Streetwise Professor

Several stories converge to tell a single story.

1. Russian capital outflows totaled $25.8 billion in the first quarter.  Given that the government had forecast between $0 and $10 billion for the year . . . they’re revising their projection.  To $40 billion.  Who wants to quote an over-under for the next revision?
2. Russian economic growth slowed to .1 percent year-on-year in February.  In other words, barely any growth at all.
3. Putin gave an order to all state officials to close foreign bank accounts within three months, or be fired.
4. A deputy chairman of the Russian Central Bank said that Russian officials may be required to invest in domestic securities.
5. Putin is again mooting the idea of some sort of popular front, and ditching United Russia has his favored political vehicle.  United Russia, of course, being basically the bureaucrats’ political party.
6. Putin is cracking down on NGOs that have any connection with the West.

1. and 2. are symptomatic of a sputtering economy that cannot generate the growth or the capital necessary to pay for Putin’s promises, or his ambitions.  3., 4., and 5. show that Putin is at war with the bureaucracy-just like the Tsars and Commissars from the beginning of Russian history.  6. reveals Putin’s continued paranoia that NGOs are plotting some sort of Orange venture in Russia.

All suggest that Putin is increasingly beleaguered.  Life was easy when the economy was doing well.  Not so easy when it’s stagnating: given Russia’s presumptions as an emerging market, .1 percent growth is equivalent to a major recession in the US: a far cry from the 6+ percent of the mid-00s, and even the 4-5 percent which Medvedev and Putin have claimed to be expecting.  Standing still is falling back, especially when Putin has promised big increases in both social and military spending.

So where does he turn?  The predations of the bureaucracy are a drag on growth: so attack them, like the Tsars and Commissars before him.  Uhm, good luck with that.  Like cockroaches, the bureaucrats have always survived every attack against them.  Stalin imposed some discipline-but look at what was required.

But outlawing foreign accounts is one knout that he can wield that hits them where it hurts.  It also is a form of financial repression that can offset, in part anyways, the difficulties that Russia faces in attracting and retaining capital, due to its poisonous investment climate.  In essence, Putin is attempting to reassert his power over the bureaucracy and at the same time to recirculate their ill-gotten gains within Russia, rather than without, thereby offsetting the reluctance of foreign investors to risk their capital to the whims of the Russian state and its agents.

But resorting to sticks, rather than carrots (“play along and you can share in the rents”) Putin is betraying some desperation.  Moreover, although the bureaucrats may mulishly submit to the knout, they will resent Putin’s resort to coercion.  They may falsify their preferences, and promise fealty.  But they will be alienated.

This is the classic authoritarian dilemma.  A subservient but resentful class of underlings.  Coordination problems mean that few are willing to declare openly their opposition.  But this equilibrium is quite tenuous.  A shock to the system that weakens the autocrat-a natural disaster handled badly, an overreaction to an isolated act of opposition-can lead to a rapid and uncontrolled chain reaction in which those who suppressed their true feelings stop falsifying their preferences.  This is the dynamic that toppled Mubarek in weeks, and unleashed civil war in Libya.

Stability in autocracy is one equilibrium in a global coordination game: complete collapse is another.  The literature on global games predicts that the stable equilibrium is a fragile one.  A small event can lead to a “run” on the autocratic bank of power.

That’s where Putin is now.  I am not predicting that Putinism will collapse.  I am saying that the risk of such collapse is heightened.  The best evidence for this is Putin’s ratcheting up of oppressive measures, whether they be applied to bureaucrats theoretically subordinate to him, or NGOs.

Look back to posts I wrote in 2007-2008 where I emphasized the brittleness of Putinism.  Putin recognizes this.  His actions demonstrate that clearly.  A confident autocrat would not do what he is doing.