“Russia is condemned to this state of affairs for many decades to come.”

May 24, 2016

Andrei Movchan, Valentin Baryshnikov

“Russia is still a long way from economic collapse, but it’s gradually moving in that direction.” In this interview, Movchan discusses potential scenarios for Russia’s development in the coming years.

Old-Soviet-Factory

Will the regime use up Russia’s reserves and attempt to hang on until the presidential elections of 2018 before lurching sharply in the direction of a Soviet-style economy?  

I’d say that as long the reserves are there, the regime will continue to make use of them. The regime does understand that this is ultimately more effective [than non-market economic mechanisms] […] But as these resources are progressively exhausted – and this will certainly happen in the absence of any reforms – the regime will be forced to deploy leftist methods, because these are very good at prolonging regimes’ lifespans. They bring the economy down but prop up the regime. Given that the Russian economy is relatively powerful, they could extend the life of the regime for decades.

People have suggested recently that the regime may concede limited economic reforms. But you believe it will head in the opposite direction?

It doesn’t have a whole lot of directions to choose from. It’s got today’s agenda and its policies, which are very harmonious. They’re very inefficient, but perfectly harmonious. We have this command economy that’s built on the legacy of high resource prices, and it’s very passive from an economic point of view. This will cause further recession, but a very quiet and gradual one, with minor localised drivers that will allow the economy to stay afloat.

Certain “rightist” reforms, such as relinquishing control over the economy, restructuring, attracting foreign capital, are disadvantageous in the sense that they’ll undoubtedly precipitate a sharp drop in GDP. Rightist reforms have never resulted in instant GDP growth. […] Our regime really frets over its approval rating – it’s dependent on the support of the majority and has no other means of holding on to power. So if “rightist” reforms were indeed carried out, I doubt the regime could even cling on for three years. Given the relatively strong paternalistic tradition in Russia, the resulting regime change would by no means bring any rightists to power, but rather the Communists or someone of their ilk. So I just don’t think the regime has any “rightist” option to speak of.

Is the regime confident that it will be able to handle deteriorating living standards? You’ve sketched out a potential post-2018 scenario wherein Russia really comes to resemble the Soviet Union. Do you think people will be capable of enduring a return to Soviet-era consumption levels?

I don’t think 2018 will be a “Rubicon year.” But by 2018 or thereabouts, a gradual Sovietisation [of the economy] will have commenced – concomitant with the need to plug the most serious holes caused by falling consumption, falling production, falling economic indices, and falling living standards. From a ten-year perspective, an annual 1-2% GDP drop is still not a very high figure. This might sound sacrilegious, but it really is the case – in ten years, we’ll be back to 2000-era levels. Which isn’t as frightening as all that – this was a relatively stable period. People were far worse off in the 90s and 80s, and yet the country wasn’t plagued by any serious social instabilities. That’s one thing I don’t think the regime will be afraid of – it understands that the population is highly pliable, and that low risk levels matter far more to people than high levels of income.

“Low risk levels matter far more to people than high levels of income.”

When you talk about a “Sovietisation” scenario, do you mean that the regime will tighten the screws so as to prevent people from acting autonomously?

No. When I talk about Sovietisation, it’s not any rejection of private property that I have in mind. Several principles of modern rule entail private property, market pricing, the free movement of capital, and so on – these would most likely be quashed only out of absolute necessity. […]  The idea would be that medium and small businesses could continue to exist – but against a backdrop of nationalisation on the big-business level. Moreover, the regime would perhaps even be willing to introduce concessions for super-small businesses – they could become tax-exempt, for instance, because the regime knows only too well that the cost of collecting taxes from these minnows outweighs the revenues generated. So the players on the lowest rungs of the business ladder will continue to exist on that same level. Their numbers will gradually dwindle – simply because the benefits of working for the state will become ever more apparent. […] As someone recently pointed out, young people from wealthy families want to work for Gazprom, while young people from poor families want to work for the tax police or the Investigative Committee.

How will things look, say, a decade after the regime has embarked upon this course? Are we actually talking about “USSR 2.0”?

Well, a country truly reminiscent of the USSR would take more than a decade to create – that’d require more like 70 years, in addition to the most ruthless class cleansing and a wholesale restructuring of consciousness. The current regime and the people surrounding it not only have no desire to accomplish such a thing, they’d be incapable of it in principle. They have no party, no doctrine, no ideology – nothing that’d make this possible to achieve. Rather, Russia will come to resemble late-twentieth-century Argentina. This means an economy whose lowest rungs are of a quasi-market character, but which is otherwise largely nationalised and subordinated to the regime. It means a relatively low GDP per capita. It means a corrupt, military-dependent regime, a militarised popular consciousness, and a considerable degree of international isolation. It means relatively high levels of criminality, endemic corruption, and the lack of any safeguards for investors’ rights. It means there’ll be semi-autonomous chunks of territory governed by local laws. Finally, it means the destruction of medicine, science, and education. […]

“Russia will come to resemble late-twentieth-century Argentina.”

You make particular reference to the fact the country will fragment into its regions.

[…] Chechnya, for example, is a completely self-standing region. If the situation develops along Argentine lines, it’s more likely than not – depending on the local state of affairs and the personalities involved – that the whole of Dagestan, Tatarstan, the Far East, and Kaliningrad will become milder variations on a Chechen theme. They will of course recognise the authority of the federal centre on paper, and there’ll be agreements in place (which would hinge on their receiving money from Moscow); in practice, however, the regions will have a wholly autonomous political landscape, complete with elites and factions wielding total control over the internal situation. […]

But the likelihood of such scenarios is relatively small?

I believe that the probability of what I’ve just described is 100%. The probability that the regions will end up having total political autonomy – so Tatarstan, say, actually becomes an independent state – is close to zero, simply because, technically and structurally speaking, there’s a plethora of economic, cultural, and social links [that would prevent full-blown regional independence]. It would be much more lucrative for these semi-independent entities to remain politically subordinate. Furthermore, the state wouldn’t be as weak as all that […] – the federal centre would still have the capacity to give the regional separatists plenty of headaches, which means the latter would prefer money over independence.

So the probability of sudden political crises is small, but the economic processes themselves are inevitable.

Yes, I think that’s the case. I wouldn’t entertain any illusions about a revolution in Russia, that is, a fundamental transformation that we saw in the late 80s. Rather, there’ll be a risk of periodic upheavals, when, for whatever reason – the leader’s advancing years, the leader’s death, the emergence of powerful interest groups – the country will witness regime changes promptly followed by proclamations to the effect that “now everything will be done differently and life’s going to be so much better.” In actual fact, though, everything will remain more or less the same, but with a spectrum of possibilities, ranging from today’s “soft” regime to a far harsher one – or, to put it another way, from the imprisonment of a single oppositionist to the execution of 10,000.

You’re predicting that this regime will survive even after the country’s current leader departs the scene. So the system will remain stable whether or not Putin is at the helm?

Major features of the system’s configuration may change – it might assume a totally Soviet character, price controls and all, or else it might soften its rhetoric and we’ll find ourselves getting chummy with the United States. But it’s fundamentally very robust, and adapts very effectively to reality. […] On the one hand, the [political and business] elites adeptly integrate state and private elements into the economy; on the other, they skillfully manipulate public opinion, and can wield a number of populist instruments to keep society on-side. I’m afraid Russia’s condemned to this state of affairs for many decades to come.

“I’m afraid Russia’s condemned to this state of affairs for many decades to come.”

Oil prices are currently on the rise, the rouble isn’t falling. Could oil rise to levels at which everything will be all right with the budget, and the authorities will be able to work within its limits?

The government simply has no choice, it will have to work within its limits. There’s the option of borrowing money, of course, or of printing money and introducing it into the economy, but you can’t do this ad infinitum. Whatever cutbacks the government implements, it will involve a reduction of purchasing power and consumption. Ultimately, it all boils down to consumption, and even if we produce fewer tanks, it’ll mean paying lower wages to the tankmen and the manufacturers. So the government will of course have to work within the budget’s limits, and this will of course precipitate the impoverishment of the population.

On the other hand, the oil price won’t increase that dramatically. […] It might yet bounce up and down a bit, but we’re not going to see it exceed $50-60 per barrel. This, of course, is insufficient for the Russian budget, because the budget is very inefficient, riddled with corruption, and structured on paternalistic lines. […] With every passing year, the budget requires more and more money, because more and more money gets eaten up by the bureaucracy. […] Objectively speaking, even $130 per barrel wouldn’t be enough to maintain pre-2013 levels – but it’s the $50-60 benchmark we’re going to have to adapt to. Which means that consumption levels will be reminscent of what we witnessed in the early 2000s, and, in due course, perhaps even the late 1990s.

But no one’s going to attempt to reduce budget corruption? And in the meantime public consumption levels are declining.

Let’s not dichotimise: ultimately, corruption does, in large part, end up fuelling consumption. Corruptionists spend their money on their kids’ teachers, on staff, chauffeurs, restaurants, flash cars, fancy houses – and all these things are produced by people within the country. In other words, corruption is a form of economics as well.

It’s another matter that corruption transfers the burden from the free economy to the budget, which is terrible for the latter. Furthermore, corruption, unlike normal business, is very inefficient – that’s its second major drawback. On the whole, however, corruption is just a form of economic functioning.The state can currently do very little about corruption because corruption isn’t merely some regrettable phenomenon – rather, it’s the very foundation of the Russian economy. Remove corruption from the equation and regional adminstrations will simply cease to function, as will the security apparatus, the incentive system, and the regime itself. […] And until Russia realises that the only driver of the economy is business development – and business development requires a reduction of risks and a vast complex of stimulatory measures – until that time comes, I think we’re all going to have to make do with less and less, while declining consumption levels will be counterbalanced by mood-boosting propaganda.

This interview, which references an essay written for Carnegie Moscow Center by Andrei Movchan entitled “Russia’s Economy in the Twenty-First Century” was first published by Carnegie. 

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