Russian Economy in Reverse Gear

A New and Approved Authoritarian RussiaThe un-modern face of Russia’s economic “modernization” was evident in Prime Minister Vladimir Putin’s response to the nation’s credit crunch. Last month he ordered state-controlled banks to lend $13 billion — and said that the banks’ CEOs couldn’t take their summer vacations until they had done his bidding.

Russia today often seems to combine the worst aspects of a free market and a command economy. It has the dealmaking and corruption of the new capitalism, and the top-heavy bureaucratic inefficiency of the old communism. The result is an economy that seems stuck in second gear, even as those of the nations Russia sees as its peers — Brazil, India and China — continue to accelerate.

Konstantin Remchukov, a former industrialist who is now publisher and editor in chief of the newspaper Nezavisimaya Gazeta, says that the economic mess reminds him of the lyrics of a rock song by the Russian band DDT, which was popular in the last days of the Soviet Union: “We fight to the death Tuesday for Wednesday, without understanding Thursday.”

Russia’s basic economic problem is that it is a developing economy trying to pretend that it is a developed one. “Nobody in the West really understands how deep is the abyss we have to overcome,” says a top Kremlin adviser who also runs one of the country’s biggest companies. Communism turned people into “aliens,” he explains, and the economy won’t really be modern until it’s run by a generation that has no memory of the old system. That’s more than a decade away.

A stark view of the Russian economy comes from Vladislav Inozemtsev, a professor at the Higher School of Economics and director of the Center for Post-Industrial Studies. In a paper prepared for a conference sponsored by the Russian Institute, he described the process of deindustrialization that has enfeebled Russia since the fall of the Soviet Union. Russia’s industrial production actually declined from 1994 to 2008, while China’s grew more than fourfold and India’s more than doubled.

Russia’s industrial workforce today is nearly seven times less productive than its American counterpart, Inozemtsev calculates. Its industrial exports totaled just $32 billion last year, compared to $1.4 trillion from its “BRIC” colleagues, Brazil, India and China.

This economic disaster is obscured by Russia’s success as an energy exporter, which fuels an unrealistic dream that it can prosper as a “petro-superpower.” But even this crucial sector is backward and badly managed. “In spite of Russia’s immense reserves and smart people, its oil and gas production is stagnating because of corruption, underinvestment and mismanagement,” says J. Robinson West, the chief executive of PFC Energy, a Washington consulting firm.

“Why has this happened?” asks Inozemtsev. “I have one and only answer: The ruling Russian bureaucracy is simply incapable of managing anything more sophisticated than an oil well. In the last 10 years, the government has made nothing that would be able to contribute to the industrial growth in this country.”

The Russian strategy has been “authoritarian modernization,” argues Olga Kryshtanovskaya, director of the Institute of Applied Politics, in another paper prepared for the Russian Institute’s conference. “As if running the clock backward,” she says, Putin decided that “modernization should be started only when he held tight all the controls.”

Putin and Russian President Dmitry Medvedev both speak frequently about the need for economic modernization. Indeed, it has become the “elevator music” of the new elite. But Inozemtsev says that it’s mostly just talk. The energy giant Gazprom, for example, spends three times less on research and development than any other major energy company in the world.

State-run monopolies add to inefficiency. Inozemtsev estimates that raw material and energy costs are three to four times greater in Russia than in China; a kilometer of paved road costs three times more here than in Western Europe, and new retail space is four times more expensive.

High oil prices convinced Russians that they live in a rich country. Their best economic hope is to admit that they don’t — and to adopt the tough modernization policies that have brought real prosperity to countries such as South Korea and Malaysia. Otherwise, says Inozemtsev, oil-rich Russia will “end up in a mess like Venezuela, Nigeria or Angola.”

In last week’s summit with President Obama, Russia’s leaders asked to be taken seriously as a global player. But until they fix their economy, this will remain an empty demand. The numbers show that today’s Russia is a declining power, not a rising one.

A Russian Economy in Reverse Gear
David Ignatius
The Washington Post, 12 July 2009

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