I cannot judge how likely was a dissolution of the Russian Federation if Mr Putin had not centralised power, as he did. I suspect it is an excuse for such centralisation, rather than a reason. The Russian Federation was, of course, much more ethnically homogeneous than the Soviet Union. While regional governments might have been obstreperous in the 1990s, this hardly presaged a break up. Tartarstan did declare independence in 1990, but this claim did not last long. Since Tartarstan is surrounded by the Russian Federation, its claims to independence could never have been effective.
My conclusion then is that the only example of what Mr Sobell calls “Yugoslav-style” mayhem was the result of preventing dissolution, rather than of permitting it. Praising Mr Putin for averting a grave danger seems to me to be the reverse of the truth. This is one of Mr Putin’s achievements only if one believes that preserving the integrity of the Russian Federation is itself an overriding objective. This, then, is assuming what one wishes to prove: petitio principii.
I am, however, now prepared to grant that the reforms introduced by the Putin government, particularly in its first term, were more substantial than I stated in my column. But I would argue that we would still expect Russia to have done substantially better than most of the other republics in the 2000s: Russia is hugely resource rich, while commodity prices have been booming; it was inevitably far less affected by the economic disintegration of the Soviet Union than most other republics; and it inherited most of the governmental capacity of the former Soviet Union. Yet, for what it is worth, estimated Russian GDP in 2007 was still only the same as in 1990. (I agree that this is probably not very meaningful.)
I do not agree that achieving spectacular success was so easy for the Baltic states. Some correspondents have noted that they received significant assistance from the EU. But the resource transfer to Russia from higher energy prices dwarfs any such EU aid: my back-of-the-envelope calculation is that Russia has gained at least 25 per cent of national income through the improvement in its terms of trade over the past four years. If so, this must be about an order of magnitude bigger, relative to GDP, than the net transfers to the Baltic states. Finally, let me repeat a point I made earlier: with a windfall like this, Russia should be balancing its budget with great ease. So, no, I do not think doing so is an extraordinary achievement.
Posted by: Martin Wolf | February 15th, 2008 at 7:16 pm | Report this commentI would like to respond to some of the other interesting comments I have received on my column.
I agree strongly with Jeremy Putley. What Mr Sobell lauds as a successful effort to prevent the disintegration of the Russian Federation has included the brutal suppression of Chechnya. But it is worse even than that. Vladimir Putin became president in the immediate aftermath of a series of bombings in Moscow that killed close to 300 people. These bombings were, of course, blamed on Chechen terrorists and were the excuse for the second war against the Chechens.
The beneficiaries of these bombings were, of course, those who wanted to fight another war against the Chechens, including then prime minister Mr Putin. Furthermore, the bombings were not subsequently repeated. For these two reasons, one has to ask oneself whether the proposition that Chechen independence fighters (or terrorists, as the Russian government would call them) had anything to do with these attacks passes an elementary plausibility test. Why would the Chechens embark on a bombing campaign whose consequences were to help Mr Putin become president and give such an obvious excuse for another Chechen war? Why, having started, would they stop once Mr Putin had attained power and mounted a massive assult upon their country?
Yet that is not all. As Edward Lucas explains in his book, there is also some direct evidence linking the FSB (the KGB’s successor organisation) to the bombings: in essence, FSB operatives were caught setting explosives in the city of Ryazan in September 1999. The head of the FSB then explained this away, implausibly, as an “exercise”.
In all, I find the official story on these bombings quite unconvincing. Normally, I would find it impossible to believe that an organ of government would mount an atrocity against its own people, to help one of its own get elected. But the atrocities committed by the KGB in the course of the 20th century would make this the merest peccadillo.
Of course, the media no longer enjoy the independence that helped bring the connections between the FSB and the bombings to public attention. Furthermore, as we know, investigative journalists have a habit of ending up dead. Anna Politkovskaya, assassinated in October 2006, was the most famous and perhaps the bravest of them all.
In all, this is a distasteful picture, to put it mildly.
Let me turn to Mr Feikert’s comments.
My answers to his first question, about comparisons between Russia and central and eastern Europe, are that I did not mention east Germany at all, which is irrelevant. But, as I have noted above, the windfalls received by Russia from the soaring prices of energy greatly exceed the money received from the EU by the countries he lists.
My answer to the second question, about the performance of countries of the former Soviet Union, is to agree that all such comparisons are very difficult. But all I was trying to do is show that there is nothing remarkable about Russia’s recovery. Given the depth of the recession between 1990 and 1998, this was the least one might expect. Ukraine is indeed substantially poorer than Russia today. So what? It was also substantially poorer in 1998. Given the fact that Russia is a vast, resource-rich country that inherited most of the former Soviet Union’s government and has had a famously “stable” government under Mr Putin, it should have done far better than far more unstable Ukraine in the 2000s. It did not do so.
Then, Mr Feickert asks who gains from the conclusions I reach. The question is rather whether the conclusions are correct. Mr Feikert believes Russia is being “encircled” by Nato. That is propaganda. Russia is surrounded by countries that were previously part of its empire. They do not trust its good-will. The West is not responsible for those perceptions: Russia is. If there is to be a change in Russia’s external environment, Russia itself must change: it must make its neighbours feel safe, instead of threatened.
What, finally, he asks, should the West do? I rather like the idea of an energy community with Russia, if the latter is interested. As I said, I would also be delighted to have a democratic and free Russia in Nato. But that is not up to the West alone. It is also up to Russia.
Finally, let me turn to the comments from Mr Goncharev. I accept his point about the Soviet debt, though one should add that Russia also inherited most of the land mass and a huge proportion of the natural resources of the former Soviet Union, while losing more than half of the population. So it was not that bad a deal.
I am puzzled by his suggested comparison with Saudi Arabia. Does any Russian really want to compare his country, with its large and highly educated population and sophisticated culture, with Saudi Arabia? What was Saudi Arabia before the discovery of oil? Nothing, except the home of the most sacred sites of Islam. But Russia, for all its flaws, was a great power.
Yet, to make my view clear, I do not think Putin’s economy success was only due to oil. Oil helped. But a recovery would have occurred in any case after the crash of 1998 and the long decline in the previous eight years.
Posted by: Martin Wolf | February 17th, 2008 at 3:39 pm | Report this commentYevgeny Goncharov (guest): Mr. Wolf: “I do not think Putin’s economy success was only due to oil. Oil helped. But a recovery would have occurred in any case after the crash of 1998 and the long decline in the previous eight years.”
Of course, oil helped and nobody (but Illarionov) argues about that. But some might point out ‘Holland disease’ here and will be absolutely correct. Next, thanks to Putin’s action toward oil companies (eg, Yukoil, Shell), now Russia can enjoy an ‘oil bonanza’. Otherwise (say, under Yeltsin), the “bonanza” would mostly go abroad and Russia would not enjoy the largest reserves she ever had.
Additionally, Putin’s behavior “scared” some enthusiasm from “oil investors”, but taking into account the “Holland disease” one might argue that it is not bad thing after all (Illarionov has a valid point there). Even given Putin’s politics, ruble value continuously grows with regard to the dollar, which is bad for Russian effort to diversify the economy.
Next. Mr. Wolf is in a vicious circle in the argument about “Russia’s growth is not surprising”: he claims that ‘even dead cats jump’ to prove that there is nothing surprising about Russia’s debt. Then, he claims that Russia is more (twice in terms of PPP, even more in real terms) prosperous than Ukraine, because Ukraine was doing much worse in 1999. But, the “dead cat jump” argument should imply that it should be easier for Ukraine to grow! Meanwhile, it is not the case (btw, Ukraine
gained a lot from increase commodity prices as well: iron; so it is not honest to mention oil gain for Russia and be silent on iron gain for Ukraine): it grew less than Russia!
Even more can be said about Georgia: there is hardly a more “dead cat” then that in Europe. Georgia is around 5 times poorer than Russia (although it used to be one of the richest republics in USSR, along with Baltic republics).
Yes, contrary to what Mr. Wolf claims, Russia grew more than Ukraine (over Putin’s years in power): 83% for Russia and 75% for Ukraine since 1999. What is interesting, Ukraine’s growth is more or less comparable to Russia’s because of “pre-orange-revolution” years, that’s the only time when Ukraine grew faster than Russia (what an irony!).
So, what do we have? Right now Ukraine is in a convenient position of a “dead cat” (in about the same as Russia was in 1999, only without the burdain of Russian debt back then), but still, after the orange revolution, with an economist Yuschenko, it cannot “jump” over Russia, with its KGB-Putin.
Posted by: Yevgeny Goncharov, Assistant Professor, FSU | February 19th, 2008 at 3:28 pm | Report this commentAnders Åslund: In Martin’s discussion of Russia, I would like to comment on six themes: Putin’s popularity, the avoidance of a Yugoslav dissolution, Putin’s achievements, corruption, East Germany’s transition, and Russia’s future. I should start out saying that I completely agree with Martin in what has been said here.
Putin is popular for three major reasons. First, he is the beneficiary of Russia’s high growth. Second, he benefits greatly from censorship and skilful image-making. I tell Vladimir Gusinsky that it is his fault that Russian media are still so credible – they were not in Ukraine before the Orange Revolution. Third, the revolutionary dynamic also favours Putin. Russia is now in the stage of post-revolutionary stabilisation as Vladimir Mau puts it. People are tired of politics, the Bourbons are back, and ordinary people want to make money. In any case, the purported popularity of a manipulating dictator in a boom has little or no significance.
The avoidance of a Yugoslav bloodbath was the great achievement of one man, Boris Yeltsin. When Ukraine voted for independence with overwhelming majority on December 1, 1991, Yeltsin quickly and successfully finished off the Soviet Union in consort with other republican leaders. Yeltsin insisted from the outset that no borders must be changed regardless of Russia’s good case against Ukraine and Kazakhstan after Stalin and Khrushchev’s arbitrary border changes. On December 11, he asked the Soviet general staff to stand up for Russia, and they did. Russia came together financially with the financial crash of August 1998. Putin made no positive contribution, but possibly a negative one.
I have discussed Putin’s contributions at length in my book, Russia’s Capitalist Revolution, which Martin so kindly refers to. First, even if Russia has underperformed in terms of growth, Putin has at least been focused on 7 percent growth. Second, until October 2007, Putin allowed Kudrin to maintain good macroeconomic stability. The last few months, however, are worrisome. Third, Putin completed many 1990s reforms from 2000 until July 2002, notably a tax code, civil code, customs code, deregulation of small and medium-size enterprises and the privatization of agricultural land. After July 2002, he has hardly done anything useful. His signature achievements are reinforced authoritarianism, re-nationalization of numerous large, good private companies, and extraordinary tolerance of corruption.
What I am missing in this discussion is that Russia today probably has the greatest larcenary the world has ever seen. Putin has organized the extortion of billions of dollars from large private companies and an extraordinary system of kickbacks of often 30-50 percent of the contract sum in infrastructure projects. One excellent source is Maxim Kvasha’s interview with the silovik investor Oleg Shvartsman in Kommersant on November 30, which was never denied. Another is Vladimir Milov and Boris Nemtsov’s excellent, brave and substantial new report, “Putin. The Results,” available all over the Russian internet. It prompted Putin to demand that the Union of Right Forces through out Nemtsov, who was one of their leaders. Finally, the political analyst and Stanislav Belkovsky, who at least used to work for Igor Sechin, has claimed in at least three times in interviews from Moscow that Putin is the beneficiary owner of concrete enterprise shares worth $40 billion, which corresponds well to the grapevine. Only on February 14, when directly asked, did Putin bother to deny this. I think Putin is the most corrupt politician the world has ever seen both in terms of building a corrupt system and personal enrichment. We might learn about it quite soon.
David Feickert mentions East Germany. West Germany has indeed pumped some $80 billion a year into East Germany, which is an incredible amount, initially 50 percent of the regions GDP. The effect has been devastating. East Germany has had a growth rate of 1-2 percent a year and stands out as perhaps the greatest failure of post-communist transition. I have discussed it in detail in my book, How Capitalism Was Built (CUP, 2007). The West German subsidies put East Germany in a frightful social welfare trap, which was even worse than Russia’s current oil curse.
I see many reasons to optimism about Russia. First, Putin’s bizarre poker play about his succession is more likely than not to destabilize his authoritarian rule. Second, with imports increasing by 35-40 percent a year and energy production stagnating, Russia’s current account surplus is likely to disappear within two years. Third, the siloviki factions seem to be exposing and weakening one another, allowing a much more liberal economic discourse than we have seen for the last three years. Fourth, if Ukraine really succeeds as a democracy, Russia will look extremely obsolete. Fifth, Russia is far too rich to be so authoritarian. Among countries that are so well off, only Singapore and seven small oil states are as authoritarian. My conviction is that Putin’s authoritarian system will collapse sooner than almost anybody believes. As Andrei Shleifer and Daniel Treisman wrote in 2003, Russia is after all a rather normal country.
Posted by: Anders Åslund | February 21st, 2008 at 9:30 am | Report this commentMartin Wolf: This is, I hope, going to be my last post on this topic. But it has been a superb debate, which I have much enjoyed.
Let me comment on Yevgeny Goncharov. He mentions “Holland disease”, by which he presumably means what we call “Dutch disease”. To clarify, this is the situation in which the exploitation of a natural resource (or, for that matter, a large capital inflow) raises the real exchange rate, so crowding out other industries producing tradeable goods and services. But it is perfectly possible to have Dutch disease and grow rapidly, while the additional resource revenues pays for the required imports.
My own strong impression – but I admit I have not done the work on this – is that Dutch disease is indeed at work in Russia. Certainly, I am unaware of the growth of a significant, internationally competitive manufacturing industry, for example.
I do not understand what Mr Goncharov refers to when he says that Mr Putin’s actions towards Yukos and Shell allowed an oil bonanza. Expropriation by the state was not necessary for that. It almost certainly reduced production. The same aim of shifting rent from the companies to the state could have been achieved by taxation (though see Anders Aslund’s comments on corruption, which may be a more relevant motivation).
I do not fully understand what Mr Goncharov says about Ukraine and Russia. Russia and Ukraine both had deep collapses in the 1990s. Russia’s was smaller, partly because it has better natural resources, partly because the Yeltsin government was much more successful at reform (something most supporters of Mr Putin refuse to recognise), partly because Russia inherited much of the Soviet Union’s human capital and partly because Russia did not have to create what is essentially a new country. Ukraine is still a deeply divided country. All this seems obvious, at least to me.
Both countries then started to grow again, at much the same time. I don’t know where Mr Goncharov gets his growth figures from: they are not the same as mine. But, to all intents and purposes, Ukraine and Russia grew about as fast as each other between 1999 and 2007. So they both had roughly similar bounces. I accept that Ukraine was an even deader cat. If that was the only reason for subsequent growth, it might have been expected to grow faster than Russia, instead of at much the same rate, as Mr Goncharov points out. But, of course, growth is a more complex process than that.
Significantly, Ukraine has gone through a democratic political transition, while Russia has not. This certainly disrupted its growth. I agree on that. Mr Goncharov points this out with some glee, horrified, I presume, that his former fellow countrymen were allowed to indulge in their disgusting flirtation with democracy, instead of being treated like idiot children, as Russians are, once again. But I do accept that such political revolutions normally slow growth, as they did in Ukraine, at least while they are happening and for some time afterwards.
Russia still has to make this political transition. I hope it will do so, as Anders Aslund does. But I expect that when (if) it does so, there will also be a period of economic disruption in Russia. As to the point about Ukraine’s iron ore, I am afraid I do not know how big the windfall for Ukraine is. Is it really close to being as big as Russia’s oil windfall? I would like some data on that.
Given the troubled post-Soviet history of Georgia and the trouble Russia has gone out of its way to cause for this small country, I am astonished Mr Goncharov even wishes to mention it.
Finally, I should note that Mr Goncharov refers to Russia’s enjoying the largest reserves she has ever had. I presume this refers to foreign currency reserves. I regard these as a foolish investment, not a triumph at all. The latest figures I have are $464bn (December 2007), which are the third largest in the world. While it clearly makes sense for a commodity exporter to have substantial reserves, this seems extraordinary: it must be not very far short of half of 2007 GDP.
Let me repeat what I said. I still find little that is all that surprising about Russia’s growth since 1999. Maybe Ukraine should have done even better than it did. But given the scale of the Russian decline in the 1990s, the reforms put in place in that decade and the oil windfall, this is about the least I would expect.
I have nothing to add to what Anders says. He is far better informed than I am about what is happening in Russia. I hope he is right to be optimistic about that country’s political future.
Posted by: Martin Wolf | February 21st, 2008 at 7:20 pm | Report this commentVlad Sobell: I would like to thank Martin Wolf for spending quite a lot of his precious time on the discussion of Russia. But as this certainly is a very important “country”, I am sure his effort will not have been wasted.
However, I need to make a short rejoinder on Martin’s suggestion that, far from preventing Yugoslav-style mayhem, Putin’s “authoritarianism” has caused it in Chechnya.
I would never deny that the events in Chechnya were, indeed, a Yugoslav-like mayhem. However, to place the blame on this directly on Putin’s regime, as Martin seems to be doing, is a great simplification.
An objective examination of the situation of post-Soviet Chechnya suggests that, as the Soviet order collapsed, this old culture with a proud record of resistance to Russian imperial control reverted to its old ways. Unfortunately, this was not a pretty picture, as it involved the embrace of the Sharia law, large scale kidnapping, terrorism (including the beheading of four British engineers working in Chechnya) and last but not least, the incursion of Chechen warlords into the Republic of Dagestan in early August 1999 - that is well before the entry of the Russian forces into Chechnya. (Incidentally, this means that the FSB and the regime never needed the supposed pretext, the bombing in Moscow and other Russian cities). In other words, Chechnya was headed towards an Islamist caliphate, based on the Taliban model and the leadership of the day made no secret of it.
I would hate to condone the excesses committed by the Russian army in Chechnya and I am not going to do so. But, Putin could only have the tools he had, and this happened to be the utterly corrupt, ineffective, ill-trained and demoralised post-Soviet army. So what do you expect? Before charging the Russian leadership with mass killings, we should demonstrate how else should have peacefully dealt with the situation in Chechnya.
Martin notes the theory that the bombing of the Russian cities were engineered by the FSB. Unfortunately, there are things that will never be properly explained and this is one of them. However, I would advise Martin to put this theory in the same sorry category as those meant to prove that the CIA conspired to accomplish 9/11. Are we really going to be fools enough to buy any of this nonsense?
I think Martin has a very serious point regarding the supposed “authoritarianism” and “over-centralisation” engineered by Putin. Maybe the regime went a little too far in the centralisation direction. But this should be interpreted as an over-reaction in the face of clear and present danger. With the economy and state prostrate, a resolute action to save it is understandable. If we in the West “protect our freedom” by fighting wars in remote places such as Iraq or Afghanistan, who are we to lecture Moscow about the need to protect the integrity of its state by authoritarian means if the need arises?
Besides, as I pointed out earlier, this centralism is easily reversible. Indeed, a move in the opposite direction is now expected under the Medevedev presidency. And who has “appointed” Medvedev, in preference to a hard-line “silovik” such as Sergei Ivanov? The Autocrat in Chief, Putin. Something does not quite add up here.
Posted by: Vlad Sobell | February 26th, 2008 at 5:16 pm | Report this commentMartin Wolf: I appreciate Vlad Sobell’s efforts to educate me in the virtues of Putin’s rule of Russia, even if he does not persuade me.
I do not regard myself as an expert on Chechnya. But from what I have read and heard the proposition that “Chechnya was headed towards an Islamist caliphate, based on the Taliban model and the leadership of the day made no secret of it” is far from universally accepted, to put it mildly. Nor should one forget that the Chechnya of 1999 was already badly damaged by Yeltsin’s earlier wars, which I regard as his single greatest blunder.
Yet it is important to go back to the beginning of this debate, without focusing on either the rights and wrongs of the war in Chechnya or the responsibility for terrorist outrages in Russia. Recall, above all, Vlad’s view that Putin saved Russia from Yugoslav-style mayhem. My point is that there was no such danger, except in Chechnya, where Yugoslav-style mayhem duly occurred - and how! So Vlad’s defense of Putin’s authoritarianism does not stack up. Putin “saved” Russia from an imaginary danger. While Russia faced dangers in 2000, as it does today, it did not face the danger of dissolution. That was (and is)an excuse for the authoritarianism, not a justification.
The dangers of a violent breakup really could have been used an excuse for authoritarianism in 1991, with a view to keeping the Soviet Union (the old Russian empire) together. Fortunately, it was not then so employed. Yeltsin was wise enough to avoid that trap.
That is enough on Russia, for the moment. The debate has been very stimulating. Russia remains a great and fascinating, albeit more than a little depressing, country.
Posted by: Martin Wolf | February 27th, 2008 at 7:41 pm | Report this comment