Streetwise Professor

June 20, 2009

Doubling Down

Filed under: Economics,Energy,Politics,Russia — The Professor @ 12:14 am

Russia has decided not to enter the WTO, announcing its intentions to join the organization as part of a customs union with Kazakhstan and Belarus.   According to Stephen Blank, there is room to doubt whether the announcement was coordinated or not with the other two CIS members.   As Blank also notes, Russia was no doubt unwilling to agree to conditionssuch as opening its meat and dairy sectorsand realistic in recognizing that Georgias veto would make joining the organization an unlikely prospect in any event.   But Blanks most important conclusion echoes my reply to commentor Howard Roarke in response to the latter’s query regarding my opinion on the subject:

Naturally, such economic policies are also connected with the growing efforts of Putin’s entourage to rely exclusively on energy prices going up to extricate Russia from the current crisis, and their efforts to extend ever more state (i.e., their personal) control over ever more sectors of their own and other states’ economies. Closed markets and trade blocs generally accompany closed political systems and neo-imperial policies that can only end in conflict. Georgia may have been the first as we saw last year, but as Belarus shows, it probably will not be the last such example

Blanks diagnosis could have been written by the theorists of the Natural State, North, Wallis, and Weingast.   NWW emphasize the connection between closed economic systems that do not permit free entry and open competition even when they possess the simulacra of a capitalist system (e.g., corporations and some freedom to contract) on the one hand, and closed political systems that do not permit free entry and open competition in political life even though they possess the simulacra of a democratic system (e.g., elections and parties).  

The entire trajectory of Russian politics and economics post-crisis is further illustration of the Natural State character of Russia.   Some within Russia, including some elements associated with Medvedev, have expressed hopes that the crisis would spark a transformation in the economy, leading to a decreasing reliance on energy and resource rents.   These hopes have proved chimericalas the Natural State theory would suggest.     The natural state is highly vulnerable to the destabilizing effects of economic and political competition, especially Schumpeterian destructive competition.”   Economic competition upsets the distribution of rentseconomic goodiesthat holds together the coalition of factions in the Russian state.       As a result, when the state is weakened and threatened, the immediate response is to move even more aggressively to limit competition.   Sure, the crisis provides strong evidence that to benefit Russia, it needs to diversify.   But benefitting Russia and benefitting the factions in a rentier state are two very, very different things.  

And, truth be told, it is quite possible that an attempt to move beyond the natural state would be so destabilizing that the result would be chaos.   Thats why Ive called Putinism purgatory economics.   Its not hell, and it’s sure not heaven.   But, attempting to leave purgatory is more likely to result in taking up residence in hell than in heavenas centuries of Russian history, most notably the last, demonstrate.  

The WTO announcement, along with numerous other recent developments, is a manifestation of this fundamental tendency to respond to crisis by suppressing competitive forces, rather than strengthening them.   International trade erodes rents, reducing the power of some and increasing the power of others.   Upsetting the balance of rentsand hence the balance of poweris a dangerous thing in the natural state.   Moreover, WTO is rule based.   Natural states also rely heavily on the ability of a relatively unconstrained state, often embodied in a highly personalized style of rule (Blank also mentions the highly personalized Putin style) to adjudicate between rival factions in order to maintain balance.   Rules impede the ability to do this.  

The other developments include: Medvedevs announcements that attempts to spur innovation in the Russian economy would be focused in state corporations, rather than left to market processes; Putins statement that he would create a vertically integrated state-controlled body to oversee oil and gas exploration in Russia; and Putins personal intervention in Pikalevo.  

And, if further illustration were needed that Russia lacks the institutional infrastructure to support a transition, today the Bailiffs’  Service announced its intention to sell Telenors stake in Vimpelcom.   Add that to the Khodorkovsky trial, and the new legal travesty involving Heritage and HSBC, and you will understand that there is no check on the discretion of the state, least of all from the court system.  

The logic of the Russian state is that the prospect of negotiating a transformation from a competition-suppressing rent-based natural state to a competitive economic and political system is so daunting that it is unlikely to be attempted.   Anything that limits the flexibility of the center to shuffle around money and power is not to be tolerated.    The response will be to double down on the existing system, not to move away from it.  Indeed, all forces tend to work against the movement to an impersonal, competitive system: and will continue to do so until the pressure of crisis abates, or the system collapses.    As Wellington said of Waterloo, which alternative is realized in Russia will be a close run thing.   It could go either way.


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  1. One wonders whether Russia will care to inform Kazakhstan or Belarus when it decides they’ve become part of Russian territory like Abkhazia and Ossetia. Likely not, with this move as precedent. Hopefully, they’ll tell the US before they take back Alaska.

    Meanwhile, seems Russians aren’t aware that we in the West are familiar with the story of “The Fox and the Grapes.”

    Comment by La Russophobe — June 20, 2009 @ 6:19 am

  2. It certainly explains why Khodorkovsky is so toxic to Putin’s clan and so personally loathed by Putin for publicly humiliating him. He is one of the few people in Russia that understands what you are saying. He’d be dead by now if so many western eyes weren’t glued on the travesty of his show trial and properly characterizing the whole Yukos saga as a human rights issue.

    A sustained oil price of $50/barrel or below added to Russia’s problem of finding and extracting enough in the future seems to me Putin’s ultimate demise, but, sadly another set of thugs with another set of promises will fill the vacuum.

    Putin will use live ammo on his way out the door as is now happening in Iran today. Russian masses are fascinating for their insane capacity to choose the same thing over and over again and expect a different outcome.

    Thanks, Professor, you are one of the best reads on the internet.

    Comment by penny — June 20, 2009 @ 7:26 pm

  3. Thanks for your follow up on this interesting topic, Streetwise. Stephen Blank always has an excellent take on Russian matters and the natural state concepts really create some connections here. As for me, I’ve noticed several additional points that highlight the strange (but typical) goings on in Russia regarding the WTO.

    First, in addition to the self-interests of the leadership described above, there is still the cultural aspect that has been haunting Russia for centuries. It is the classic slavophile vs. western wrestling match that exists in most Russians’ souls. Upon reading Russian history, you see an amazing consistency where the country bounces back and forth between the two irreconcilable views of the world. You just never know which of the two camps is going to pop out at any given time. The slavophiles popped out this time.

    Second, Russia (and especially Putin) have been toying with the notion of a “multipolar world.” They cannot let go of the desire to be a viable alternative to the West even though this notion could be labeled a fantasy, logistically impossible, or just decades and decades away. You cannot create a polar-entity with Belarus and Kazakhstan at your side. (I wince just thinking about it)

    Third, ego and pride prevent Russia agreeing to something not on their own terms. WTO, by definition, possesses its own terms, (and yes, let’s be clear, they are Western-oriented) and thus threatens Russia’s view of itself. They have also twiddled their thumbs for so long, that Ukraine and Georgia have squeaked in before them and the idea of submitting to their terms is probably inconceivable to them. This seems to be a face-saving maneuver, but then I can’t help think of the expression, “they’ll cut off their nose to spite their face.”

    Fourth, this situation exposes the impetuousness of the leadership. How can the Prime Minister, after years and years of negotiating with the WTO, suddenly annouce to the world such a radically different solution that nobody expected? How can you trust leadership that cannot be predicted? This about face places further burden on their already weak credibility.

    As an additional sidenote, having been a corporate-wank for most of my career, (5 years in Russia, btw) I read with shock the quote from an Associated Press article who quoted an Alfa Bank economist: “I don’t believe the WTO holds any benefits for Russia,” said Nataliya Orlova, an economist at Alfa Bank in Moscow. “Russia has just signaled that its relations with its closest neighbors are more important.” This quote is huge! First of all, if you’ve ever been involved in developing public statements at a corporation, total control of the message is essential. If this is the case, Alfa Bank has said something completely radical. If this is not Alfa Bank’s true statement, then this economist would be canned and out the door so fast (at least at my company, anyway) and their PR department would be retracting the quote. This has not happened, and so you must assume that this is a sanctioned position that Mr. Fridman approves because it is in line with the political leadership of Russia. There are so many things wrong with this situation, I can’t even go on.

    After all this, I want to make it clear that this is not just Russia-bashing, though I’m sure there will be accusations thrown at me anyway. I think all of us are just saying that we see a good path for Russia to take but simply agonize when they choose (to us) the wrong one. That is at least my stance. I WANT them to succeed but can’t be silent when they go in directions that seem disastrous.

    Comment by Howard Roark — June 21, 2009 @ 1:27 am

  4. Russia needs no WTO. Pirated games and unenforced PR rights kick ass.

    Comment by Sublime Oblivion — June 25, 2009 @ 1:57 am

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