Russia’s economy is going to recover, and its political system will not change

The past month has seen a number of truly insane attempts to compare Russia’s present economic hardships to the profound systemic crisis of the command economy in the 1980’s. Mikahil Gorbachev, among other, have argued that Russia faces a “moment of truth” much as it did before the collapse of communism. As I’ve argued before, there are many reasons why it is profoundly wrong to compare the collapse of command socialism to the (admittedly sharp) temporary downturn in present-day Russia’s (highly imperfect)market economy. But even if we take a Bob Beamon-like leap of faith and agree that the 2010 Russian Federation is directly comparable to the late 1980’s Soviet Union, how is Russia’s economy faring? Is it faring as poorly as the command system did during its death throes? Is it able to meet the needs of Russia’s citizens?

You don’t need to look particularly hard to see that the worst of Russia’s crisis is already behind it. Indeed, unless you have a very clear ideological interest in presenting Russia and its economy in the worst light possible, it’s quite obvious that the sky is not falling and that Vladimir Putin will not be thrown out on the street due to a wave of “people power” led by Garry Kasparov and Boris Nemtsov. Russia’s industrial production is again growing, interest rates are being cut and inflation is near its lowest ever post-Soviet level, the economy is on pace for roughly 4.5% growth, and, most importantly of all, the price of oil is again over $80 a barrel (indeed if oil prices rise much more, the Kremlin’s much-vaunted budget deficit will all but disappear).

Does this mean that Russia’s economy is poised for a China-like stampede onto the world stage? Will Russian businessmen soon swam into London, Paris, and Berlin like a conquering hoard of Visigoths? Is the Kremlin simply going to “buy” back most of what it lost in the Soviet collapse? No, no, and no. Russia’s economy still has some serious structural weaknesses, and, per the government’s own announcements, the economic recovery is still rather fragile. But what a modestly-recovering Russia is not faced by is the complete collapse of its political-economic system, something that was facing it in the late 1980’s.

Now, why is Russia’s present system not faced by collapse? I can think three main reasons

1) Russia’s present-day economy is substantially more flexible than it’s Soviet predecessor.

The EBRD regularly puts out transition reports. Ranked on a scale of 0 (basically representing a perfectly illiberal economy) and 4.5 (representing a Randian wet dream) Russia scored well on the following measures

• Large-scale privatization   3.0
• Small-scale privatizaion     4.0
• Price liberalization             4.0
• Trade and forex system   3.4

Now, to be honest, there are some rather important sectors, such as banking, where Russia’s performance is less than stellar and others, such as enterprise restructuring, where it is downright abysmal. That, of course, is not good. But I am not trying to claim that Putin’s Russia has been magically transformed into Galt’s Gulch, merely that it is more liberal, adaptable, and flexible that the administrative socialism that characterized the Soviet system. It seems to me that this isn’t even a “debate,” it’s just the acceptance of easily observable fact (the Soviet command system wouldn’t have scored above 1.5 on any of the EBRD’s measures)

2) Russia’s political system and its political leadership are more responsive to, and concerned with, public opinion.

Is Russia a perfect democracy? No. Is Russia a democracy at all? This is highly debatable, though, personally, I suppose that Russia would fail most tests of “polyarchy.” Today’s Russia is a populist authoritarian system, or as some would call it “competitive authoritarianism,”a system where rival power centers and opposition figures are viciously repressed but where the political authorities simultaneously strive to gain popular support not merely through repression and violence, but also through delivering economic growth and rising living standards. The unprecedented extent to which the Kremlin has emphasized social spending during the recent economic downturn is, I think, the clearest indication of its heightened concern with its public image.

The highly militarized Soviet economy was largely unable to provide social services, healthcare was of an abysmal quality and funded on a shoestring, and while Russia’s social safety net is still threadbare when compared to that of rich Western nations, it is significantly less threadbare than was the Soviet system of social defense.

3) The inflation-adjusted price of oil is far above what is was during both Gorabachev’s and Yeltin’s terms in office (this is probably the most important reason of all).

As this chart shows, from 1986-2004 the real price of oil only cracked $40 a barrel for a brief period in 1991. The Soviet economy was just as dependant on oil (it was virtually the only source of hard currency available to the Kremlin) as today’s Russia, but, due to the gargantuan subsidies to its massive and massively inefficient industrial sector, the free oil provided to it client states in Eastern Europe, and the much lower price-per-barrel price of oil, was able to earn far less money from energy sales. Due to the rise of China, India, Brazil, and a number of other rapidly developing countries, the structure of the world economy is much different: oil is above $80 despite the fact that the entire developed world remains mired in recession/stagnation. This strongly suggests that, despite the fervent wishes of folks at the Cato Institute and other assorted pro-market happy thinkers, commodity prices have moved to structurally higher levels. Obviously, this is a huge boon to the Kremlin.

Thus even if Russia’s political and economic system wasn’t more flexible, liberal, and responsive than its Soviet predecessor(and it is), the amounts of money available to the Kremlin to paper-over its various inadequacies are, and are going to be, much larger than they were during the decade-long collapse of communism.

So, to summarize, if you are holding out hope that Russia’s current regime is going to collapse, you are going to be sorely disappointed for a very long time. This does not mean that Putin’s regime is good or that I support it, merely that I recognize the plain truth that the opposition to it is poorly led, socially marginalized, and lacks the necessary resources to mount an effective campaign for systemic change. I really am bemused by the wishful thinking that has taken over large sections of the Western media over the past several months. If you are trying to convince people of an imminanet peresroika-like upheaval, you need some really massive evidence that society is mobilizing and that the present system is unsustainable: a few scattered marches, some angry jeremiads on Echo Moskvy, and a petulant petition in Ezhednevny Zhurnal, are not going to cut it.