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December 2, 2007
David Warsh, Proprietor


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A Nation Once Again?

The only question in today’s parliamentary election in Russia is how big will be the margin rung up by that country’s newly-forged United Russia party. Soon Vladimir Putin will reveal how he plans to retain power after his second presidential term expires in March. It is very hard, to put it mildly, to know what to think about Russia these days.

In contrast, in Venezuela, it’s perfectly clear: Hugo Chavez is a disaster; the referendum today is life or death for the country’s hopes to become a modern nation. But from a distance, it’s impossible to muster the same conviction about Putin. The press fulminates: it’s a phony election, says The Economist; a travesty, says the Financial Times.Yet every day brings new dispatches about the former KGB administrator’s popularity among middle-class Russians, and the appeal of his platform, which consists of “a national pride and self-confidence rediscovered after its 1990s economic decline, coupled with a paradoxical and near-paranoid suspicion of the West” (as Neil Buckley and Catherine Belton described it in the FT the other day).

There is no doubt that Putin has greatly centralized power; marginalized serious opposition among various oligarchs, the Communist Party up-and-comers who acquired great wealth during the ’90s; and cracked down on dissenters. Nor is there any doubt about the atmosphere of mistrust.Last week he accused the US State Department of pressuring European monitors to cancel plans to witness Russian balloting, adding later that, thanks to the rejuvenated military establishment, “We will not allow anyone to poke their snotty noses in our affairs.”The really interesting questions have to do with the extent to which suspicion of the West serves a useful purpose in Russia — and the degree in which it is merited.

It will be years, probably decades, before the sequence of events that followed the collapse of Russian communism in 1990s is well understood. At this point, all that seems clear is that Russian experience of the presidency of Boris Yeltsin was, generally speaking, one of humiliation. The first four-year term was all gold rush; the second a period dominated by external default and internal collapse.

The standard story of those years has been that “shock therapy,” a program of deregulation, privatization and macroeconomic stabilization to jump-start the economy, administered by Russian politicians and bureaucrats and supported by the International Monetary Fund, the World Bank and the US Treasury Department under the intellectual authority of “the Washington consensus,” worked pretty well, and that the main problem was that it didn’t go far enough.

That, of course, is precisely the version of events that Putin is running against so successfully. My impression is that, even in the West, the only people who continue to believe this simple account are a dwindling band of “market Bolsheviks” drawn from those macroeconomists who propounded the “big bang” in the first place.One of these defenders is Anders Åslund, for many years a fixture at the Carnegie Endowment for International Peace, now at the Peterson Institute for International Economics, in Washington D.C.Åslund was memorably correct in 1989 when, in Gorbachev’s Struggle for Economic Reform, he predicted the collapse of the Soviet Union. Now he is back with How Capitalism Was Built, an updated and expanded version of an earlier book. Building capitalism in Russia has been successful, Åslund says, and it is time to take stock of how it was accomplished.

On this particular election day, that all seems somewhat premature.Åslund is an expert in transition economics. His mastery of the details is impressive. What’s most notable in his account, though, at least in the context of Putin’s mistrust of the West, is his failure to so much as mention what in many ways was a hinge upon which the US-Russian relationship turned in the ’90s. That was what happened in the spring of 1997, when Harvard University professor Andrei Shleifer, Yeltsin’s principal American economic adviser, his mission to Moscow financed by the US State Department, was discovered to be investing in Russia, with wife, father-in-law, deputy and deputy’s girl friend, in flagrant violation of his contract. The State Department fired Harvard’s Institute for International Development, the Institute fired Shleifer from its team, and Yeltsin’s government fired the State Department. Yeltsin’s government continued to cooperate closely with Washington, but by now its reputation for give-away-the-store corruption was sealed among ordinary Russians.

In July 1998, the international financial crisis that had begun in Asia the autumn before reached Moscow. The government devalued the ruble, defaulted on some of its bonds, and ended the wild expansion of the previous seven years in a spasm of economic pain and disappointment. The Yeltsin presidency wound down, and on New Year’s Eve 1999 Yeltsin resigned in favor of Putin, his prime minister. In March 2000, Putin was elected president. That fall the US government sued Harvard and Shleifer, and four years later, Harvard went to court and lost. His role in the affair helped cost Harvard president Lawrence Summers, Shleifer’s close friend, his job.

I emailed Åslund last week to ask about this omission. He replied:

I think the issue about the Harvard Russia Project was far too marginal to deserve any place in a book about East European transition or in my later book “Russia’s Capitalist Revolution.” Very intentionally, I reduced the size of my chapter on international assistance, since Western governmental financial flows were negative. That is the big news. The second point is that the radical economic reform model supported by the IMF, the World Bank, and the G-7 worked.

The transition was primarily an internal issue, and the Harvard project attracted little attention in US media. It was incomprehensible that US media could write so much on so little basis to anybody but US insiders. May I remind you that no crime was ever found by any court. No US money was lost, and it was so little in any case so why would any Russian be bothered? The US gained $1.4 trillion in a peace dividend in the 1990s and gave Russiaa total of $2.6 billion in grant aid in the 1990s, approximately 600 times less (commitments – actual disbursement might have been less). This is navel studying – no crime and no resources: why should Russians bother?

I persisted. A judge had found the chief American adviser to the Russians had broken US law (the civil, not the criminal code), committing a substantial fraud in highly public fashion, at the very moment he was counseling the Russians on how to write their own securities laws.

Some discuss the world. Others deal with personal intrigues and the invention of scandals. The question has been answered: no crime was ever evident. Should you draw any conclusion from that?

 

In recent weeks, two competing views of Putin’s long-term strategy have been offered by well-connected Russians.  One turned up in the cosmopolitan German magazine Die Welt, where Stanislav Belkovsky asserted in an interview that Putin had become extremely wealthy while serving as president. Claims that Putin was enriching himself have circulated for years among his critics. Belkovsky, a long-time Kremlin insider, made specific claims (but offered no proof): Putin owned 37 percent of Surgutnefegaz, a Siberian oil and gas company; 4.3 percent of the natural gas giant Gazprom; and half of Gunvor, parent company of Timchenko, an oil-trading firm. Under the headline, “Unmasking Putin’s Grand Myth,” Ǻslund repeated the claim last week in an op-ed piece in the Moscow Times. The figures added up to $41 billion, he wrote.  “If these numbers contain any truth, Putin would be the most corrupt political leader in world history, easily surpassing Ferdinand Marcos of the Philippines and Zaire’s Mobutu.”  

The other explanation was advanced in an unusual open letter to a Moscow newspaper by Viktor Cherkesov, a Putin ally who heads Russia’s powerful anti-narcotics agency, and reported in the FT by correspondents Buckley and Belton. Several of Cherkesov’s agents investigating corruption recently had been arrested. He warned of the possibility of a “war” between rival security clans. His letter “gave a telling glimpse of how those who exercise real power see the country,” wrote Buckley and Belton. They continued:

Russia, [Cherkesov] wrote, was plunging into an abyss in the late ‘90s, but grabbed hold of a “hook.” That hook was the chekisti, former security sevices men led by Mr. Putin who formed a kind of “corporation” to save Russia. Mr Cherkesov then outlined three scenarios for Russia’s development. “First and best” was to move beyond the “corporation”and create a “normal civil society.” Second was to “finish building the corporation” to ensure long-term stability – an authoritarian model. Third was to smash the corporation, as opponents demanded, which he said would thrust Russia back into chaos.

Putin has defended his decision to continue to hold the reins of government despite the term limits written into the Russian constitution, noting that the United States had preferred to continue Franklin Roosevelt in the presidency for four terms during the Great Depression and World War II. And Vladislav Surkov, often described as the architect of Putin’s plan to create the United Russia party, has said it is designed to become a dominant ruling party similar to Japan’s Liberal Democratic Party or Mexico’s Institutional Revolutionary party in their early days, each of which has seen its hegemony power declining after many decades in power.

“It is still possible that Sunday’s election and the coming presidential campaign will prove the low point in a temporary retreat from the freedoms Russians won in the ’90s, not a final decent into autocracy,” the FT’s Buckley and Belton wrote in a recent appraisal. “But as even some of Mr. Putin’s supporters concede, if Russia is to have a democratic future, it has more ground to make up than before.” What is needed now is much more reporting in this vein, culminating in a dispassionate appraisal of Russia’s experience since the ’90s by someone not in the thrall of the reformers’ enthusiasm – something like the clear-eyed account of China’s Cultural Revolution that the American journalist Stanley Karnow finally provided in 1972, after many years of shallow and gullible coverage elsewhere.

Successful nation-building is tricky business. Political leadership and cultural understanding is required to develop the sort of day-to-day consensus on which institutions as delicate as law and markets depend; witness, for instance, the example of China’s growth “out of the plan.” Putin’s “near-paranoid suspicion of the West” may be mainly a theatrical ploy – a means to an end, a device to restore dignity after its 75-year bender on central authority collapsed.

But time’s a-wasting. Living on financial prosperity engendered by natural resources, as Russia is doing now, has its risks, as Harvard Business School professor Michael Porter warned readers of the industrial gazette Vedomost last week. Oil and gas dependency “weakens government institutions, focuses the economic policy debate on the use of public funds, and undermines efforts to upgrade competitiveness.” He’s right, of course. Russia needs to move decisively to diversify and open its economy if it is to prosper. That means building a more reliable and transparent legal system, encouraging greater decentralization, and cutting red tape instead of aggrandizing state power – exactly the opposite of the last few years.

At least today, the country has got plenty of economists of its own. The Plekhanov Russian Academy of Economics in Moscow, the nation’s oldest and largest economics university, is thriving. So is the New Economic School, founded in 1992 by, among others, Harvard professor Zvi Griliches, with its Centre for Economic and Financial Research. The old Leningrad Institute, where Leonid Kantorovich did the wartime work on planning for which he shared the 1975 Nobel Prize in Economics, is now the Saint Petersburg State University of Economics and Finance. And the best young Russian economists are in demand at leading universities around the world.

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