Streetwise Professor

May 8, 2012

Putin Redux: Purgatory Will Persist, the Hamster Wheel Will Just Keep Spinning

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 11:48 am

Much has been written about Putin’s resumption of the Russian presidency. Much of it relates to economics. Much of it is silly.

This article from the FT’s Beyond Brics blog summarizes a lot of the silliness that is spun by those making the “bullish” case for a Putin return:

The bulls can put together a persuasive story: Putin 2.0 cannot run the economy as he did in his first two presidential terms in 2000-8 or as prime minister in 2008-12 because he can no longer rely on rapidly rising oil prices.

. . . .

Therefore, so the bull argument goes, Putin must pursue economic reform, including market liberalisation, privatisation, reducing red tape and fighting corruption. Otherwise Russia cannot generate the economic growth needed to transform itself into a fully-functioning modern society. Finance minister Anton Siluanov said on Monday Russia required growth of 5.6 per cent annually, (not the 3.4 per cent forecast by the government for 2012).

. . . .

So, say the bulls, Putin will change because he must. At the age of 59, he will be thinking of his legacy, and he won’t want to be remembered as the man who created a historic opportunity to modernise his country – only to waste it.

Most of that is nonsense on stilts.  Or, more accurately it is projection on stilts: it accurately summarizes what Putin should do if his objective was to create a modern Russian economy with self-sustaining growth, which is what the bulls think a “normal” country and a “normal” leader would do.

But that totally misses the way the Russian system works, and what Putinism is about.  It misses that Russia is a natural state, and that the system is structured to benefit the elites and uses control of resources to keep a balance among the elites in order to maintain political stability.  Creating a dynamic system, a modern system, would fatally undermine this equilibrium.  Moreover, in this system, corruption is a feature, not a bug.

As I noted yesterday, Putin is already signaling clearly that he will brook no opposition, and will bring down the batons on anyone with the audacity to raise his head.  This is one aspect of maintaining political control.  Maintaining control of the economic levers is another.   Putin may talk modernism, but he walks traditionalism, meaning a traditional, natural, authoritarian state where economic policy is all about distributing rents and maintaining control of economic resources in order to protect the elite and their property.

And although Putin may talk about moving beyond oil and gas, he’s not walking away from it.  To the contrary.  He is avidly pursuing energy deals with western companies (h/t R), and touting these deals to anyone who will listen.  Steve LeVine argues Putin is “good for business” but the businesses LeVine mentions are notably the big western energy companies.

Some (including LeVine, it appears) rationalize this as a means of funding and pivoting to a more modern economy.  Such beliefs are truly a triumph of hope over experience.  Sergei Guriev has written often and powerfully about this.

Further note that although Putin announced privatizations, energy was clearly off the table:

In the decrees, Putin said he wanted the government to sell its stakes in firms which do not belong to natural resources or defence sectors and are not natural monopolies. That would require a change to the state’s privatisation programme when he wanted in place by Nov. 1, he added.

This strongly suggests that Sechin has prevailed, and that what is old is new again.

Other aspects of Putin’s newly announced programs are purely aspirational, decrees to achieve wonderful economic outcomes, but with no concrete policies that could actually achieve them:

Putin ordered the government to take measures to raise capital investment to no less than 25 percent of GDP in 2015, from the current level of 20 percent, and to create 25 million high productivity jobs by 2020.

He also called for a 50 percent increase in labour productivity by 2018 and a 30 percent increase in the share of high tech products in GDP in order to lessen Russia’s dependency on natural resources.

Uhm, just how, exactly?  This is redolent of Soviet planning, with the center setting ambitious targets.  The difference being that it’s easier to do that with something like steel production, especially when you can shoot people who don’t perform, and dragoon peasants from the farms to the factories and dragoon the peasants who stay behind into feeding those who left.  Not so easy to do in a modern economy.

Putin seems to recognize this (h/t R again):

In characteristically colorful language, Putin struck back by blaming the economic difficulties on the Communists who ruled the Soviet Union until 1991. The Soviet economy was based on heavy industry and produced shoddy consumer goods.

“Yes, my dears, there’s no need to discuss this,” Putin said. “The point is that what we produced — and no need to wave your arms — no one needed. No one bought our galoshes except for Africans who had to walk on hot sand.”

That’s great that he recognizes the obvious, but it’s a long way from that to understanding how to create a system that generates 25 million high productivity jobs and increases the role of high tech in the country.  It’s further still from such an understanding to a willingness to take the measures necessary-measures that would undermine his power, his wealth, the wealth of the elite, and the stability of the political system.

And he’s all about stability.  When analyzing the actual policies he pursues, rather than the pie-in-the-sky rhetoric, you have to start from that fact, rather than projecting western political “it’s the economy stupid” attitudes onto him.  Putin understands Soviet failures, and will not repeat them.  But he also understands the mortal dangers that a rule based, competitive system would pose to him and the elites.  He will steer a middle course, a natural state course.  He will continue on, pretty much as before.

Another “bull” point (with “bull” being accurate in more ways than one) in the Beyond Brics article is that Putin will change to ensure his legacy.   I think that’s farcical for the reasons just discussed, but it is completely unrealistic for other reasons as well.  First, although it is not historically unprecedented, it is extremely rare for aging leaders to change dramatically.  Hell, it’s extremely rare for aging people period to change dramatically.  Indeed, habits and tendencies tend to become progressively more defined and rigid as one ages.   For someone as arrogant as Putin, in particular, it is delusional to think he will conclude that he has to change dramatically.  Second, change requires receiving realistic feedback.  Authoritarian systems generally, and Putin’s in particular, have disconnected most of the feedback mechanisms: elections, a free media.  The crackdown on the opposition (including today’s lovely threats to smear their livers on the sidewalk) may succeed in its object, but in so doing will short circuit another source of feedback.  The natural authoritarian tendency for leaders to surround themselves with sycophants, and for sycophants to rise to the top because sycophancy is the primary fitness trait in such regimes, further isolates the leader from reality.

Some of Putin’s other decrees are particularly idiotic:

Putin bound the government to reduce mortgage loan rates to 2.2 percent by 2018.

He also pushed for state measures to increase real wages 1.4-1.5-fold by 2018. The average lifespan in Russia must reach at least 74 year Putin said in a decree.

2.2 percent? Really? What’s he doing? Trying to create a real estate bubble? That always ends so well!

And just what state measures can increase wages 50 percent in 6 years?  Why hasn’t any other state figured out how to do that?  And how is lifespan to be increased by decree? He might as well order the tides to stop: Canute knew better than this, but pace the sycophancy point, who in Russia is going to tell him so?  And would Putin play Canute to chide the sycophants around him? Please.

No.  There will be no modernization to speak of.  Putin’s Purgatory will continue, and become more stagnant and corrupt.  The hamster wheel from hell will keep on spinning, until it falls apart or is knocked over by some shock that turns off the tap of resource rents that is essential to its operation.

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  1. “As I noted yesterday, Putin is already signaling clearly that he will brook no opposition, and will bring down the batons on anyone with the audacity to raise his head.”

    Our dear Professor,

    We fear that you have misspelled “…to throw a Molotov Cocktail.”

    Comment by a — May 8, 2012 @ 3:53 pm

  2. Those who can’t think, command.

    Comment by sotos — May 9, 2012 @ 4:17 pm

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