Putin’s Deguello

Streetwise Professor reports on Vladimir Putin’s “deguello*”:

The island of stability theme is now longer operative.  According to Interfax,

Russia more vulnerable to world crisis because of integration – Putin

MOSCOW. Dec 29 (Interfax) – The global financial crisis’ effect on the Russian economy is rather substantial because Russia has become an integral part of the world economy, Prime Minister Vladimir Putin said at the Monday meeting of the federal government.

“Since the late 1990s we had been seeking integration with the world economy. Our integration wish came true. As people say, we slit our own throat,” he said.

Is this a self-reproach?  Hard to tell.  But since (a) Putin has been in charge of the integration policy since its initiation in the late-1990s, and (b) he blames integration for his country’s current difficulties, that seems a reasonable conclusion.

I must say, however, that his diagnosis is largely misguided.  Even in the days of its alleged autarky, the USSR was integrated with the world economy–through the commodity markets, most notably the oil market (as a seller) and the grain market (as a buyer).  In its later days, the USSR also borrowed extensively on the international credit markets.  Indeed, the collapse of the USSR was hastened–and arguably caused–by a collapse in the price of oil that deprived it of the export revenues necessary service its debts and to buy grain to feed the populace.

Current events are not all that different.  A collapse in raw material prices (led by oil) knocked the props from under the Russian economy.  Government debt is not large, but private debt is, and the decline in resource export values is making it very difficult for the borrowers to service that debt.  Moreover, the line between public and private debt in Russia is somewhat blurred, given the Russian government’s adamant refusal to let control of “strategic” firms fall from Russian hands.

Some things are somewhat changed.  Today, international investors and currency traders make very public evaluations of Russian economic conditions, as revealed in stock prices and the exchange rate.  These signs of economic distress were lacking in the 1980s.  These public expressions of gloom no doubt infuriate Putin, who desires total control over information and publicity.  But, in my view, these markets are of secondary importance compared to commodities and debt.  In these areas, Russia’s integration with the world economy is nothing new.

I will say, however, that Putin is right about “slit[ting] our own throat.”  He’s just right in the wrong way.  Yukos; backsliding on various economic reforms; Sakhalin II, etc., Mechel, BP-TNK, the Russo-Georgian War, continuing legal nihilism and hostility to property rights, a misguided ruble policy and other ham-handed economic policies in the midst of crisis, and a revanchist foreign policy have all conspired to dramatically increase the difficulties that Russia will face in recovering from its current difficulties.  And all–all–of these elements are Made in Moscow, and Produced by Putin.

In brief, Vlad’s laments, and dreams of some imaginary autarkic paradise, reflect a sadly distorted view of history, and the way the world works.  Russia (and its Soviet predecessor) have long been integrated in the world economy.  It has been connected through the commodity/oil price channel, and its booms and busts have followed closely the waves of world commodity booms and busts.

Ironically, Russian policy under Putin has not ameliorated, and arguably has aggravated, this integration.  The focus on energy-led development, the disregard of the development of other sectors (silly things like the creation of state nanotechnology corporations don’t count), and the erosion of property rights have increased Russia’s reliance on industries that are highly sensitive to world economic conditions.  So, again, he is in a way correct about slitting his own throat–just not in the way he thinks.

Putin’s remarks suggest a desire to turn inwards, to cut Russia off from the broader world economy, probably through protectionist measures (already seen in automobiles and timber).  That would be just another self-inflicted wound.  Protectionism would only exacerbate the economic malaise (cf., Smoot-Hawley), cement the retrograde practices so common in the Russian economy, and delay its economic evolution.  It’s a really dumb idea, but given Putin’s economic illiteracy, I fully expect it to be implemented.

* The Deguello was a tune dating from the wars of the Reconquista in Spain.  Literally, it means “The Throat Slitting,” and was played before battle to signal “no quarter.”  Santa Anna’s army played it before storming the Alamo.

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