Streetwise Professor

April 28, 2009

One R Short of a BRIC

Filed under: Economics,Politics,Russia — The Professor @ 8:03 pm

A couple of pieces caught my eye today.  Each discusses the prospects for political unrest in Russia.

The first is by Peter Reddaway in the National Interest.  It makes a point that I’ve been advocating here for well over a year: namely, that the fundamental nature of the Russian state makes it ill-suited to respond to large shocks, and as a result is brittle and subject to collapse.  (Here’s one of my posts that discusses this in detail.)  Here’s Reddaway:

To date, these have been lacking, partly because Putin and Medvedev have somewhat different interests and instincts, partly because the mafia-like clans of Russia’s power elite are seriously divided, and partly because the deeply ingrained vices of “the Putin system” have made personal and clan interests, not Russia’s interests, the ruling class’s priority. None of the clans wants to upset the covert and intricate arrangements of the status quo with an honest debate about the national interest. They are rich, sometimes superrich, with too many secrets to hide about how they acquired their wealth. Usually their business interests conflict with the national interest, to the detriment of the latter. Members of Putin’s main clan—his comrades from the security services in St. Petersburg—are especially determined to hang on to their power and wealth, and may, in the short term at least, have more ways both of influencing Putin and of undercutting Medvedev than do others.

The clans are trying to adapt to the disorienting political system in which there are suddenly two masters and not one. Even though Putin is clearly more powerful than Medvedev, they see that this might change if, say, Putin decides to retire. So maybe it is best to get close to Medvedev in advance, or at least to hedge their bets. On the other hand, maybe Putin will push Medvedev out and resume the presidency, in which case he’d take revenge on them for having sucked up to Medvedev. After a year of this, the uncertainties facing Russia’s rich are as enervating as ever. And with a drop of 70-75 percent in the value of the stock market, the well-off are losing a lot of money and their moods have become sourer still. Thus the risk grows that the bolder clans could start to seek change in the leadership, a potentially disruptive outcome.

If, as seems plausible, the recession and the clumsy tandem structure should make the Putin-Medvedev leadership increasingly erratic, the implications would be many—a deteriorating economic policy, business and bureaucratic groups ever-more aggressive in their demands, regional governors asserting more autonomy, the spread of popular discontent, weakened media censorship and a less predictable Russian foreign policy, to name a few. The future of the leadership would be subject to even-more discussion, maneuvering and plotting than it is already. And the critical public support for the present leaders would start to fragment. This would throw their futures into doubt and could lead to an unstable transfer of power.

This description is similar to the cartel model that I’ve advanced before.  Such systems are ill-suited to change.  This is true for a couple of reasons.  The most important is that they are set up to maintain the status quo.  Rival groups settle on an agreement to divide the spoils.  Importantly, as the stream of spoils is expected to persist over time, it is desirable to avoid haggling and conflict in the future, so the agreement is intended to be enduring.  However,  any such agreement is subject to reneging.  Any major change can be perceived as reneging, and one perceived episode of reneging is often met by retaliatory moves.  Such tit-for-tat behavior can lead to unravelling of the entire agreement.  So, such systems usually attempt to build in constraints on change.  

A famous paper by Marshall and Weingast that discusses the seemingly byzantine nature of Congress explains the complexity of the committee system, seniority rules, and arcane procedures as one means of constraining change in order to enforce deals among Congressmen.  I promise to vote for the dam in your district if you vote for the defense plant in mine.  Next year, however, I might be tempted to lead an effort to cut funding for your dam, especially if I feel that my defense plant is secure.  The earlier promises can’t be enforced in court, so there must be some way of preventing this sort of reneging; otherwise such logrolling deals would never be made as performance could never be relied upon.  

The committee system is one way to do it.  If you sit on the committee that is responsible for dams, and I sit on the one that is responsible for defense appropriations, and importantly, if my committee must approve any change in defense appropriations and yours must approve any change in dam appropriations, I can’t unilaterally renege on my deal, nor can you.  You will shoot down my attempt to renege in your committee, as will I yours in mine.  Weingast and Marshall show how other seemingly inefficient aspects of legislative rules and procedures play similar bargain-enforcing roles.  For example, seniority tends to lead to stability in committee assignments, and to give the most senior legislators greater power in committees.  This creates hystersis in committees that tends to lead to stability in legislative bargains, and resistance to change.  

The important point is that since reneging is change, these rules tend to favor the status quo and to make change difficult.  That is typically for the good in stable situations, but can be disastrous in conditions of discontinuous external change, e.g., a large economic shock.  In Russia’s case, for instance, the representative of one clan argues “We need to respond to this crisis by doing X, a radical departure from our past practice.”  The other clan retorts: “No, you don’t want to do that for the national benefit, you are just trying to get out of our earlier deal and do something that helps you and hurts us.  No dice.”  

That is, since it is so difficult to distinguish reliably between policy/rule/deal changes that are optimal responses to shocks, from those that are opportunistic changes intended to undo previous deals to the benefit of one party and the detriment of others, systems of this sort are typically very rigid and resistant to change.  The choice is usually either between doing nothing, or (in the immortal words from The Godfather), going to the mattresses.  Given the horrific consequences of the latter, the tendency is to do nothing even when it is widely acknowledged that something should be done.  

This is particularly true of highly centralized, state-dominated systems.  In such systems, the relevant bargains are much more extensive and encompassing.   There are few independent agents who can unilaterally act without upsetting the whole structure.  Such systems find it especially difficult to deal with big shocks.  

These systems also tend to undermine elections and court systems that can overturn the status quo.  This further reduces their capacity for change.  Similarly, restrictions on the flow of information also favor stability, but at the expense of reasoned response to exogenous changes such as an economic shock.  

I think these various factors explain the policy gridlock that Reddaway describes.  It also explains the fetishization of stability in Russia, and the deep-seated fear of change.  This is also why incremental change is very difficult in such systems, and hence why when it does come, political change tends to be cataclysmic.  When the external shock is big enough, and the system cannot respond organically and supplely, collapse/chaos/cataclysm is the typical result.  That is, sometimes the rivals feel compelled to go to the mattresses.

Which brings us to the second article, via FT Alphaville:

Risk consultancy Eurasia Group is exploring the “increasing likelihood of radical political disjunctures”, or fat tail events in national-level politics.

Here’s their synopsis:

The combination of lost savings, banking crises and credit crunches, rising unemployment, growing popular discontent with financial and political elites, and the squeeze on government services is dramatically increasing the pressures on political leaders, institutions, and stability in countries all over the world. Governments everywhere are taking steps to counteract the impact of the global crisis with efforts to ward off socioeconomic and political discontent. But countries vary significantly both in their resiliency in the face of the crisis, and in their ability to respond to it coherently and effectively.

The political impact of the crisis is anything but uniform across countries.For differing reasons, we see a great deal of resilience in some of the most important emerging powers, including China, India, and Brazil. But the unprecedented strain on political systems is creating fat tail risks for unexpected political changes in a number of major countries.  In this report, we describe the top ten fat tail scenarios: significant political changes in important countries that would have been almost unthinkable six months or a year ago but are now much more conceivable. In general, these scenarios reflect the interplay between elements of the economic crisis and preexisting tensions, conflicts, and political vulnerabilties. (Emphasis from FT-Alphaville).

Note which BRIC country is missing from the list of “resilient” nations?  B–covered.  I–covered.  C–covered.   R?  Nope, no R.  That’s because Eurasia Group assigns an appreciable 20 percent probability to a Kremlin coup by hardliners.  (Putinophiles–I won’t say Russophiles–may take comfort, however, in EG’s assessment of 15 percent odds of a Ukrainian turn towards Russia.)  

EG’s analysis makes sense in light of what Reddaway writes, and what I’ve mentioned here and elsewhere.  “Unprecedented strain on political systems” is most dangerous in places like Russia, where extreme resistance to change is baked into the cake.  Such resistance is necessary for the system to survive in normal times.  But it can be fatal in abnormal ones.  

I’ve never said that a cataclysm in Russia is a probability 1 event.  I have said consistently that the structure of the system makes it more vulnerable to cataclysm than most other major nations.  The Reddaway and EG pieces take a similar view.

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  1. To quote a commenter from the second article, “I’m 95% confident this is a load of rubbish”. 😉

    Comment by Sublime Oblivion — April 28, 2009 @ 8:53 pm

  2. […] they were close to signing a deal on the South Stream gas pipeline to Europe after resolving One R Short of a BRIC – 04/29/2009 A couple of pieces caught my eye today.  Each discusses the […]

    Pingback by Ладушки.Net » Blog Archive » Posts about Putin as of 29/04/2009 — April 29, 2009 @ 3:26 am

  3. What’s rubbish is that anyone could be a big enough moron to question Russia’s instability when it has
    spectacularly collapsed before our gaping eyes not once but twice in the past century.

    I wonder what Sublime Moron will say when Russia actually does collapse once again. Oops, that’s one on
    me? I doubt that will be much comfort to the Russians who, unlike the Moron, have to live through it.

    Comment by La Russophobe — May 1, 2009 @ 3:03 pm

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