COMMENT: Is Russia stagnating?

COMMENT: Is Russia stagnating?
Mining operation in Russia, where the economic stagnation increasingly looks like Latin America's 'lost decade'.
By Mark Adomanis in Philadelphia March 7, 2016

Mark Galeotti is, in my humble estimation, one of the very best Russia analysts in the game today – a rare voice who can effectively and eloquently criticize Russia without lapsing into overheated nonsense about “Nigeria with snow”. More than most Westerners, for whom Russia is often perceived as equal parts malevolent and pitiful, Galeotti understands that the country has real strengths, including a highly educated and adaptable military establishment, that make it a consequential actor on the world stage.

So it’s with some trepidation that I push back against one of his recent columns for bne IntelliNews which argues that today’s Russia is heading towards “something that increasingly resembles the period zastoya, the ‘time of stagnation’ of the 1970s, when Brezhnev allowed economic decline, military adventurism, and public disillusion to build to up to a level that proved beyond redemption”.

I don’t think this is right, but it’s important to be very specific and detailed about why I don’t think that Russia is going to reprise the Brezhnev-era zastoi or something resembling it. This argument has nothing to do with the public spiritedness of the authorities or the wisdom of Vladimir Putin’s inner circle. Galeotti is, at least in my mind, appropriately withering about the Kremlin’s obsession with tactics and ignorance of long-term strategy. My skepticism has everything to do with the basic institutional building blocks of Russia’s (highly imperfect) capitalist economy. Essentially, I think that the fundamental contours of Russia’s economy make a repeat of the 1970s an impossibility: the degree of state interference in economic life which defined the command economy doesn’t exit any more, and (barring some truly radical policy changes) isn’t ever going to come back.

Historical freezes

Consider one of the problems that is currently causing significant headaches for the Russian authorities: inflation. Polls routinely show that inflation is the average Russian’s most significant concern, ahead of every other political, social and economic problem. Ever since oil prices started to collapse in late 2014 and the ruble was “floated”, the Central Bank of Russia and other economic policymakers have been frantically trying to keep prices from spiraling out of control by, among other things, forcing through a massive middle-of-the-night hike in interest rates.

Under Brezhnev inflation wasn’t a problem, or at least treated as a problem, because the authorities had “solved” it by freezing prices for a whole host of goods. It’s been a little while since my course on Soviet economic history, but if I recall correctly, prices for the most basic consumer goods (such as bread) were frozen for the better part of a half century. Consumers didn’t have to worry about rising prices because the authorities didn’t allow prices to change. This, of course, didn’t actually “solve” inflation (inflation is an essential part of any economic system), but it did mean that, under Brezhnev, it manifested itself in an entirely different manner.

Analysis of virtually any other economic topic, the ruble’s exchange rate versus the dollar for example, would tell a broadly similar tale of fundamental discontinuity between the 1970s and today. Consider the amount of ink spilled over the past year describing the “collapse” of Russia’s currency. This is an important issue because Russians consume quite a lot of imported goods and, as the ruble has slumped, these goods have become much more expensive in ruble terms. A weak ruble also puts foreign vacations, which the middle class has embraced with gusto, also increasingly out of reach. The currency situation appears to have (momentarily?) stabilized, but this was a real political issue with real consequences for the popularity of the government.

Was the situation the same during Brezhnev’s stagnation? Were fluctuations in the currency market potentially important as a political issue? Well, no. The average Brezhnev-era factory worker didn’t particularly care about the ruble’s strength versus the dollar because ordinary citizens weren’t allowed to own foreign currency. The ruble’s value on the forex market was fixed at a completely arbitrary government-established level, and only a tiny section of the elite were ever allowed to use this exchange rate. This almost absurd degree of government intervention had a host of other (largely unseen) costs. It certainly didn’t mean that Soviet monetary policy was effective, but it did mean that the authorities were politically insulated from currency movements in a way that Putin’s government is not.

Essentially, as a more or less free-market economy, Russia’s “transmission lines” of economic information function much better than they ever did under Brezhnev. The ruble, for example, responds almost immediately to changes in government policy or in the oil market, as does the inflation rate. This is also the case with Russia’s state finances, where the market very rapidly, almost instantaneously processes new information to determine how much government bonds should cost, or how much investors should pay to guard against default.

Lost decade reprised

This rapid processing of information, unfortunately, doesn’t mean that the Russian government cannot implement terrible policies. Policy over the past several years has, pretty obviously, been far from ideal. But it does mean that the cost of the policies becomes apparent very quickly. Arguably, this has also restrained the authorities’ worst impulses: many in the Kremlin wanted to keep the ruble at a “managed” level, but the costs of doing so compelled them to move to a free-float. This was not the case under Brezhnev, where a byzantine array of cross-subsidies, wage and price controls, and government-established output targets meant that economic problems could be, and were, pushed under the rug for an extended period of time.

A free market doesn’t mean that Russia’s economy is necessarily headed for a shining future. Output could conceivably grow at a level that would feel like “stagnation” to most of the population. But if you’re looking for an example of what this would look or feel like, I would suggest not the Brezhnev-era Soviet Union but Latin America in the “lost decade” of the 1980s: severe economic problems, yes, but nothing like the systematic, top-to-bottom rot of the late-stage Soviet Union.

Follow @MarkAdomanis – Wharton MBA by day, Russia analyst by night.


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