Putin’s Sham Economy

Writing in the Moscow Times Marshall I. Goldman, professor of economics, Emeritus at Wellesley College and senior scholar at Harvard’s Davis Center, and author of the forthcoming book The Rise of the Petrostate: Putin, Power and the New Russia, exposes the fundamental fraud of the Russian pseudo-economy and the essential criminality of the Putin pseudo-government:

While most Russians have nothing but praise for what President Vladimir Putin has accomplished, the way he has handled the recent Cabinet shuffle raises the question as to who benefits more from this exercise, Putin or Russia?

Whether correct or not, it is easy to conclude that Putin is reluctant to yield power to a successor until the very last minute. Granted, he could easily have arranged to stay on for a full third term, so at least we should give him credit for insisting that it is best for Russia that he leave office after two terms as specified by the Constitution. Yet, the way he is handling the transition process and the personnel changes he has executed suggest a reluctance to become a lame duck any earlier than necessary. He seems more interested in keeping the public and his potential successors off balance than in doing what is best for the country.

As others have noted, it took Putin 10 days to make up his mind on the composition of this Cabinet, whereas with his earlier reorganizations he needed only three days to pick Prime Minister Mikhail Kasyanov’s Cabinet and then four days to pick the Cabinet of the rather colorless Prime Minister Mikhail Fradkov.

The irony, of course, is that one of Putin’s stated reasons for making the shake-up now is that Fradkov’s Cabinet has become less efficient, evidently distracted by the forthcoming State Duma and presidential elections. The extra time Putin needed to make the most recent changes suggests that Putin himself has also become distracted and less efficient — thus, the need for more time.

There is no doubt that Putin has been good for Russia, at least for its economy. That is why his removal of German Gref as economic development and trade minister does seem to indicate a lack of gratitude. After all, Gref not only helped shepherd the economy to the solid 6 percent annual growth of Russia’s gross domestic product since 1999, he also helped to lead the transition team for Putin when he took over as president in 2000. True, Fradkov recently criticized Gref for some shortcomings, including his failure to win admission into the World Trade Organization.

Even more, Putin may have concluded that the country’s economic success is not so much due to Gref’s or anyone else’s efforts, but is almost entirely a result of the increase in oil and other commodity prices after 1999. If Boris Yeltsin had not left office on Dec. 31, 1999, when oil prices were $10 per barrel, and if he had the luxury of today’s $80 per barrel oil prices, even he would have looked like an economic genius. So it appears that Gref — like Putin — looks like a good economic manager thanks to fortuitous timing, not because of economic insight.

This is largely true, but it is not entirely fair — at least to Gref. While the spike in oil prices account for most of Russia’s recent economic success, it also must be said that Gref, along with Finance Minister Alexei Kudrin and the all-but-forgotten Andrei Illarionov, former adviser to Putin, do deserve credit, not so much for stimulating the economy, but for restraining it. All three, by insisting that most of the onrush of oil and gas export earnings be set aside for a rainy day in a stabilization fund, prevented an inflationary spiral that would have crippled the country’s monetary and fiscal system and would have led to an unrestrained money fight for pork and power.

This insistence on restraint required determination and self-confidence against a horde of politicians who were eager to win friends and votes and build public works monuments in their honor. On occasion, the three fiscal conservatives may have been too unyielding, but it is easy to see that if they had not taken a consistent stand against raiding the state treasury, a trickle of spending would have turned into a torrent. In other words, Russia’s economic recovery depended on fiscal restraint almost as much as it depended on the high price of oil and gas.

The question is what comes next, not just in the months between now and the election but afterward as well. There is no doubt that the new president will make further personnel changes. Even if Kudrin remains the sole survivor from the team of economic liberals in the new government, he will have a hard time maintaining fiscal restraint. It is one thing to hold back fiscal raiders when you have backup from supporters like Gref and Illarionov, but now they both are gone.

Even if Kudrin remains a deputy prime minister, it will be harder to continue this policy of restraint without that chorus — even a small one — echoing his words. Elvira Nabiullina’s promotion to Gref’s position as economic development and trade minister may help, but previous women ministers in Russia (with the exception of Catherine the Great) have not had much impact on government decision-making.

So by removing Gref — the most visible of those removed from the Cabinet — Putin may have put the country’s economic stability at risk. Orderly growth in the future may well depend on whether Kudrin can singlehandedly prevent his fellow ministers from raiding the treasury. If not, Russians will come to understand that Gref played a more important role in the country’s recovery than it may have seemed at the time.

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