The Moscow Times offers readers a two-part review of the onset of serious academic criticism of the Putin economy. How long this will be allowed to continue, and indeed how long these courageous academics have to live, is an open question.
First comes an op-ed from Sergei Guriev, rector of the New Economic School in Moscow, and Aleh Tsyvinski, professor of economics at Yale University:
Russia’s economy is collapsing, but the situation could be even worse. The global economic crisis has finally forced the government to adopt sensible policies, thereby staving off disaster — at least for now. Official forecasts for Russian gross domestic product growth in 2009 remain positive, but most analysts, including government officials, are bracing for a severe recession, which appears to have started in the fourth quarter of 2008. The stock market’s collapse — its 72 percent fall is the worst of all major emerging markets — is only the most visible sign of this.
Even Russia’s oligarchs are pawning their yachts and selling their private jets. Signs of political instability are mounting. The approval ratings for the country’s president and prime minister are heading south. Mass street protests have started, and they are led not by opposition political parties but by workers and middle-class families facing job losses and declining wages. More important, protesters are demanding that the government resign, which was unthinkable just a year ago.
With oil prices plummeting 70 percent from their peak, it is no surprise that the country is facing severe economic challenges. Growth is endangered, the ruble is weak, and the government budget is in deficit. Nevertheless, up to now, the government and private sector have weathered the storm reasonably well.
Critics of Prime Minister Vladimir Putin’s regime argue that the political system is too centralized and risks collapse in today’s economic storm. The regime’s ideology, after all, places the state and loyalty to the rulers ahead of private property and merit. When the crisis hits with full force, they argue that the government will nationalize major banks and companies, with the resulting inefficiency then burying the economy, just as it doomed the Soviet Union.
The government has, in fact, made serious mistakes in dealing with the crisis. Taxpayers’ money was spent to purchase corporate stocks in a failed attempt to support collapsing stock prices. The government is unlikely to recover its investment anytime soon.
The government was also too slow in depreciating the ruble. While it can be argued that a one-off devaluation could have triggered a panic, gradual depreciation should have started earlier than it did. In the last two months of 2008, the Central Bank allowed the ruble to weaken at a rate of 1 percent per week, then at 2 percent to 3 percent per week. It probably still needs to fall another 10 percent. In the meantime, the Central Bank hemorrhaged reserves defending this slow correction, while commercial banks have been holding onto dollars in anticipation of the ruble’s further decline.
The third mistake was to raise import duties, especially for imported cars. This decision was economically foolish since the automotive industry, as with many other import-competing sectors, will certainly be protected by the weakening ruble. It was also politically dangerous. Car owners are an affluent, socially active and easily organized group. Street protests against the import duties became the first serious popular uprising that Russia has seen in many years.
Yet these mistakes are relatively minor and reversible. In all fairness, the government, unexpectedly, has made resolute and mostly correct economic decisions. First, it prevented the collapse of the banking system. Many Russian banks were heavily exposed in foreign markets and therefore faced severe financial problems once the crisis hit. A massive liquidity injection by the government ensured that no major bank collapsed, and minor bank failures were administered in a surprisingly orderly fashion.
Moreover, the crisis has — so far — not resulted in major nationalizations of private companies. The government could have used the crisis to nationalize all banks and companies in financial distress. It has not despite its still large foreign reserves, which give it the means to buy out a significant portion of the economy at fire-sale prices. Instead, the government has mostly been providing high-interest loans rather than engaging in massive equity buyouts.
Nor have the oligarchs been bailed out. Of $50 billion in external debt owed by Russian banks and firms in 2008, the government refinanced only $10 billion. Apparently, the terms offered by the government (LIBOR+5 percent and collateral) have turned out to be right on target.
How did reasonable economic policies prevail in this crisis? The key factor is that for the first time since Putin came to power the Kremlin perceives a genuine threat. The years of easy popularity are over. All the ugly facts that Russians ignored during the years of fast economic growth are bubbling to the surface.
The regime knows that its survival depends on preventing economic collapse. The crisis energized the system and shifted decision-making power to those who know about and can do something for the economy.
But did these policy changes come too late? The ossified, corrupt and inefficient economy built in the fat years of the oil boom may be impossible to save. So the central question that Russia confronts is whether even competent economic policy can prevent economic and political collapse.
Then, a news story along the same lines:
An influential government think tank criticized key aspects of the state’s response to the crisis Monday and said small business could lead the way to reviving the economy.
The Institute of Modern Development, which advises the Kremlin on economic policy, issued a report underlining the seriousness of the economic downturn and rejecting the government’s assertions that the crisis has been brought about largely by Western financial mismanagement.
“The economic crisis cannot be dismissed as an infection contracted from the West,” said Igor Yurgens, the report’s lead editor and the head of the think tank, at a news conference.
The report names “fundamental flaws in the structure of the country’s economy and its underdeveloped financial system” as the cause of the “full-scale market crisis.”
The report calls for the state to boost its support of private enterprises and take a long-term view on crisis-relief measures. “No matter what path is taken, there is no alternative to private business taking center stage in overcoming the recession,” the report says. “The country is running out of time to retune the economy to take a new quality of post-crisis growth.”
Social fallout from the crisis should be a top priority of the state, and “resources allocated for professional retraining should be put to radically more efficient use,” the report says.
Last month, the government announced a series of measures to stimulate private business, among them giving 60,000 rubles ($1,700) to unemployed Russians as startup capital to open small businesses, as well as subsidies to companies to put employees facing imminent layoffs through re-education and training programs.
The report’s authors said at the news conference that the middle class would not face serious consequences from recession if inflation were kept in check. Other segments, however, like the small percentage of the country’s population who had invested in the stock market, have not been so lucky.
“Those who have been playing the stock markets, the ‘button pushers,’ they lost big,” said report co-author Leonid Grigoriyev, the president of the Energy and Finance Institute Foundation. “Now they’re back to playing Tetris.”
The study gives high marks to some government tactics to date but says many measures “lacked long-term vision” and a commitment to the competitiveness and balance of the economy.
“Ballooning state involvement in the economy, the propping up of ineffective businesses and the atrophy of market institutions present major risks, both now and in the future,” Yurgens said.
The state has spent hundreds of billions of rubles in recent months to bail out struggling companies and inject money into the economy. Billions more have been earmarked for the state owners of a wide variety of companies, including floundering carmaker GAZ.
Anna Belova, director for strategy and corporate development at SUEK and one of the authors of the report, said at the news conference that the crisis was more serious than initially thought and that an end was not yet in sight.
“This appears to be a structural crisis, one that could go on for as long as three years and bring about fundamental changes,” Belova said.
Grigoriyev said economic numbers would likely continue getting worse until the summer. “We are not near the end,” he said. “This is only the acute phase. By summer, the sharp drop in production should stabilize.
“The financial system has not been reconstructed since 1998, and we’re paying the price for that.”
Measures to stem the impact of the crisis in the Russian regions were also criticized.
“Communication between the federal center and the regions is developing into a key problem,” the report said. “The central government is better prepared for the crisis than local governments, and this is becoming ever more apparent in the hardest-hit regions.”
Streetwise Professor has more Russians following suit.