Russian Economic Reform

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Putin, Chubais, the Euro and the USSR!

Published on October 09 2011
Posted by: jeff

When trying to change a country or region it makes lot of sense to try to integrate economic goals with those political so that the two facilitate each other. But, there can be two types of problems in doing this.

One type of problem is that the economic and political actions are not sufficiently coordinated, with the result that there is under-achievement of both. The second type of problem arises when one type of action is intended and used as a way of forcing change in the other; and in this case there the results can be worse than underachievement – indeed, they can be quite destructive!

An example of the first type of problem is, in my view, the present lack of development in the Russian political system which is impeding development of flexibility and efficiency in the economic system. There is nothing particularly dangerous about this. Rather, it means that the economic performance is not as good as it could be.

Other examples include the post-second world war history of Turkey (where the political system held-back economic performance for decades), and possibly India (where a chaotic political system impedes economic development). For the last 30 years China has successfully combined the two because its rigid political system has largely facilitated economic development based on large scale production of goods; but successful movement into a more service orientated type of economy will require a more nimble political system.  

An example of the second type of change where one goal is used to try to force change in the other, with ultimately destructive consequences, was the efforts of the early Russian economic reformers (Chubais, Gaider etc) to use economic changes – in the form of quick and large scale privatization – to force a change in the political system (ie the permanent end of communism). Many of the present-day problems in the Russian economic and political systems are the result of (often well-intentioned) actions taken in the 1990’s. The resultant  economic system was distorted, and political development actually went backwards.

Political goals are generally much more emotional issues than economic goals, in part because the latter are more quantifiable. When human beings consider what they want to achieve, they are more likely to think rationally about specific and quantifiable economic actions which give an emotionally satisfying political outcome – than to rationally and unemotionally think about a political process to give specific quantifiable economic results. Because the desired political results are more emotional and less quantifiable that the desired economic results, they also have a greater chance of being unrealistic.

Thus, the Euro is an economic project ultimately based on attempts to achieve political goals of peace, coordination or even “union”. Some countries were included in the EU and then the Euro because it was thought that this would essentially compel some political results (including political actions in the budget policy process). But, as we now see, the unrealistic nature of the desired political result has put in danger the economic mechanism itself. It is clear that Greece, for example, should never have been admitted into the Euro.

So, now we can talk about Vladimir Putin and his “common economic space” (arising from the customs union of Russia, Belarus and Kazakhstan) and his idea of an eventual “Eurasian Union”.

This issue is being examined by Working Group 21. Given that Putin is the “куратор” (curator or supervisor) of the Strategy2020 project, I have often wondered why it is ranked number 21. It might be that the list was prepared by others (mainly academics) involved in the project, and that after listing internal Russian economic (and social) issues they then turned to international ones. However, I am sure that if it came to prioritizing the groups, Putin would give a much higher ranking to “Development of economic and social integration in the post-Soviet area”.

Working Group 21 has produced little in the way of rational justification for the emphasis that Putin is now putting on this issue.

Izvestia published an article by Putin on October 4 titled “The New Integration Project for Eurasia: A Future That Begins Today”. After praising the economic integration efforts made so far, Putin wrote: “We must not stop at this, but set for ourselves an ambitious goal: to reach the next, higher level of integration – the Eurasian Union.”

In my view, Putin is being driven on this issue by his emotions – a point made by a number of other commentators. He is trying to use achievement of an economic goal to force development of an ultimate political goal.

It won’t work and, in my view, there will be negative consequences.

Putin’s focus on this issue will divert attention and resources away from the work of many of the other 21 Groups which could have a far more beneficial effect on the Russian economy. However, the damage will be limited provided that Putin does not attempt to overplay his hand and attempt to use economic cooperation to force along greater political and defense cooperation among the countries in the “common economic space” – ie if he does not attempt to force the creation of a Eurasian Union.

In the Izvestia article, Putin also suggested that the Eurasian Union would aim to be one of the “poles of the modern world”. It is this emotional desire that could prompt him to over-play his hand by – for example – attempting to push the ruble as a official regional currency.

It can seem for some time that everything is going along well in such a situation, but (as demonstrated by the Euro etc) the fundamental issues will ultimately reassert themselves. In the Eurasian Union case, none of the possible candidate countries for this organization want to be dictated to by Russia – be they led by their own mostly dictatorial leaders or the citizenry who could at an unexpected time end up in a revolutionary driving seat.

Just imagine, if France did not exist – but Germany had suggested some decades ago the formation of an EU that consisted only of itself and neighboring small countries. Would there have been many takers? Hardly likely! Maybe one or two. Most would have been afraid of German domination.

It is conceivable that the Ukraine could join a Eurasian Union and play a similar the role to that of France as a counter-weight to Russian, but don’t hold your breath! Whatever it’s present – largely self-inflicted – problems, the Ukraine would never get any sort of domestic consensus to be able to negotiate about and be part of such an Eurasian Union.

As for Central Asia, there is a lot of interest in developing “easterly” rather than Russian relations and cooperation – even in the currency field!

Generally, Russia could get some benefits – although hardly significant – from Putin’s emotional attachment to this issue. But if he pushes too hard on the “poles of the modern world” type-stuff he will probably end up with less than he has now. 

This whole issue has caused some excited comment in parts of the Western media. As for me, I remain distinctly underwhelmed. See my article/blog of 13 July on this issue (go to right hand column and click on Expert Group 21).