Streetwise Professor

Sergei Guriev is a friend, and an excellent economist.   (Both also hold true for his wife, Katja Zhuravskaya.)    Along with Yale’s Aleh Tsyvinski, Sergei has written a very even handed appraisal of Russia’s policy mistakes—and successes—in dealing with the financial/economic crisis:

 Russia’s 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 one can argue that one-off devaluation was risky – as it 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 one per cent per week, then at two to three per cent per week. It probably still needs to fall another 10 per cent. In the meantime, the central bank haemorrhaged reserves defending this slow correction, while commercial banks have been holding on to dollars in anticipation of the ruble’s further decline.

The third mistake was to raise import duties, especially for imported cars. This was not only economically foolish (as with many other import-competing sectors, the automotive industry will certainly be protected by the weakening ruble), but also politically dangerous. Car owners are an affluent, socially active, and easily organised 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. Indeed, Russia’s government, unexpectedly, has taken 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 nationalisations of private companies. The government could have used the crisis to nationalise all banks and companies in financial distress. It has not, despite its still awesome foreign reserves, which give it the wherewithal to buy out a significant portion of the economy at fire-sale prices. Instead, up to now at least, 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 per cent 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 growth are surfacing.

The regime knows that its survival depends on preventing economic collapse. The crisis energised 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, inefficient economy built in during 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.

Sergei seems less convinced than I that the current Russian system is brittle, and hence vulnerable to collapse, although the last paragraph does suggest that he is open to that view.   He is a serious man, on the ground, with excellent connections in and out of government, so I take his views seriously, and adjust my opinion accordingly, in a good, Bayesian way.  

The major piece of evidence that Sergei cites in favor of his opinion that (a) the Russian government has not done badly in handling the crisis, and (b) is not excessively centralized and brittle, is the absence of major nationalizations.  

A fair characterization of what has happened in the last 8/9 months, but it is still somewhat of an open question as to whether this will hold going forward.   Today’s Bloomberg contains a report that expresses the concerns of a Russian think tank that is allegedly close to Dmitri Medvedev:

Russia’s reaction to the world economic crisis threatens to increase state control over the economy and reduce national competitiveness, according to a research institute close to President  Dmitry Medvedev.

“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,”  Igor Yurgens, head of the Moscow-based Institute of Contemporary Development, said at a presentation today.

The “fundamental balance” between government and business may be harmed if state ownership of companies’ stock rises another 10 percentage points from the 45 percent held at the end of 2008, according to a 73-page report published by the institute.

Prime Minister Vladimir Putin said in December the state may buy stakes in key companies on “a large scale” to help them survive the crisis. The government has set aside $50 billion to help businesses pay foreign borrowings in exchange for putting up part of their stock as collateral.

. . . .

‘Systemic Crisis’

Yurgens rejected suggestions by the country’s leadership that the domestic situation was caused by problems in western economies. Russia is facing a “systemic crisis” resulting from structural weaknesses particular to its economy and financial system, he said.

The state will only find a way out of the crisis with a “full-fledged” dialogue with society, including civil groups, Yurgens said.

“There are a lot of pragmatic people in the government,” he said in an interview with Bloomberg Television today. “Since they don’t have to mess around with parliament, as in a classical democratic government, they are even more effective in a tactical sense. But we need strategy.”

New import duties on cars and trucks, which sparked demonstrations in cities across Siberia and the Russian Far East, are typical of protectionist measures “popular in many ministerial offices,” the report said.

‘Blind Faith’

The tariffs were “categorically misdirected,” supporting an outmoded industry and running counter to a declaration signed by Russia at November’s G-20 summit in Washington opposing protectionism, the authors said.

Speaking at the opening session of the World Economic Forum in Davos, Switzerland last month Putin warned of the dangers of “unrestrained state interference” in the economy and of protectionism. “Blind faith in the omnipotence of the state” is a mistake, as proved by the Soviet Union’s collapse, he said.

The Institute of Contemporary Development was founded last year on the initiative of Medvedev, who was elected president in March. He is the chairman of the institute’s board of trustees.

Note the report’s association of the nationalization (and protectionist) threat with Putin.   Coming from putative Medvedev allies (and Medvedev’s people apparently have no love lost for Putin’s although the principals apparently get on well), this is another indication of a growing difference of opinion within the Russian ruling elite.   As the economic crisis deepens, and its affect on ordinary Russians intensifies, this rift—and the potential for rifts within rifts, e.g., among different clans in the Putin circle—will almost certainly widen.  

This is where I think the true brittleness comes from: divergent interests and opinions among a ruling elite under stress, compounded by struggles over a shrinking pool of rents, in a system with weak institutions, and hence few mechanisms (other than repression) to deal with popular discontent, to remove failing governments, or to adjust failing policies.    

Sergei’s argument is that faced with an existential crisis, the government has raised its game and made some good policy choices.   He points to some specific examples where immediate disaster has been avoided (e.g., avoiding a full-blown banking collapse.)   I still think there is considerable uncertainty about the course in future months as the crisis in the real economy intensifies.   That will be harder to deal with than the banking situation, and pose greater challenges to the government.   In my view, it will, moreover, stress the system at its weakest points.   That said, Sergei’s analysis does provide room for optimism, although his cautionary note in the last paragraph makes it clear that his optimism is not unbounded, and that he understands perfectly well the structural weaknesses of the Russian system.  

Paul Gobel summarizes a more pessimistic view from Dimitry Tayevsky:

Because the economic system adopted under Vladimir Putin is no longer working, the political system the former president and current prime minister put in place is rapidly approaching its end, according to a leading Siberian political analyst. But what will replace it and equally how it will be replaced remain very open questions.

In a lengthy commentary posted on the Irkutsk portal Babr.ru, Dmitry Tayevsky argues that because Moscow is running out of money as a result of the declines in the price of oil and gas, the Russian political system is no longer in a position to sustain itself or act as it has both at home and abroad (babr.ru/?pt=news&event=v1&IDE=506710).  

Barring a miracle – and Tayevsky says there won’t be one – Moscow will not be able to meet the commitments it has made to foreigners – including its efforts to purchase friends in the CIS – or to Russians – such as promises to increase pensions – and consequently, Russians won’t be able to continue to live at the level they thought was theirs after the troubled 1990s.
It is worth recalling, Tayevsky says, how “92 years ago, a much less serious situation led to some very serious consequences” and thus to think about what may happen as a result. He thus devotes the remainder of his article to a discussion of six possible “variants” of Russia’s future development.

The first variant, he says, which might be called “the New Perestroika,” would be one in which the regime would blame Vladimir Putin for all the country’s problems and move in a new and more democratic direction. Such a step would be “logical,” but it would almost certainly lead many Russian regions to seek independence rather than be “deceived” a second time.
The second variant, which could be labeled Foros 2,” would be based on exactly the opposite diagnosis. Putin would blame Medvedev for all the problems Russia now faces and demand his removal. By taking such a step, the prime minister might guarantee Russia “a long and stable development like Chile in the 1970s, Cuba, Libya and North Korea taken together.”

But if the first variant could be triggered by the stroke of the pen, the second would be more difficult to pull off, Tayevsky insists. Medvedev, unlike Gorbachev before him, simply hasn’t taken enough “energetic steps in any direction” to have alienated the population and led it to be willing to support anyone else.

The third variant, which Tayevsky calls “Iron Curtain 2,” would rest on an idea the regime has long sought to promote. “Its essence is simply – in fact, in Russia everything is wonderful … but the enemies surround it – from Wahhabis to Georgians, Ukrainians, Americans, the British, or the Estonians — are doing everything” to destroy Russia.

Thus, Russia must cut itself off from the world in order to protect “the young Russian democracy, Orthodoxy, and nationality.” But that would alienate not only many non-Russians but also many Russians in the regions who remember how things played out the last time Moscow adopted this strategy.  

The fourth variant would be a subset of the third. It would involve cutting Russia off in order to justify authoritarianism in order to modernize the country. While not that different from what some around Putin appear currently to aspire to, an effort to realize this variant could lead to the disintegration of Russia as well or to a political explosion.

Such an explosion or “bunt” is the fifth variant of Russia’s future that Tayevsky describes. That would be perhaps the worst, and yet it is the one the Russian government seems to be pushing the country toward. On the one hand, it is impoverishing the people without giving them a chance to express their anger within the system.

And on the other, the current regime lacks both the resources and the leadership to prevent such an explosion or to “redirect” in a positive way. There are, Tayevsky says, no “pretenders”now to the role of Lenin, Trotsky or Stalin, and consequently such an explosion could lead to “a complete national catastrophe.”  

But it is the sixth variant, one that Soviet writers at the time of Gorbachev sometimes called “the Latin American option,” that Tayevsky suggests is “the most probable although far from the most welcome” not only in the way that it would be introduced but also for the situation it would create.

There are many people who don’t like the current regime and have the military capacity to change it, he notes. They might set up “a military dictatorship,” although it is not clear that they could run the country after taking over except by killing people in large numbers not only immediately but for a long time, just like Chile in the 1970s.

There would be only “one welcome aspect of this variant,” Tayevsky concludes his article by saying, and that would be that “none of those who have power [in Moscow at the present time would remain at large.” They would be punished, but so too unfortunately would all the peoples of the Russian Federation.

While it is tempting to dismiss such feelings as those of an isolated individual, that would be a mistake. The notion that Moscow is living beyond its means to promote its own idea of “greatness” or to distract attention from its failures is far more widely held. For another example, this time from a Moscow analyst, see www.gazeta.ru/column/oss/2937043.shtml.
But perhaps the most convincing evidence that many have exactly the same fears Tayevsky points to is that only a few hours after his article was put online, it was removed, perhaps because of pressure from above or hacked by supporters of the regime, so that at the time of this writing it is not accessible, even though Babr.ru remains functional.

Tayevsky’s analysis raises several important considerations, one of which is the centrifugal forces in Russia.   That Medvedev is trying to do to mayors what Putin did for governors is one indication that the ruling elite in Moscow considers this a serious concern.   It is a major problem that US and European (and most Asian) policymakers don’t have to deal with.   (China may face something similar, especially as reflected in the urban-rural divide.)  

In the end, I think it will come down to the resilience of Russia’s institutions in the face of incredible stress.   Inasmuch as institutional robustness is not one of Russia’s strengths, I am less sanguine than Sergei.   But his views definitely deserve to be taken very seriously.   I do.  

At the onset of the financial crisis, I conjectured that this would jeopardize the South Stream and NordStream pipeline projects.  Bloomberg reports that South Stream is indeed in trouble:  

OAO Gazprom  plans to delay natural- gas deliveries to Europe through its South Stream pipeline as Russia’s largest energy producer cuts investment amid slowing global economic growth and declining energy demand.

Gazprom, which originally said it would start shipping gas through South Stream in 2013, expects a start date at the end of 2014 or 2015, according to a presentation to investors today in Moscow. Gazprom spokesman  Sergei Kupriyanov  couldn’t be reached for comment.

The cost of the project, which will bypass Ukraine by traveling under the Black Sea to Bulgaria, may reach more than 24 billion euros ($31 billion), the company told investors. Russian Energy Minister  Sergei Shmatko  said in July that the project may cost $20 billion.

Russia, which supplies a quarter of Europe’s gas, is seeking new routes to Europe after a price dispute with Ukraine led to a two-week cut in exports via the former Soviet republic. South Stream is the twin of Nord Stream, designed to link Russia directly to Germany under the Baltic Sea.

State-run Gazprom may cut investments by 14 percent this year as the credit crunch squeezes resources and revenue drops because of falling prices and demand, according to today’s presentation. The world’s largest gas producer will invest $29 billion this year, down from $33.6 billion in 2008, according to company estimates.

‘Generally Positive’

“Our takeaways were generally positive, including surprisingly large declines in expected capex outlays,” Moscow- based Alfa Bank wrote in a note to investors after the presentation. “Gazprom is adapting to the new economic reality.”

Gazprom’s  budget  is based on a $50 a barrel price for Urals crude, Russia’s export blend. Other scenarios under consideration assume barrel prices of $40, $30 and $25, according to the presentation. Chief Executive Officer  Alexei Miller  said in June, when the price per barrel hovered at more than $120, that the price may “soon” hit $250.

The 14 percent (“surprisingly large”) reduction in capital expenditure is perhaps a more important fact than the South Stream delay.  It is well known that Gazprom’s existing fields are in decline, and that it is desperate to find new sources of supply.  It has massive reserves, but getting at them is a daunting task, almost certainly beyond the company’s capabilities.  A 14 percent drop in capex will seriously impede the company’s development of new supplies.  This will further increase its dependence on Central Asian sources (esp. Turkmenistan).  This, in turn will intensify the bargaining, bribery, and conflict currently swirling around that region.  

The delay in South Stream may also give the ill-starred Nabucco project a much needed boost, but other difficulties must be overcome.  Given the gas war, however, one hopes that Europe finds the will to make the way.  Sadly, however, I have my serious, serious, doubts.  This means that Ukraine will continue to play a pivotal role in gas transshipment for the foreseeable future.  This, in turn, means that future gas wars are more likely than not.

I came across several articles today that contained succinct statements with which I am in broad agreement.  The first is by Stephen Blank, of the US Army War College (and a University of Chicago PhD who studied under the amazing Arcadius Kahan, from whom I had the honor of taking two classes while at Chicago.)  Writing of Russian hyperventilating over the Arctic in Russia Profile, Stephen says:

Undoubtedly, Russia’s overly aggressive moves in the Arctic have caused NATO and the associated states to react strongly, raising the possibility of a political and military struggle over its resources, especially as they become more accessible.  This has become a continuing theme in East-West relations, where Russia, driven by resentment over Western failure to take it at its own, self-inflated value, makes an excessively aggressive move that it cannot then back up, except at ruinous cost. (Emphasis added.)

That last sentence is priceless, and encapsulates a theme that I’ve sounded on many occasions.  Nursing an injured ego, the Russian government–and Putin personally–goes walking around, chin thrust out, looking for a scrap.  Needlessly, in most cases.  And stupidly, since as Blank notes, the “correlation of forces” (a standard Soviet concept), military, economic, and political, is strongly against Russia.  Part of this is the “man in a hurry” problem that I wrote about some time ago.  Part of it is the neurosis that Putin et al pretty clearly display, and which I’ve also written about.  

Speaking of neurosis, combined with a ruthless authoritarian streak,  Ralph Peters has some trenchant things to say:

The Putin model –  tolerant totalitarianism  – gave the dying command-state a new lease on life. The new czar saw that most human beings don’t care who governs them, as long as the government minds its own business. And if the ruler can revive the illusion of national power, so much the better.

Shamelessly cynical, Putin goes through the stage-managed forms of democracy. He even permits scripted media criticism of the state (though not of himself).

But there are limits to the new totalitarianism’s tolerance. You can call Putin a baboon-butt monkey-boy over the vodka bottle at your kitchen table – butdon’t  do it in public.

Cross that line and you are, literally, dead. A deal’s a deal.

The breathtaking lack of response from the West as the Putin regime murders uncooperative journalists, human-rights activists, defense lawyers, regime apostates and even foreign critics is a glorious gift to Czar Vladimir. His security services are  permitted  to murder ex-pats in Vienna or London. Even an assassination attempt on an American critic in the Washington, DC, area got swept under the diplomatic rug with remarkable speed.

Putin’s starting to look like a slicker version of  Saddam Hussein, with sharper targeting skills (and Vlad really  does  have weapons of mass destruction). As a result of the West’s cowardice, his ambitions are soaring: The most-predictable geopolitical event of 2009 is an assassination attempt on Georgia’s president, Mikhail Saakashvili, by a “Georgian patriot.”

Working through the traitorous Ukrainian power-broker Yulia Timoshenko, Putin’s also going to do all he can to “reunite” Ukraine and Russia. And he’ll continue to use natural gas as a strategic weapon, while Europe boldly responds,  Oh, dear. . . One really ought not to do that . . . Really, one oughtn’t. . .”

A friend who’s gotten up close to Putin sees the dictator as a mere  chinovnik– a petty bureaucrat promoted above his station. But that view misses the elementary human reality that greatness and pettiness, courage and cravenness, brilliance and banality, can all be attributes of the same individual.

As I’ve pointed out in the past, Putin  does  have two weaknesses: his temper, which leads the ice-man to attack his neighbors in fits of pique, and economic illiteracy.

The one-two punch of the oil-price collapse and a global depression is limiting Putin’s ability to keep up his half of the “other New Deal” by improving Russia’s quality of life. A serious outburst of unrest could fire his temper and wreck his political Ponzi scheme.

Yet protests to date have been minor and managed. Developments could go a number of ways as the Russian economy crumbles.

But whether Putin continues to reign for decades or falls in an orgy of Russian self-destructiveness, his intellectual legacy will endure: the dictatorship that stops at the front door.

The temper is obvious.  The economic illiteracy is becoming more apparent by the day.  Easy to look like a genius when oil goes from around $10/bbl to $140; a lot harder when it goes back down to the $30-$50 range.  Putin gives speeches about the importance of avoiding government control over the economy, after presiding during a 9 year period in which the scope of government control has widened significantly.  And, this control is expanding apace during the financial crisis (he has company westwards, in that endeavor.)  He also warns against protectionism while his government is implementing a variety of protectionist measures (ditto.)  Not to mention his warnings–given in Switzerland–about avoiding military buildups, while bragging at home about how military expansion and spending will continue despite the financial crisis.  Several Russian economists of my acquaintance are appalled at the economic ignorance of Putin and the Putin team.  Kudrin is a sensible guy, but he’s only one man, and one in a tenuous position, to say the least.

The last item is from WindowOnEurasia, where Paul Goble discusses the views of Russian scholar Emil Pain, as expressed in Novoya Gazetta. Pain has several interesting things to say, including this which should sound familiar to SWP readers:

But in less than two decades, all that has changed, a reflection Pain insists of the fact that “Russia is a pendulum. Everything in it changes quickly,” and among the things that have changed are predictions about the future, views about the past, and about the very possibility of still more change ahead.

The Moscow scholar argues that it is quite clear “why there is no demand for democracy in Russia today but there is a demand for paternalism, fatalism, and their ‘intellectual’ defenders.” But intellectuals, who pride themselves on their ability to think critically, should not fall into that trap.

And if such people simply look around, they will see plenty of reasons for why the idea of “a special path” for Russia is a blind alley. The world crisis “dispelled illusions about Russia as an island of stability.” Indeed, it showed that countries that try to live by the export of raw materials alone are more at risk during crises than are industrial and post-industrial ones.
That is because the fate of such “banana” exporters is more closely tied to the rest of the world than are the others, Pain argues. Moscow’s attempt to act as if this is not the case has ended in disaster, not only leaving the country more impoverished but also more isolated as its actions in Georgia showed.

When oil was 140 dollars a barrel, he says, Russians and the Russian state could ignore this reality for a time. But in Pain’s view, now that prices have fallen, “the resources of Russian authoritarianism and imperialism are close to being exhausted.” Already at present, he writes, “there is no ammunition, there remains only ambition.”

In this interconnected world, every country has to be prepared to play by a common set of rules if it is to succeed and to transform itself periodically in order to move forward. That is what the United States has just done, Pain says, having overcome the “cruelest” racism in the past to elect an African American as its president. And other countries have made similar strides.
Pain says that he can imagine the response of his opponents to this observation: “Yes,” they will say, “they can but our thousand-year old history does not permit change.” And consequently we Russians can have no hope for change and must simply and fatalistically go along.

Not many years ago, some of the very same people, during the earlier swing of the pendulum toward democracy, “did not want to hear about the concept of the thousand-year-old history” of their country. They wanted to blame everything on the Soviet system, and they believed that having rejected that, they could overcome everything and become like the West.
Now, however, they have become pessimists and talk fatalistically about historical cycles of reform and counter reform in Russian history, ignoring the reality that this pattern is hardly unique to Russia and that other countries have been able to use such cycles to move forward rather than assuming that nothing can be done.

But Russians now talk only about cultural limits on the possibility of progress. According to Pain, the economic limits the country has imposed on itself are more important. “For 300 years, Russia has lived by selling its natural resources,” first wood and furs and now oil and gas. Countries doing that back the values of empire because territory is “the main resource.”  

“No ammunition, only ambition.”  Concise, clever–and correct.

Pain also says:

Now, he is taking on the perhaps even more widespread conviction that Russia cannot escape its culture or survive without an authoritarian state. That serves the interests of those in power, he points out, but it is ahistorical and dangerously wrong when propounded, admittedly with regret, by members of the Russian intelligentsia.  

Pain begins his essay by noting that in Soviet times, many Russians blamed the country’s climate for the chronic shortages of food. Now, even though the climate has not changed, few talk about it, focusing instead on “the so-called cultural determinism” that supposedly makes it impossible for Russia to be anything by an authoritarian empire.

According to Russia’s current rulers, the country’s current “imperial form of rule, which is called ‘sovereign democracy,'” is the product of Russia’s “special path” of historical development about which nothing can be done, however much some in the intelligentsia may regret that fact.

In the view of “the ideologues of [this] new edition of official nationality in Russia,” Pain continues, “the best periods of its history have been connected with despotism,” whereas “all attempts at liberalization and democratization have taken place during periods when the state was weak and the country experiencing crises.”

At a superficial level, of course, this argument may appear convincing. When things are going well, no one thinks about changes, and consequently reforms always occur when the state is weak, something Pain says that sets off “a new cycle of swings of the Russian pendulum, from the strong hand to freedom and then back again.”

Russia’s liberal intellectuals who “angrily reject” the regime’s suggestion that this special path represents “a millennium of the greatness of Russia” are nonetheless quite “ready to accept this very same myth in another form” and view the history of their country as being “a millennium of slavery.”  

One can understand why Russians accept this fatalistic view about their past and hence their future at present, Pain says. Making bleak prognostications is profitable: If they turn out to be true, their authors are viewed as visionaries; if they don’t, “no one will take note and all will be happy.”  

But he goes on to say that such views now are not so much a manifestation of Russian national culture as “a sign of the times.” In the early 1990s, “during the period of democratic euphoria and massive hopes for a rapid improvement in life,” few talked about older historical and cultural factors that would make that task extremely difficult in the short term.

It is more than ironic–in fact, it is tragic–that the “liberal” episodes in Russian history are deemed catastrophes, while the eras of autocratic rule are idealized, and the more autocratic the era, the more it is worshipped.  This attitude gets cause and effect exactly backwards.  The liberal eras occurred because of the utter collapse of autocratic regimes due to their inherent failings.  Those in power during the (relatively) liberal periods were reaping what had been sown by the autocrats that proceeded them.  Case in point: the USSR couldn’t feed itself in the 1980s because Stalin had destroyed Russian (and Ukrainian and Kazahk) agriculture in the 20s and 30s.  When oil prices collapsed, so Russia couldn’t pay for imported food, the entire system collapsed, leaving a shattered hulk of an economy as its legacy.  That is, the autocratic failure ushered in the (relatively) liberal era, and bequeathed it with an existential economic problem.

Now, Yeltsin and the “reformers”/”liberals” made errors, but I doubt anyone could have done much with the catastrophe they inherited.  Blaming them for the Russian economic travails of the 1990s is like blaming the paramedic who couldn’t revive the guy with a gunshot wound to the temple for the victim’s death.  

So, the autocrats get the glory, even though they are the prime culprits behind the periodic catastrophes that Russia has suffered.  

Sadly, though understandably, in the aftermaths of autocratic collapse, Russia has not been able to build institutions that would support the development of a (relatively) free economy and civil society.  Instead, the conditions of chaos have proved tailor made for opportunistic wielders of force to create their own autocratic systems.  

And that is the Russian conundrum.  How to get off the pendulum?  

Or is it a see-saw?  De Custine has an interesting passage about the this “favorite amusement of the Russian peasants”:

The two performers, sometimes of the same, sometimes of opposite sexes, place themselves, always standing, and with legs firmly planted, on the two extremities of the plank, where they preserve their balance by taking hold of the cords.  In this attitude they are impelled through the air to a frightful height, for at every swing the machine reaches the point beyond which it would turn completely over, and its occupiers dashed to the earth from a height of thirty or forty feet, for I have seen posts at least twenty feet high.

An apt metaphor for Russian political history.  

Oh, and DR–just having a little fun at your expense (you’ve seemed a little testy lately).  No offense taken, I hope;-)

Vladimir Shlapentokh is a sociology professor at Michigan State University (not far from my old stomping grounds).   He’s written some very interesting things, most notably Contemporary Russia as a Feudal Society.   Vladimir sent me his latest piece, which compares three autocracies: Tsarist Russia, the USSR, and Putinist Russia.   It is a very insightful and interesting read.

One important fact that Vladimir emphasizes is that virtually nobody predicted, even immediately before the events, the fall of the first two autocracies.   He quotes Vladimir Ryzhkov saying “They [i.e., both regimes] wore off almost instantly” and Vasilii Rosanov as saying that Tsarist Russia “dissipated in two days, maximum three.” As a result, he concludes that the apparent solidity and popularity of the Putin government could be misleading.

The most interesting part of the article (to me) is this:

At the same time, in both cases, the leadership could have avoided “the period of danger,” if it abandoned its geopolitical ambitions. For the tsar, the Entente (the alliance with France and England) and the victory in the war promised the expansion of the empire. For the Soviet leadership, the structural changes in the economy promised military parity with the West. In both cases, some advisers warned the rulers about their actions. In one case, the pro-German party at the court was against Russia’s involvement in the war; in the second case, party conservatives were against the radical reforms. However, the combination of pure subjective and objective factors pushed both regimes to their termination.

This seems particularly apposite today.   I have noted several times that Russian pugnacity, its cavorting with the world’s most disreputable regimes, its aggressiveness in the near abroad, all at a time of existential economic crisis is foolhardy.   And today’s news brings more evidence of this.   Responding to Russian pressure and blandishments, Kyrgyzstan agreed to deny the US and NATO access to an airbase used to provide logistical support to operations in Afghanistan.   Purely coincidentally, I’m sure, Medevedev also announced a $2 billion loan to Kyrgyzstan and $150 million in aid.   Tajikistan is also apparently attempting to leverage its geographic location to induce the Russians to provide financial support in exchange for not supporting US efforts in Afghanistan.

NATO is apparently is search of a clue (I suggest reading the paper, and then adding two and two):

NATO said on Wednesday it would be a worry if Russia were found to have had a role in Kyrgyzstan’s decision to close a U.S. military air base which supplies U.S.-led troops fighting in Afghanistan.

Kyrgyz President Kurmanbek Bakiyev said that the Manas base would be shut after he secured Russian aid at talks on Tuesday in Moscow, a traditional ally of the former Soviet state.

“If it were to be the case that a Kyrgyz decision to withdraw U.S. access to Manas was as a result of Russian engagement that would be of concern,” NATO spokesman James Appathurai told a news briefing.

Moscow has denied a connection between a $2 billion package to combat an economic crisis — the equivalent of about half of Kyrgyzstan’s gross domestic product — and Bishkek’s decision.

Appathurai said any Russian interference would be out of line with Russia’s repeated statements that it supports the international effort in Afghanistan and its position as a U.N. Security Council member that approved the mandate.

“If Russia were found to have a role”?   Are they serious?

Actions speak louder than words, and this kind of action speaks very loudly.   It puts the lives of American (and other NATO) servicemen-and-women at risk.   It strikes at a vital US interest, and one that presumably should be a Russian interest too.   (Just how is Russia helped by a Talibanized, or chaotic, Afghanistan?) It means far more than any nicey-nicey words that Lavrov, Medvedev, or Putin say in Obama’s direction.

The primary motive here seems to be epater les Americans, regardless of the cost.   And again, as Shlapentokh says, pursuing geopolitical ambitions has cost Russia dearly in the past.   And, as the quote by Edward Radzinski that titles this post indicates, the problem with the Russian past is that it too often is its future.   Russia can’t afford its geopolitical ambitions, especially now.

Russia may gain in the short run, as a distracted country with a dreamy President convinced of the power of his mere words and gestures to resolve historically intractible conflicts may not respond to Russia’s reapolitik and reprise of the Great Game.   But that won’t last.     If Russia succeeds in achieving its objective of diminishing American interests while our attention is fixed elsewhere, or while some of us our hypnotized by visions of hope and change, it will attract the attentions of a distracted hyperpower.   And Russia cannot prevail once that happens.   Counting on Obama to be forever naive and overconfident is a dangerous thing, as even the feckless Jimmy Carter eventually awakened to the Soviet threat.

Geopolitical ambition is an important driver of Russian policy.   It was an unaffordable luxury even when oil was north of $140/bbl.   It is an insane goal when the country is on the financial precipice.   As Vladimir Shlapentokh notes, unrealistic realpolitik has destroyed Russian regimes in the past.   But, since Vladimir Putin et al have learned nothing or forgotten nothing, Radzinski’s lament may soon be illustrated yet again.

No, this isn’t a review of a punk rock CD: It’s the latest installment in an ongoing series on the ruble’s gyrations in the foreign exchange (“FX”) market, and the title is a commentary on what is becoming a more likely outcome by the day.

Well, gyrations is not quite the right word; it connotes movement in all directions, but the ruble has been moving only one way–down.  Today (per MICEX), the ruble closed at 35.4886, about a 1.8 percent move.  Although the currency gained a bit on the Euro (which was down against the dollar), it is approaching the 41 rubles vs. the basket that central bank head Sergei Ignatiev has pledged to defend unless Urals crude plunges to $30 and remains there for an extended period.  Speculators are taking this as a challenge, it appears.  

The behavior of the ruble in the days since the band was widened to 10 percent suggests to me that the government is spending FX to defend the band, even before it is reached.  The currency has been down several days in a row, and is on an extended losing streak since the widening of the band.  Absent intervention, you’d expect the number of losing days and gaining days to be about equal.  Runs of consecutive days with adverse moves can happen, but are relatively unlikely.   In contrast, if the central bank is trying to slow the fall in the currency, and is preventing it from reaching its equilibrium level on a single day, you’d see losses day after day–which is what’s going on.  

Moreover, I’ve looked at the intraday charts on MICEX this week.  Each day the currency has gapped lower (RUB/USD–higher USD/RUB) right at the open, and then hovered there, with at most a slight movement over the remainder of the day.  Again, this suggests that the central bank is effectively setting limit orders at progressively lower levels each day, and then maintaining that level within the day.  

All of this would burn through reserves.  

The central bank–and Putin–have put their credibility on the line.  They have said that 41 vs. the basket is the limit absent a collapse in the oil price.  The market is pushing there very hard.  The conditions for a speculative attack are clearly evident.  The government’s/bank’s credibility is on the line  How much will it spend to defend it?  If it tries, NOFX is a real possibility.

Indeed, other news provides further evidence that the condition is ripe for a speculative attack.  Kudrin stated that government revenues will likely fall 40 percent in 2009.  He states further that most–but not all–of the reserve fund will be spent to cover the budget shortfall.  Of course, if oil prices fall further (and the chronic economic weakness around the world makes that a very real possibility), all of the reserve funds will go down the chute.  It should also be noted that although Kudrin anticipates that the situation will turn around in 2010, government revenues usually lag economic recovery.  Therefore, even if the Russian economy–and the world economy–begins to turn around in late-2009 or early-2010, it is likely that revenues will remain weak well into 2010.  This means that even if some of the reserve fund survives 2009, it may be dissipated in 2010.

It’s of course better for Russia that it has such a cushion than not.  But, as I noted in several posts when the crisis began in the late-summer and early-fall, the existence of the currency stockpile and the reserve funds likely provided a false sense of security, and arguably led to a delayed response to the crisis.  I specifically noted that one thing the crisis proved is how quickly it is possible to blow through $600 billion, and that’s being proven right in the Russian instance.  

The weak government revenue picture is just more blood in the water that will attract yet more sharks to the ruble market.   Given the budget picture, it’s hard to see how the central bank can credibly defend the currency at the 41 level. Trying to do so will (a) waste–waste–the country’s currency reserves, because it will merely delay the inevitable, and (b) exacerbate the weakness in the real economy, particularly the manufacturing sector.  

So, push is coming to shove.  As the FX rate approaches the band, the speculators will test the government’s commitment to maintaining that band absent a further, severe erosion of fundamentals.  Flexing to defend the ruble will be very expensive, and arguably ruinously expensive.  The next week or two should be very interesting.  Although currency and capital controls have not been widely discussed, if the attack is as severe as I expect it to be, I wouldn’t be surprised to see such measures implemented.  

It is no picnic to be a policy maker anywhere in the world right now, but Russia has to be among the worst.  This could explain Putin’s rather bizarre behavior at Davos, where he alternated between giving lectures about the virtues of a free market (!) and delivering testy–nay, ferocious–responses to genuine (if naive) offers of assistance from Michael Dell.  

Putin has essentially placed a huge long bet on the ruble.  He has staked his credibility on avoiding a precipitous drop in the currency, cost what it will.  Like many traders on a losing streak, he is effectively doubling down by stating that the band will not be widened further.  Doubling down can work, but the odds are usually quite unfavorable.

Hence, the coming days could be quite significant, not just economically, but politically.  With Medvedev showing signs of independence, and the ruble battle reaching a climax, the long-anticipated tension–and perhaps rupture–in the diumvirate could be coming.

Putin speaks the Davos urp-fest tomorrow, and has a lot to feel chastened about since his previous, boastful appearance–not that he will.  This quote hits the nail on the head, though:

“Putin will attempt to paint Russia as a willing player looking to deepen its integration into the global economy and eager to attract global investors,” said  James Beadle, chief investment strategist at Pilgrim Asset Management in Moscow. “Sadly, Russia has berated and abused many of its global partners, and now that the stakes have balanced, few will trust this new, benign rhetoric.”

Fool me once, shame on you.  Fool me twice, shame on me.  Anybody who buys what Putin is selling is a fool.  But very early on in the history of this blog, and many times since, I’ve expressed amazement at the credulity of western investors when it comes to Russia, and their belief that they’re special and will avoid becoming just another statistic.  We’ll see if Putin can succeed, yet again, playing Lucy with the football, with western investors reprising their role as Charlie Brown.  Beadle thinks not.  I’m not so sure.

And blames the United States for the just (maybe) completed battle of the Russo-Ukrainian gas war.  Putin’s remarks are a variant on Gazprom’s Aleksandr Medvedev’s, but represent a somewhat broader indictment.  Putin blames the US, and the Bush Administration in particular, for the political instability in the Ukraine which Putin argues that is the root cause of the War.  Putin also denigrates the US role in Georgia.

In a nutshell: Putin’s view is that the US (and its Sancho Panza, the EU) encouraged the Ukrainians and Georgians to get all uppity.  This, in turn led to a shooting war in the Caucusus, and a Gas War between Russia and Ukraine.  If the hot headed Georgians and the upstart Ukrainians would only remember their proper places, that corner of the world would be all sweetness and light.  For the Russians, anyways.  And presumably for the Europeans too, for why should they have to worry their pretty heads about where their gas is coming from, and whether the national aspirations of former imperial subjects are crushed to ensure the steady flow of that gas?

This is just another manifestation of the Russian elite worldview that refuses to acknowledge that the post-1991 settlement is in any ways final.  Indeed, they believe it to be an aberration; an affront to Russian dignity; and a geopolitical mistake to be reversed.  

Further illustration one: Putin’s remark to Bush that “Ukraine isn’t even a real country.”

Further illustration two: The ongoing efforts to delegitimize Ukrainian control over the Crimea.

Further illustration three: Russia’s outrage at Ukrainian insistence that they suffered uniquely under Soviet collectivization, and that the Ukrainian famine was genocide.  (Dmitri Medvedev made particularly dismissive remarks about this.)

The Russian case on the latter episode is that all of the USSR’s peasantry suffered from collectivization, and that Ukraine is without justification in claiming either greater suffering, or an ethnic component to Soviet policy (thus transforming a mere mass murder into a genocide analogous to the Holocaust, or the Armenian genocide.)

But there is considerable evidence that Ukrainians did suffer more, were the particular object of Stalin’s ire, and that the Ukrainian famine was genocidal.  In his authoritative Harvest of Sorrow, Robert Conquest writes:

Fifty years ago as I write these words, the Ukraine and the Ukrainian , Cossack, and other areas to its east . . . was like one vast Beslan.  A quarter of the rural population, men, women, and children, lay dead or dying. . . .  At the same time, (as at Belsen), well-fed squads of police or party officials supervised the victims.

. . . .

The events with which we deal may be summed up as follows: In 1929-1932 the Soviet Communist Party under Stalin’s leadership . . . struck a double blow at the peasantry of the USSR as a whole: dekulakization and collectivization. . . . These two measures resulted in millions of deaths–among the deportees in particular, but also among the undeported in certain areas such as Kazakhstan.

Then in 1932-1933 came what may be described as a terror-famine inflicted on the collectivized peasants of the Ukraine and the largely Ukrainian Kuban . . . . This action, even more destructive of life than those of 1929-1932 was accompanied by a wide-ranging attack on all Ukrainian cultural and intellectual centres and leaders, and on the Ukrainian churches.  The supposed contumanciousness of the Ukrainian peasants in not surrendering grain they did not have was explicitly blamed on nationalism: all of which was in accord with Stalin’s dictum that the national problem was in essence a peasant problem.  The Ukrainian peasant thus suffered in double guise, as a peasant and as a Ukrainian.

Thus there are two distinct, or partly distinct elements before us: The Party’s struggle with the peasantry, and the Party’s struggle with Ukrainian national feeling.

Conquest shows in telling–and heart-rending–detail how the Great Famine of 1932-1933 fits into the longstanding Muscovite ambition to extirpate the Ukrainian nation.

Putin is the heir to that policy.  No, he is not Stalinist in his choice of means, but he is Stalinist in his goals.  And he is a tsarist as well.  Like both (bizarrely in the Georgian Stalin’s case) he is a Great Russian imperialist, and he views the Gas War as just another episode in Russia’s campaign to submerge Ukraine in a Great Russian empire.

It is not all about gas and dollars.  It is not merely a commercial dispute.  Sure, money matters to these people.  But it’s not all that matters.  Indeed, it’s not likely the most important thing.  Putin wants to reverse the “greatest geopolitical tragedy of the 20th century” and the most important step in achieving that ambition is reabsorbing Ukraine, either de jure or de facto.  

It is essential, therefore, to put the gas war in its broader historical context.  Putin certainly does.  As for the Pomo Europeans, that’s doubtful in the extreme.  Certain elements of the Bush administration did–and that’s why it earned Putin’s particular ire.  (He probably thinks–I gave you free rein in Afghanistan, the quid pro quo was I get free rein in the Near Abroad, and you welshed.)  

As for the Obama administration, the jury is still out.  Putin’s remarks about Obama are clearly a signal.  Putin’s “hopes” for Obama can be translated as “we have hope that you will see things our way; that you understand the natural order of things; and will sacrifice Ukraine and others in the sake of restoring that natural order.”  It is also another effort at divide and conquer, suggesting to the Europeans that American intransigence and unrealism is why their cozy warm homes are at risk, thereby hoping to spark European pressure on a presumably pliable Obama to throw Ukraine under the bus.  (A very likely possibility, as it is very crowded under Obama’s bus, cf. Jeremiah Wright, Bill Richardson, Susan Power, etc., etc., etc.)    

In short, the Gas War is just the surface of things.  Under the surface one finds the true dynamic–Russian imperial ambition resisted by a nation struggling to realize an independence long denied, but doing so under a confused, divided, and corrupt leadership.

And that’s just one reason why this is far from over.  This is a real global test, one in which there is an acute imbalance between the test givers (Russia) and the test takers (US & EU) on such dimensions as importance, scruple, and will.  Whether Russian advantages on these dimensions are sufficient to overcome that nation’s fundamental strategic and economic weakness, and its propensity to over-reach and self-destruct, remain to be seen.

It seems that the frog is now boiled.  Today Russia’s central bank dramatically widened the ruble trading band by 10 percent, in contrast to the gradual widenings of about .5 percent that it had permitted frequently over the past couple of months.  This comes on the heels of a week in which Russia spent an estimated $30 billion in defending the currency.

The ruble has shown a bit of strength recently.  I think this in part reflects a Parthian shot by the central bank that had engaged in a flurry of buying (i.e., selling dollars) to raise some doubt in the minds of speculators about the riskiness of betting against the currency.  It also reflects the periodic increase in the demand for rubles that business use to make VAT payments–making this a good time to permit a dirty float because technicals will support the currency for a bit.  

The overall market consensus is that Russia took this measure far too late, and thereby exacerbated the country’s economic difficulties, particularly in manufacturing.  That’s certainly been my view.   One Moscow economist opined:

“It’s inevitable that the ruble will move to the limit of the new band,” said Alexei Moiseyev, economist at Moscow brokerage Renaissance Capital. “This had to be done, but it should have been done faster,” he added.

Economists say the slow ruble decline channeled the government’s bailout funds into currency speculation and deprived companies of vital capital. “We’re paying for this with very bad figures for industrial production,” said Mr. Moiseyev. In December, industrial output plunged 10.3%, according to government figures reported by the Interfax news agency.

Companies across Russia have furloughed workers or cut jobs. More than a million Russians have lost their jobs since the early summer, Interfax reported Thursday, and government officials expect the unemployment rate to rise to 7.5% this year from 6.5% in November, the last month for which data are available.

The central bank apparently cried uncle because speculative pressures were threatening to overwhelm any attempts to support the currency, thereby blowing through the rest of the country’s already depleted reserves:

This month, the central bank sped up the ruble’s decline, but traders say the move only added to pressure on the currency as banks, companies and individuals scrambled to get out of rubles. Central-bank reserves dropped $30 billion in the past week alone.

“For the past two months, everyone was just speculating [against the ruble],” said Yevgeny Gavrilenkov, economist at Troika Dialog, a Moscow investment house. “They weren’t paying debts, barter was rising.”

Who benefited from this policy?  The slow motion devaluation helped the government politically.  It was also quite helpful to oligarchs who had borrowed in foreign currency.  Thus, the government was apparently willing to spend hundreds of billions to save political face and ease oligarchic pain.  Who paid the price?  Primarily, Russian manufacturers, and the people they employ.  

That choice tells you a great deal.

The Russo-Ukranian Gas War of 2009 is supposedly–and I emphasize this qualifier–over.  The initial news judgment is that Russia–and Putin–came out the winners.  The AP argues, for instance, that:

Russian Prime Minister Vladimir Putin’s tough tactics seem to have paid off in talks to resume gas shipments through Ukraine to Europe, most importantly by doubling the price Ukraine pays for  gas.

Yuschenko criticized the deal, characterizing it as a defeat:

But Ukrainian President Viktor Yushchenko criticized as a “defeat” the deal clinched by his prime minister, his former ally turned rival, saying the price set for Russian gas was too high and offsetting transit rates for Ukraine too low.

But, as always seems to be the case when one says the words “Russia,” “Ukraine,” and “gas” in the same sentence, what really happened, and the implications of whatever happened, are very difficult to determine.  So there’s supposedly a 10 year deal in which Ukraine agrees to pay “European prices” for gas, and Russia agrees to pay “market” prices for transport–but neither term is defined.  (Also, supposedly the transit and gas deals are separate.)  Moreover, intermediaries are supposedly out.  But, given that, ahem, neither Russia nor Ukraine seems to treat contracts as sacrosanct,  with these vagaries, one would have to be very Pollyannish indeed to believe that the prospects for another war same bat time, same bat channel have gone away.  

But, as I say, the conventional wisdom is that Putin has won, and that this is a step towards bringing Ukraine back into the Russian orbit, and out of the Euro-American sphere, with Tymshenko playing shepherd (or would that be Quisling) from the Ukrainian side.  

Things are really too murky for me to judge–and in my view, for anyone to judge–whether that’s indeed the case.  

I will just present one significant data point that contradicts this interpretation.  If Russia is indeed the winner, Ukraine will indeed pay higher prices, and the prospects for a future war with all the adverse immediate economic and long run reputational consequences are greatly diminished, one would expect Gazprom’s stock price to have risen upon news of the settlement.  In fact the opposite has happened:

Note that Gazprom stock price peaked on 6 January, with an intraday high of almost $18.50.  The price has fallen since, even as it became apparent that some settlement along the lines of that just announced would be reached.  The price is now in the $13 range, after trading as low as about $12.50.  So the stock price has lost about 30 percent.  To put things into perspective, over the same period the RTS is down about 15 percent.  

So, if the masterful Gasputin has really engineered such a coup, one that in addition to pulling Ukraine into Russia’s orbit, also secures Gazprom’s economic interests, why has the company’s stock performed so badly?  The market certainly doesn’t seem to think that Gazprom/Russia have “won” (at least commercially) the latest gas war.

There are a variety of different ways to analyze the effect of the crash in energy prices on the Russian economy and political system.  One is to just focus on the basic macroeconomics and public finance; the effect of the decline on aggregate demand, income, the budget, the trade balance, the ruble, etc.  The results of such an analysis are not exactly comforting for Russia, but there is nothing in this analysis that has particularly dire implications for the country’s political stability, or that suggests that Russia’s difficulties will be all that different from those of other commodity intensive nations.

Another approach is more institutional and political-economic.  It focuses on the unique institutional features of Russia, and the salient role that energy plays in supporting this institutional structure.  It’s an analysis that I’ve favored, and advanced here at SWP.  In essence, I’ve argued that energy (and other natural resource) rents are the glue that holds the Russian “natural state” together.  I’ve analogized Russia to a cartel of violence specialists who cooperate to split rents rather than dissipate them in conflict.  But, I’ve also argued–and done so well before the recent collapse in energy prices–that a decline in these rents raises the likelihood that this (inherently unstable) equilibrium will collapse, thereby threatening Russia’s political stability.  

A recent post on the RFE Power Vertical blog argues that this may in fact be occurring in the here and now:

The political structure Putin built over the past decade was based on a vast system of patronage that, thanks to high oil and gas prices, allowed the Kremlin to purchase the loyalty of Russia’s sprawling bureaucracy and at least the tacit consent of a critical mass of the population.  

Here’s how Moscow-based political analyst Dmitry Oreshkin put it when I spoke to him about the emerging political crisis:

The vertical is not as strong as it seemed. It is based on buying the loyalty of officials with the help of oil funds. The bureaucratic class gives its loyalty to the center and the center closes its eyes to their corruption…When oil and gas prices were high and when the economy was growing, it worked well. Bureaucrats were afraid to show disloyalty to their bosses because if they were fired they would be outsiders. But when gas and oil prices are low and the economy falters, it is not possible to buy everybody’s loyalty.

Petrodollars, in short, were the lubricant that kept the system functioning. And now that these are drying up, the arrangement is breaking down with unpredictable consequences.  

A few trends, however, are already visible. Divisions in the elite — both within Moscow and between the center and the regions — are getting sharper. The most noticeable, of course, in the apparently worsening relations  between Putin and Medvedev, or at least between their respective teams. Here’s how Yevgeny Volk of the Heritagte Foundation’s Moscow office put it in an interview with RFE:

The Russian elite has never been united. There were always fierce battles for resources and there were always grievances. But when there are colossal resources from high oil and gas prices, these conflicts can be managed. But now, with the pie shrinking, the battle among the elite is becoming hotter and the conflicts are getting sharper. I don’t rule that there will be a conflict between Medvedev and Putin. Neither one of them wants to take personal responsibility for the worsening economic situation. This is especially important for Putin given his plans to return to power.

Moreover, as Oreshkin pointed out, the group of security service veterans close to Putin — people like First Deputy Prime Minister Igor Sechin and Security Council Secretary Nikolai Patrushev — have a very different notion of how to deal with the economic crisis than the economists like Finance Minister Aleksei Kudrin who are close to Medvedev:

The Putin group favors strengthening administrative pressure. The Medvedev group thinks the authorities need to do more than make threats and bang their fists on the table. They think there needs to be a better understanding of economic interests and rational economic behavior.

This is all getting very interesting very quickly. In our interview today, Volk said that a year ago the situation in Russia resembled that in the Soviet Union in the early-to-mid-1970s, when high oil prices fuelled an aggressive foreign policy abroad and facilitated a relatively stable political situation at home. Today, Volk says, the situation reminds him of the mid-to-late 1980s — and we all know what followed that.

Volk’s “Cocaine Blues” point is right on.  

Viewed from this perspective, the decline in energy prices is uniquely ominous for Russia because of the pivotal role that commodity rents play in maintaining the country’s political equilibrium.  

Post author Brian Whitmore promises that he is preparing a more detailed look at this issue.  That’s good to hear, because it’s an interesting one.  Indeed, I think the role of rents will be critical in determining Russia’s political path in the near to medium term.