Streetwise Professor

January 19, 2009

Rent

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 9:38 pm

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.

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8 Comments »

  1. Professor:

    With all due respect, you kind of over thinking this whole thing.

    Is there a chance there might be civil unrest? Sure, there’s always a chance. Is it likely. I don’t think so. I would suggest that any analogies between the 1970’s in the Soviet Union and far-fetched. There’s a huge difference in the way people live today compared to then.

    Excluding the bottom 25% (which we would also do when speaking about almost any country), life for the “average Sergei” is pretty good today. People have all the basic necessities of life. Some more than others, of course but generally when you walk around any large Russia city today it is light years away from where it was just 15 years ago. Civil unrest will only occur when people’s access to basic necessities is threatened. I, personally, don’t see that happening here in Russia any time soon.

    The other thing to keep in mind is that 10 years ago, the crisis is Russia was a uniquely Russian problem. Not so today. Today the financial crisis is worldwide. Spain just got downgraded to AA+ yesterday. Ukraine has seen its currency drop 50%. Iceland is bankrupt. The US banking system is barely functioning. And on and on.

    Russians, despite what some may wish to be the truth, are as well informed as any other developed country in terms of economic and political events. Sure, the top couple TV channels may not personally or directly insult the Russian President (analogous to the deference and respect our US military shows to the office of US President) but they do show a wide breathe of news coverage from around the world. Russians understand that this crisis is not solely to be blamed on Putin or Medvedev. Russians understand that people everywhere are losing their jobs and life is getting tougher.

    This awareness on the part of average Russians make civil unrest much more unlikely. Bottom-line: Russians are so much happier and hopeful today than they were 10 or 15 years ago. People generally prefer stability over opportunity. While it’s not impossible that there will be pockets of discontent and protest (e.g. Vladivostok here or the Chicago factory sit-in in the US), it does not therefore, automatically follow that a whole country will explode with outrage.

    So, I suggest that you guys don’t go holding your breathe on the imminent loss of power by the current Russian government due to civil unrest. You guys will be blue in the face before it happens. But hey, it’s a free country and hope is the last thing to die, so suit yourselves.

    Comment by Timothy Post — January 20, 2009 @ 2:57 am

  2. To add to the above, all Russia has seen so far is a few disgruntled used imported car fans kicking up a little fuss in the Far East. Whereas Greece is paralyzed by nationwide riots for a month, car torching is once again a favorite French pastime and the Parliament buildings of Latvia and Lithuania have come under direct assault.

    Comment by Da Russophile — January 20, 2009 @ 5:33 am

  3. Timothy, your comment “Russians, despite what some may wish to be the truth, are as well informed as any other developed country in terms of economic and political events”, please, that’s ridiculous. For starters, all of the tv channels where most Russians get their information are Kremlin controlled. The press has been put on notice not to report on the financial crisis in any manner not approved by the Kremlin. 80% of Russians have no internet access. That’s a pretty pathetic statistic for a developed country. Those are the facts regardless of whatever “truth” you want to fashion out of them.

    The vast majority of Russians haven’t gotten a lot out of Putin’s Kremlin. The infrastructure is still rotten. Private property rights, the bed rock of middle class home ownership in the west, are unresolved. Corruption on all levels has been accelerating. The rural areas are as backwards as ever. I could go on. And now most of the economic gains in the past ten years are being reversed.

    Maybe you ought to spend some time at LiveJournal where Russians with internet access hang out for some insights into how much Putin is disliked. You don’t speak for them.

    Comment by penny — January 20, 2009 @ 11:09 am

  4. Penny:

    I speak to Russians every day of the week from all walks of life and while the older generation is not super well informed the younger generation is indistinguishable from their counterparts in other countries around the world. Those people who care about politics, economics, culture, etc. have access through the internet, magazines, and cable channels.

    Your figure of 80% without internet access is without any context and therefore not understandable. Is the figure for households with internet access, is it the number of people who access the intrenet once per month, once per week, is it people with computers. Statistics need context. the reality is that anyone who has $20 bucks a month can get internet installed in their apartment or home if they live in one of the larger cities in Russia. Therefore, in a city like Krasnodar (approx 1 million) 100% of the people have access to the internet. Do all get it? Nope? Should we mandate it?

    The real question of interest is what percent of young people, under 40, use the internet on a weekly basis whether at work, school, friends, internet cafe, or home. That number in the big cities is way above 50%. You can go hang out at zse-zse but I prefer to hang-out at vkontakte.ru and odnoklassniki.ru

    Bottom-line Penny, and I’m kind of getting tired to repeating it to people like you who don’t care about reality, is that Russia isn’t perfect but it’s one hell of a lot better than you make it out to be. By the way, who are you Penny? Why the anonymity? What’s with you hate filled anonymous Russophobes?

    Comment by Timothy Post — January 20, 2009 @ 3:03 pm

  5. Timothy, your anecdotal evidence of how well things are in Russia – “I speak to Russians every day” – is pathetic and meaningless. Surely you can do better than that.

    80% of Russians have no access to the internet whether it’s the lack of a computer or a service provider or the money to pay the service provider what’s it matter. There are many Russians that care about politics, economics and culture surely that outside of the lucky 20% that would like that connect too.

    And, as to who I am, I’m a person that posts with the first name of Penny. I could be a canine savant at a keyboard for all that it matters. Who are past your self-reported name and bio? Really.

    Comment by penny — January 20, 2009 @ 4:29 pm

  6. Penny:

    Just like La Russophobe, eh? Spineless little think tank types who troll around the internet trying to smear everyone who doesn’t hold their hate-filled opinions. Perhaps you too ought to go work for the Jamestown Foundation?

    As for your pristine statistics, they can mean whatever you want them to mean. I’ll take my own experiences in Russia over the Levada Center’s numbers any day. At least I don’t have a hidden agenda. I openly call it like I see it. Too bad you need to hid behind the curtain.

    Comment by Timothy Post — January 21, 2009 @ 3:47 am

  7. “Too bad you need to hid behind the curtain.”

    Timothy, get your head screwed on, not everyone posting on the internet regularly with opinions that you didn’t like belongs to some nefarious anti-Russian organization. It’s laughable and shades of a sovok/Putin mentality to try to discredit others in that manner.

    You bring forth regularly anecdotal truths from your little space in Russia which are factually dismissable. Talking to my neighbors doesn’t have the same validity as the US Census Bureau, Dept. of Labour unemployment claims filed, CDC statistics, clinical trials, etc, wherever people go to find verifiable facts in any country. You also display arrogance in stating that “those people who care about politics, economics, culture, etc. have access through the internet, magazines, and cable channels.” by overlooking that many of the 80% without the internet care too. It’s stunningly smacks of elitism.

    I take it that your little gig in Russia is also your livelihood, any chance that maybe you have an agenda in play? Or, you’ve just got some ideological affinity for autocratic governments?

    Comment by penny — January 21, 2009 @ 3:25 pm

  8. Penny:

    The internet is a great tool for having debates and exchanging information. However, it is also populated by little “trolls” we post comments anonymously and throw darts without any responsibility. You are spineless troll.

    New rule (for me anyway) is not to engage in useless debate with people who don’t have the common courtesy to speak on the record. Ciao, I’m done.

    Comment by Timothy Post — January 22, 2009 @ 1:56 am

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