Streetwise Professor

Pavel Baev has an interesting article in today’s Eurasia Daily Monitor.  He echoes several SWP themes.  (Indeed, Baev and I have been arguing along very similar lines for months.)  Key bits from his piece:

Manufacturing, for instance, registered a 20 percent decline in the first quarter of the year. Prime Minster Vladimir Putin tried to provide some reassurance for workers in the Tver railcar plant last week, but responding to a direct question about Kudrin’s forecasts he said only that the Finance Minister was “under a lot of stress” and had to protect himself from pressure (Kommersant, April 16). The high point in that “anti-crisis psychotherapy session” was Putin saying he had personally prevented the purchase of railcars from China.

Such personally-delivered stimulus packages for particular enterprises destroys the coherence of Kudrin’s fiscal course, which renders Russia’s anti-crisis policy far less efficient compared with the main world economies (Nezavisimaya Gazeta, April 17). The Consumer Confidence Index dropped accordingly to minus 35 percent in the first quarter and 48 percent of respondents expected further negative economic developments (PRIME-TASS, April 8). It is not only the middle-class that is experiencing a massive migration from the “upper” to the “lower” categories; the super-rich are also suffering: according to the Russian Forbes on April 16, the “golden hundred” of the richest individuals is now worth only $124 billion, having lost $380 billion in one year.

The simmering discontent among the most politically active and influential social groups worries Medvedev far more than rising unemployment, which compels experimenting with new ways of management and governance. His aides whisper, for instance, that the giant state corporations created within the past few years are no longer viable in the recession and must be compelled to open up their accounts before undergoing radical “sanitation” (RBC Daily, April 17). Putin, on the contrary, has taken a defensive stance insisting that his economic model of ever-increasing state control is sound and provides the best protection against the current turbulence -which will soon blow over. His own cabinet is deeply split over the priorities in budget and extra-budget funding, so that ministers declare diverging courses and their aides resort to in-fighting (Nezavisimaya Gazeta, April 16). This uncharacteristic lack of discipline within Putin’s team betrays more than his doubts about choosing a way out of the crisis; his very ability to control the forever feuding elite clans is also in doubt.

The natural response to any disturbance in the system of power created by Putin is to squash the opposition and squeeze the insufficiently loyal oligarchs; the enforcement mechanism, however, has become so corrupt that forceful responses cannot be mobilized. Complaining bitterly -and futilely- about corruption, Medvedev probably believes that the system he presides over has become incapable of acting on its own logic. Hence the hesitant steps towards a neo-perestroika policy aimed at ensuring that “the state and civil society can act in harmony and together,” as he told NTV in an interview on April 12. It is a different type of “harmony”‘ than the effective exclusion of society from politics that flourished in the autumnal years of Putin’s “era.” It is not certain that Medvedev will succeed in engaging the more dynamic parts of the middle classes in a new anti-crisis social contract, and the readers of Novaya Gazeta have good reasons to doubt that he will keep his part of the bargain while Putin looms over his less-than-heroic figure. Smooth words come easy to the accidental leader who cannot hide behind the fiction of “independence of the court” from the simple but stark dilemma: if Mikhail Khodorkovsky and Platon Lebedev are acquitted, it is all over for “Putinism.”

Putin’s ad hoc interventions are truly bizarre.  “Destroy[ing] the coherence” of Russian economic policy is an understatement.  Moreover, the adverse consequences will not be limited to their near term effects on the crisis response.  They will have the deleterious long term effect of cementing Russia’s reputation for arbitrary policy, thereby tending to deter plans by foreign firms to enter markets.  Case in point, this Bloomberg story about the effect of Putin’s Pull-a-Tariff-Out-of-My-A. . I mean Hat policies on Caterpillar:

Prime MinisterVladimir Putin‘s trade measures are starting to keep  Deere & Co.  combines andCaterpillar Inc.  trucks out of Russian wheat fields and coal mines, dimming the companies’ prospects for expansion abroad.

Deere and Caterpillar, reeling from the longest U.S. recession in a quarter century, were the companies most affected by loan restrictions and tariffs of as much as 25 percent that Putin imposed this year, according to a U.S. Chamber of Commerce survey of the top 50 American businesses operating in Russia.

Putin is trying to boost Russian industries with tariffs on everything from drugs to farm equipment as declining oil revenue saps the nation’s economy. The policies are hurting sales by Caterpillar,  Deere  and  Agco Corp.  in a market where revenue was forecast to rise as much as sixfold in the next decade.

The main casualty–Russian agricultural and industrial productivity.  Actions such as these are rob-Peter-to-pay-Pavel policies.  

But back to Baev.  I think his portrait of a leadership in disarray is probably realistic.  Putin is so clearly out of his depth in these matters, but he still wields tremendous authority.  More reasonable, knowledgeable people are trying to steer a saner course, but are in grave risk of foundering on the shoals of Putin’s authority.  But, an inflexible, out-of-touch leadership runs the risk of initiating a spiral of collapse.  (See Romanov, Nicholas II.)  

I know there are many smart economists in Russia who recognize that Rosneft and Gazprom and other “giant state corporations” are economic monstrosities that should not survive, that are a drag on the economy, and are hoping that the current crisis will hasten their demise.  But they are also the gravy trains for the siloviki, who are unlikely to go quietly into that good night.  

So the ingredients for a cataclysm are there.  A befuddled, out-of-its-depth leadership clinging to its privileges, power and wealth–including a large cohort of very scary, violent, amoral people.  A growing number of people in government and some business who recognize that the Putin course is erratic and insane, and who will try to work around it, leading to policy clashes and contradictions.  Oligarchs seeing their empires crumble, who are weighing the choice between risking the fate of Khodorkovsky and economic ruin.  Regional governments facing their own desperate straits.  A currently passive populace, but one which facing economic devastation.  

Putin’s instinct–and his only likely way to remain on top–is surely to crack down further while simultaneously throwing around what crumbs he has left to pacify increasingly unsettled constituents.  But there are so many things outside of his control.  He will try to use authority to keep things in order, but that authority is not limitless.  And what’s more, as soon as his control looks tenuous; as soon as the incoherence and extemporized nature of his actions become widely understood; the equilibrium can shift very dramatically.  The oligarchs will fear him less.  The regional governors will fear him less.  The bureaucrats will fear him less.  The people will fear him less.  Indeed, as his incapacity to deal with the situation becomes apparent; as the incoherence of his policies becomes more widely understood; as the disconnection between the reality of the situation and his delusional appraisal of it becomes even more pronounced; as the smallness and irrelevance of his attempts to blame-it-on-anybody-but-Russia become increasingly tiresome; he risks something that is deadly to a strongman: widespread ridicule.  A coalescence of these forces could–and I am tempted to say will–lead to a stunning collapse of Putin and Putinism.

His only hope is a world economic recovery that pulls Russia along with it.  But that is not in immediate prospect, and anyways, the dynamic in Russia is already so unfavorable that even a world recovery may be too little and too late to save the system.

Which raises the question: What will replace it?  I fear that the answers to those questions are not happy ones.