The need for clear thinking about Russia

According to Dion Rabouin, the anchor of Yahoo Finance’s Midday Movers, Russia’s economy has overcome the challenge posed by sanctions and its financial markets are poised to offer investors large returns. Therefore, investors are pouring money into Russia.

Russia’s macro-economic indicators are undoubtedly strong, and the ministry of finance has pursued a severely deflationary policy in response to sanctions. Indeed, that has been the ministry’s default position throughout its modern history since Russia is and was a monocrop (now energy) economy dominated by that crop’s exports. It also appears likely that the new government will conduct an expansionary policy since it has lots of cash in its coffers to alleviate large-scale economic distress and growing socio-economic unrest. These trends may stimulate Russia’s economy in the short run.  

But this picture is incomplete. Anyone thinking that Russia will take off without a major rise in energy prices should rethink the situation. Despite Western analyses to the contrary, Russia is not a truly capitalist or market economy. Instead it remains a patrimonial Muscovite autocracy where the state controls all of the economy and owns a high percentage, often estimated at approximately 60 percent of it. 

There are no property rights or government accountability in law, and property is ultimately held as a result of service to the state not a legal right. These and other conditions render Russia’s economy vulnerable to inherently strong anti-competitive forces. There are markets, but no market as such. Growth occurs, but it is sub-optimal. Productivity remains relatively low, and technology inputs do not generate maximal returns to investment. Meanwhile, except for energy, Russia remains technologically backward and non-competitive in global markets. Corruption is the system and vast sums are swallowed up by state corporations and Putin’s entourage, including the new prime minister, Mikhail Mishustin.

There are also serious obstacles to investment. Capital flight in Russia since 1994 reached $750 Billion last year and is probably close to $1 trillion even if some of it has returned as investment from foreign banks. Many highly educated Russians emigrate to other countries. And as a recent plagiarism scandal shows, Russian science, technological education and research suffer from serious structural defects. Russian infrastructure shows similar problems. Virginia alone has more highway miles than does the entire Russian Federation that spans 11 time zones. 

Putin’s regime also has vast plans for national projects, not least in the Arctic. But in 2017, the state had to cut 90 percent of its intended spending on civilian infrastructure in the Arctic for lack of budgetary funds. Instead the government’s continuing ambitious plans here are being stepped up and assigned to the various national projects that Putin believes will somehow regenerate the economy. But since those projects are actually new forms of granting rents to a rent-seeking elite, the natural outcome of this system, much of that investment will likely be swallowed up in corruption mismanagement and problems of quality. Meanwhile, depictions of the impending ecological disasters that are confronting the Arctic suggest there is neither interest nor capability to meet them.

In health care too, the situation is difficult, to say the least. Putin recently proclaimed with justified satisfaction that life expectancy in Russia had reached 73. But that is what it was at in the 1960s, and the government undermined further progress by taking money from public health to increase state revenues. 

Meanwhile there is evidence that “a long downward trend of Russian demographics has begun again.” Not only are there sharper breaks in life expectancy between cities like Moscow and the Russian provinces, but deaths have again outstripped births and population decline seems inevitable. 

Finally, the defense burden, as Richard Connolly’s recent paper suggests, evidently is much larger than imagined. Assessments based on official exchange rates argue that Russia spends only $60 billion annually on defense while the real figure is closer to $180 Billion, three times as high and about 9 – 10 percent of Russia’s 2018 GDP. 

Indeed, like the Soviet economy, Russia’s economy is evidently more optimized for defense spending than for growth or investment in human capital or technology.  Moreover, sanctions, despite Rabouin’s facile assessment, are choking off foreign investment in technology, not least in energy extraction. And given the nature of Russian science and technology, it is unlikely that under the current regime investment in technology will yield maximum returns in the civilian rather than the military sector.

Therefore, we must analyze Russia’s economy as it really is, not as a deformed or misguided Western economy but as an entity in its own right. We must duly see it as its owners and masters see it. As long as Russia is ruled by the people who own it, to paraphrase Dmitri Trenin of the Carnegie Endowment, it will not follow a Western economic trajectory. 

Indeed, Putin’s new reforms follow Asian models, breaking with the West and 300 years of Russian history. If we accurately assess the essential nature of the economy and state, it becomes clear that while investors might make a short-term killing and the government might impart a policy of stimulus that may inject more growth into the system, it will take much more than cosmetic reform to overcome the structural defects of Russia’s economy.

Stephen Blank, Ph.D., is a former professor of Russian national security studies and national security affairs at the Strategic Studies Institute of the U.S. Army War College. He is also a former MacArthur fellow at the U.S. Army War College. Blank is an independent consultant focused on the geopolitics and geostrategy of the former Soviet Union, Russia and Eurasia