by Gary Littlejohn for The Saker Blog
Part 1: Divergent views on the Russian Economy
While there is widespread consensus in the West about the nature of Russian politics and the Russian economy, my own view is that the Western consensus is wide of the mark, being based on a naive acceptance of stereotypes that are at best outdated, originating as they do from either the Yeltsin years or the Soviet period. These predominant views fundamentally fail to take account of the changes in the Russian economy, society and politics during the Putin/Medvedev years.
Instead I wish to concentrate firstly on the friendly discussion by Alexander Mercouris and The Saker on the idea of a distinction between Atlantic Integrationists and Eurasian Sovereignists in Russia. The basic argument of Mercouris (responding to The Saker) can be found here:
The rejoinder by The Saker can be found here:
There is an additional discussion of the continuity of the senior personnel in government here:
The Saker has changed the terminology in the latter piece, basically using WTO/WB/IMF as a term for the views either of those simply influenced by the still-dominant Western economic ideology or of those who are consciously working to maintain/restore Western dominance over Russian politics and economic policy. One could shorten this further, by referring to those supporting the International Financial Institutions (IFIs). That is not to deny that military means and colour revolutions are used by Neocons and Western proxies to maintain the dominance of the Washington Consensus, but it does enable one to include people who simply accept this ideology as the natural order of things without consciously forming part of a Fifth Column (as other commentators call this tendency within the Russian government, parts of the media, and some foreign-funded NGOs). In a more recent posting, The Saker uses this very terminology (5th Columnists) to refer to internal activities while arguing that foreign policy is still controlled by the Eurasian Sovereignists.
Mercouris is effectively arguing that those like Medvedev, Nabiulina and Kudrin are now well aware of the hostile intent of the West, but that they still think that the current Russian government approach to economic policy is largely correct in order to maintain the resilience of the economy in the face of sanctions. In the past I have fully agreed with Mercouris’s criticism that the rate of interest in Russia is too high, and that this is choking off investment and growth, while the Central Bank has effectively insisted that this is necessary to prevent the currency from declining and reigniting inflationary pressures. I felt that this was the wrong approach, given that the current oil price is unexpectedly high and the resultant revenues are being used to build up foreign exchange and gold reserves. Indeed the Russian government now plans to double gold production within a few years, using four newly discovered gold fields inside Russia. So even if the oil price drops suddenly again, this is may not have a significant impact on the exchange rate of the Rouble. So like Mercouris I have wondered why this policy of keeping interest rates well above the rate of inflation is still dominant.
Yet the recent sanctions against steel and aluminium and other trade sanctions imposed by the Trump administration have made me a little more sympathetic to this policy. The strong Russian holdings of foreign exchange and gold have enabled Russia to respond quickly and effectively to these sanctions, and to provide a huge amount of US dollars at very short notice to the state banks that supply the working capital to, for example, the Rusal aluminium company.
It is a moot point whether or not Russia did this in coordination with China, since China sold far fewer US Treasury Bills than Russia (about $ 5 billion, as against $47 billion in April for Russia) and other countries such as Belgium sold more. Yet it is evident that various countries will probably now move slowly to using other currencies than the US Dollar to finance international trade, and the use of gold by both Russia and China means that their currencies are readily convertible to gold, a point which will reassure other nervous countries trying to cope with US sanctions.
Yet all that does not mean that the current macroeconomic policy approach of the Russian government is necessarily the correct one to bring about a step-change increase in the rate of growth, as the Russian government expressly desires. It is not even clear that the tight monetary policy has been the main factor in the reduction in the rate of inflation, which is now down to 2.4 per cent. This large change from only a few years ago (when it was ten per cent or more) could well be largely the result of the increased agricultural output resulting in reduced food prices.
Meanwhile, it has since emerged from Putin’s recent “Direct Line” TV question and answer marathon that Putin claimed that one of the main reasons for keeping the same personnel in government during his fourth term as President was that they had spent the last two years preparing for the next six-year period of economic transformation, and so important time would have been lost in the induction of new people instead of proceeding to implement this new strategy. This is his response to the disappointment in some quarters from people hoping for a change of personnel in order for Russia to forge a new path for its economy, now that its basic resilience seemed to have been re-established following the sanctions of 2014. The new strategy was announced in Putin’s Address to the Nation on March 1 2018.
New Priorities from Putin’s Address to the Nation, March 1 2018.
Early in the speech Putin claimed that sustainability and stability were the foundations for development but not its guarantee, especially when so many problems remain unresolved. Despite Russia’s economic and defence potential, it had not reached the point of guaranteeing people’s quality of life and prosperity. “But we must do this, and we will do this.” To me, that implies a shift in emphasis from stability (including military security) to responding to the still low living standards of much of the population, while involving a much wider cross-section of society in further economic growth and prosperity. “Therefore, everything hinges on efforts to preserve the people of Russia and to guarantee the prosperity of our citizens. We must achieve a decisive breakthrough in this area.” This could be construed as vacuous electioneering, but Putin’s track record is that of a long-term strategist heading up a largely competent team, with collective discussion of policy. The solid foundation that has been laid, he claimed, meant that new tasks could be set and accomplished.
This is surely a signal of a change in direction. The main question is whether or not this new approach is a radical enough break with the past for “surging ahead and maintaining long term growth.” What is clear is that Putin thinks that technological changes will facilitate the achievement of this new programme, and that failure to cope with such changes will lead to the main threat, namely a more generalised lagging behind other countries or even no real future for Russia. A breakthrough is needed and the next few years will be decisive. This is hardly a complacent claim that the country can rest on its laurels now that the economy is stable and resilient. “Russia must firmly assert itself among the five largest global economies, and its per-capita GDP must increase by 50 percent by the middle of the next decade. This is a very difficult task. I am confident that we are ready to accomplish it.”
This is to be accompanied by investment in those cities, towns and villages that have not so far been upgraded: a major undertaking that would help raise living standards and improve the quality of life. “I propose launching a large-scale spatial development programme in Russia, which would include developing cities and other communities by at least doubling spending in this area over the next six years….” Some Western news media misrepresented this last statement by claiming that this meant that rural small towns and villages would be neglected, but the phrase “other communities” refers precisely to smaller settlements.
“It is obvious that the effort to develop cities and other communities goes hand in hand with the need to overcome challenges in other areas, including healthcare, education, environment and transport. Initiatives in all these segments will require additional funding…” “Urban renovation should be supported by the introduction of state-of-the-art construction technology and materials, modern architectural solutions, digital technology for social services, transport and utilities sectors (my emphasis). Among other things, this would make the housing and utilities sector more transparent and efficient, so that people receive quality services at a reasonable cost…” “This large-scale project brings the promise of better economic and social development prospects, a modern living environment, and a favourable climate for cultural and civil initiatives, for small businesses and start-ups. All this would facilitate the emergence of a large and creative middle class in Russia…”
The speech then covered modernising infrastructure, raising wages, making housing more affordable, changing taxation and a series of other specific measures. While the Western focus in covering this speech was on the security aspects in the final one-third of the speech, and the new weapons systems announced, it is clear that this was intended (at least for the home audience) to reassure people that any improvements could not be realistically threatened by foreign intervention. While it is clear that defence spending will now tend to plateau as a percentage of GNP (but probably increase in real terms if growth permits it) the American response to this section of the speech was to seek additional funding for a new arms race. This was precisely as predicted by The Saker.
The first place to look for the probability that the new approach outlined above is serious is surely the Presidential Inaugural Address.
Putin’s Inaugural Presidential Address
“We need breakthroughs in all areas of life. I strongly believe that only a free society that is open to all new and cutting-edge advances, while rejecting injustice, ignorance, crass conservatism and bureaucratic red tape, is capable of achieving these breakthroughs. We must cast aside everything that constrains people, prevents them from fully unleashing their potential and their talents, becoming a barrier for the development of the entire nation.”
“State and municipal authorities have a special responsibility. People have every right to expect matters that cause them concern to be resolved without delay, to have their proposals, observations and demands treated with due attention, so that such things as reputation, honour, generosity and openness become a norm of life for the officials at all levels of government.”
“We must give more freedom to entrepreneurs and researchers, to creative and active people who care, and to all who want to reinvent the world. For me, this is a guarantee of continuity in our strategy and efforts to promote steady development in Russia. I look forward to novel ideas and approaches, to the audacity of young people and their ability to lead the change.”
While these sentiments are a laudable attempt to engage and energize people behind the new strategy, these comments provide no detail on how the apparently new approach is to be implemented. Priorities are not clarified. This, coupled with the continuity of senior personnel, must raise questions in people’s minds about how fundamentally new this approach will actually be.
Putin rightly referred to the recent reduction in the number of people in poverty from about 42 million a few years ago to 20 million more recently, and pointed in this speech to the fact that the minimum wage would from May 2018 be at subsistence level. He is right that this will reduce the numbers in poverty still further, but that is happening under the existing macroeconomic policy approach. What precisely will the new approach consist of? It is evident that despite the continuity of personnel in the important economic policy government posts there is ongoing debate with quite divergent views being expressed.
Yet the Central Bank’s recent postponement of a further reduction in interest rates, while understandable, does beg the question of how easy it will be to move to a radically new approach when Western sanctions can be used to argue that stability is more important than growth. The counter pressure will come partly from the fact that even the fairly dramatic reductions in poverty still leave people in most parts of the country on a fairly low living standard and that without major investment to raise productivity this cannot easily be changed. Relying on Chinese investment or on Western companies that do sometimes manage to circumvent sanctions would probably fail to produce enough Foreign Direct Investment (FDI). Russian investment must increase. Are the recent improvements in the governance of the banking system enough to stimulate such an increase?
IFI Supporters versus Eurasian Sovereignists
Meanwhile, returning to the question of how seriously one should take the problems of support for the IFIs, my own views are influenced by my personal experience. In particular, it is evident to me that the Soviet Union did not simply collapse owing to its own flaws, but rather it was consciously brought down by concerted internal and external actions. Far from being unaware of the likelihood of such an end to the Soviet Union, some Western experts were actively discussing the prospects of this happening in April 1990, at a conference held in the UK at the University of Birmingham Centre for Russian and East European Studies (CREES). I was told about this conference within weeks by one of the participants, Professor Teodor Shanin. It is highly likely that the UK government was aware of this discussion of the difficulties facing the Soviet Union, because one of the CREES professors was a former UK Treasury official.
One of the problems facing the Soviet Union at the time was that of food production, including chickens, and rather than address this directly, the government simply imported chickens from the USA, running up foreign debt to finance it. Yet the economy was not growing quickly enough to enable this debt to be paid off quickly, and so the final coup de grace in the overall project to bring down the Soviet Union was simply to require it to repay such debts immediately. This was known to be impossible for practical purposes. An alternative candidate to Gorbachev was already in place, and when in response to the attempted coup in August 1991 Yeltsin stood defiantly on the famous tank, he already knew from US sources that there would be no military challenge to him in Moscow.
A subsequent challenge from the parliament to the Yeltsin government in September and October 1993 led to many dying at the Ostankino TV station.
While some of the demonstrators favouring the parliament’s views were armed and the Vympel group from the army sided with the ‘insurgents’, most of the army took the government side and the demonstrators were defeated. I recall the strong feelings still being expressed in Moscow in November 1993, with Barrikadnaya Square covered in slogans condemning the Russian army. So the consolidation of the Washington Consensus in Russia was achieved by force of arms.
This presumably led to changes within the government because in 1995 the former Soviet Prime Minister Primakov was appointed Foreign Minister, and he initiated a policy of underplaying Russia’s strengths until such time as Russia achieved a much stronger position. It is arguable that this approach spread to other parts of the government after Putin came to power, most notably in the Ministry of Defence where new weapons systems were quietly developed starting in about 2004, and larger reforms in the armed forces took place after the Georgian invasion of South Ossetia in 2008. The results of this approach became evident with the new weapons announced on 1st March 2018.
Yet the Putin government seemed to respond slowly to the activities of foreign-funded NGOs despite the clear evidence of colour revolutions in nearby countries, notably Ukraine and Georgia, prior to the armed coup against Yanukovich in Ukraine in 2014. This is surprising, because Putin made it clear to the then US Ambassador McFaul that he was aware that the US gave orders to some NGOs. Did this indicate a blind spot with regard to the ongoing influence of Western economic ideology? Not entirely, because alternative voices have been at least listened to, even if they have not been dominant in forming macroeconomic policy. Before discussing economic debates, however, it is necessary to look at recent Russian economic performance. This will be the focus of Part 2.
Part 2: A Rose-Tinted View of Russian Economic Performance
If there are serious flaws in the conventional Western understanding of Russia, what alternative aspects should be taken into account? How should one analyze Russian capabilities and economic policy or strategy? The following is an ‘armchair’ view, based on reading mostly English language sources on the Web. It will seem rose-tinted to those still fixated on outdated conceptions of Russia, and is intended to redress the balance in evaluating the contemporary Russian economy.
Russian economic strength and political cohesion
Many economists fail to appreciate the importance of social and political factors in assessing economic capabilities and potential. This lacuna in thinking is clearly evident among adherents of the Washington Consensus, and it leads to an underestimation of the capacity for rapid change when adverse circumstances are met by a population with high morale. Thus broader aspects of Russian society surely need to be included when assessing its economic potential. For example, Russia remains one of the most literate societies on earth, and despite the large increase in the use of social media, Russians still read more than any other nation.
In spite of what is recognised as a serious decline in the quality of courses at many universities, the overall level of education of the general population remains high, largely owing to the legacy effect of high levels of education in Soviet times. This included an excellence in computing and in the natural sciences that was largely unrecognised in the West. Nevertheless, it is currently understood within the relevant ministry that the standards of higher education have fallen since then, and that action needs to be taken. The Presidential decree of 7 May 2018 discussed in Part 3 gives the latest official response to this problem, but before this contact had been made with the Scottish Government in the UK to assess how higher education is administered there. This choice was probably made because the UK Office of National Statistics had found in 2014 that Scotland was the most highly educated country in Europe and among the most highly educated in the world in terms of tertiary educational attainment.
Yet the recent change in the demographic profile of Russia is perhaps more important than its high educational level. Unlike most societies, Russia is not heading for a demographic crash. The measures introduced to reverse the demographic decline of the Yeltsin years have produced results in the last few years. In addition, marriage rates among the young are increasing, which is evidently an effect of the growing influence of Russian Orthodox Christianity. The stabilisation of the population, and now mild demographic growth, means that effective demand will continue to rise, owing to population growth and to increasing living standards.
The birth-rate is now up above replacement levels, including among ethnic Russians. Non-Russian ethnic minorities have traditionally had higher birth rates, and this is still true even without the former Central Asian republics being counted since the demise of the Soviet Union. Interestingly, in the recent “Direct Line” TV Q & A session, Putin instructed the relevant minister that the process of granting citizenship to ethnic Russians wishing to settle in Russia should be speeded up, so the population will increase more quickly than the natural birth rate would lead one to expect. Furthermore, the death rate has suddenly declined quite noticeably in the last year or two. This is primarily because men are drinking and smoking less, and taking more exercise: a sharp contrast to the disaster of the Yeltsin years. I take this to be an indication that men once again feel that they have a stake in society and that there are worthwhile and interesting jobs to do. That change in attitudes is perhaps most evident in the increase in the prestige of the armed forces themselves since 1998, and especially since 2008 when major reforms started to be introduced.
Social cohesion seems to be increasing, despite some ongoing prejudice against immigrants from the Central Asian republics. For example, the Russian government apparently felt no qualms about sending Muslim Chechen military police into the ‘de-escalation zones’ of the Syrian conflict despite the fact that many of the Russian citizens who joined the jihadist groups in Syria are Muslim Chechen survivors of the conflict of the late 1990s and the early Putin years. This lack of hostility to ethnic minorities is evident from recent opinion polls, but it there is resistance to different ethnic groups arriving from abroad.
In addition to such basic social changes, support for Putin personally remains high, and reforms of governance are slowly showing an impact, including in the IMF index of ‘ease of doing business’. More generally, since about 1998 oil and gas revenues have been used to build up two sovereign wealth funds and to diversify the economy in terms of new sectors and technological innovation. Despite the drop in the oil price in 2014, such revenues have made it possible to keep a very low ratio of government debt to GDP, at about 7 per cent. The state budget has recently been calculated on the basis that the price of oil will be USD 40 per barrel, even though it is now a good bit higher than that. A recent analysis indicated that if the oil price remained at or above USD 53 per barrel, then the annual budget deficit would turn into a surplus in 2018. Since then, that is precisely what has happened, with the oil price now above $60. The increased revenues are being fed into government reserves, rather than into higher state expenditure, to increase resilience in case of further sanctions.
That recent analysis of the potential impact of increased oil prices, now overtaken by events, is presumably based on the assumption of fairly static oil sales, but the Power of Siberia pipeline to China is due to open in 2018, and for gas the Yamal Liquefied Natural Gas (LNG) field started shipping in December 2017. Russia also plans to spend $ 80 billion on new pipelines in the next few years.
In the longer term, Russia has just negotiated a deal with Venezuela to open two unexploited oilfields there, with a 30 year deal to take all the profits and pay tax in Venezuela. It is proceeding with another oil pipeline into China and recently received the necessary permit to bring the Turk Stream gas pipeline ashore in Turkey. It has stipulated that it will only extend this pipeline into southern Europe if the EU gives it cast-iron guarantees that the regulatory regime will not be changed during or after construction. Despite opposition from the European Commission, Poland, Denmark and Sweden, it seems highly probable that the Nord Stream 2 pipeline though the Baltic Sea to Germany will be completed. Denmark has yet to formally accept this.
The Russian government growth forecast for 2018 was 2.2 per cent, up from 1.7 per cent for 2017. Goldman Sachs has a higher forecast for 2018 of 3.3 per cent, and for the first time in years wages are rising faster than inflation. It will be seen later that the rate of growth may well be substantially higher than these forecasts, despite the most recent government estimate of only 1.3 per cent for the first quarter of 2018. Yet even that would give an annualised growth rate of 5.2 per cent.
Economic sanctions have galvanised Russian decision-making in re-organising priorities to insulate the economy from the adverse effects of these sanctions. Despite the fact that economic growth restarted in the third quarter of 2016, only about two years after post-Maidan sanctions were introduced, there is still a very active programme of promoting import substitution, with specific sectors being listed amounting to about 750 products. In addition, the possibility of spectacular growth of agriculture beckons, partly owing to such import substitution but mainly owing to the fortuitous coincidence that just as these sanctions were introduced, a 70-year long non-GM programme of breeding new varieties of wheat came to fruition. These varieties of winter wheat are free of the disease ‘wheat rust’ and can grow in cool conditions and on poor soil. Whereas in Soviet times only about 11 per cent of the land was considered arable, these new varieties can grow in vast new areas of Russia. The result is that even with the loss of land compared to Soviet times owing to the independence of the former Soviet republics, most notably Kazakhstan and Ukraine, Soviet wheat production records have been broken by Russia in 2017, despite slightly worse weather than in 2016.
The implications of this for the global economy are considerable. In 2016, the US Department of Agriculture recognised that Russian exports of wheat exceeded the combined exports of the USA and Canada, formerly the two major wheat exporters in the world. Within Russia, wheat is now being used as animal feed, especially for pigs, for domestic consumption and to export products to China. Other countries are now accepting such imports, and this market is likely to grow rapidly. I expect wheat-fed chicken exports to follow this pattern. Russia stopped importing American chicken meat some years ago. Since 2016, agricultural exports have been greater in value terms than arms exports.
The implication of this is that exports of food and hydrocarbons as well as import substitution will continue to boost the balance of payments and fund ongoing high-tech innovation. The most notable recent developments in hydrocarbons are the use of four new drilling techniques, such as plasma injection, to obtain more yields from old wells. This was contrary to Western experts’ predictions, and the ongoing production from wells considered to be close to exhaustion has been accompanied by the opening of new wells and gas fields in the Arctic. In the Nenets region of Yakutia, a new town of 30,000 on the edge of the Arctic Ocean was built in a few years, with French and Chinese participation. This is to support the development of the Yamal Liquefied Natural Gas (LNG) project mentioned above. This is the first time that Russia has entered the LNG market. A second LNG project is planned for Sakhalin Island. This is likely to export to Japan as well as China, since both countries are aware of the possibility of interdiction of oil and gas supplies from the Middle East at the Strait of Malacca.
At that same time, Russia has recently reversed its earlier decision to cut off gas supplies to Ukraine (and it is still exporting coal there). It is argued that this is to reduce opposition within the EU to the Nord Stream 2 pipeline. It is not yet clear whether or not continuing such gas supplies to Ukraine will entail an end to what Russia considers to be subsidies in the gas price to Ukraine. Although Russia had warned Ukraine and the EU in both December 2015 and January 2016 that it was going to cut off gas supplies to Ukraine in January 2019, there was no sign of any measures from the EU to ease gas supply problems to Hungary and other central European states. This may be why Russia changed its policies: it needs to maintain regular supplies to customers in central Europe, and presumably hopes that in future they transfer to Turk Stream supplies if the latter reach the EU.
The USA has been trying to reduce EU dependence on Russian gas, but its own LNG costs are above those of Russia, and while one such LNG terminal has been opened in Estonia, and another in Poland, the price differential makes this competition unlikely to have a great impact. Poland is also building a gas supply pipeline from Sweden. Yet while actively pursuing the Nord Stream 2 pipeline, Russia is also negotiating to have an LNG terminal built at Zeebrugge in Belgium. It is now being reported that the USA may be giving up on the idea of stopping the Nord Stream 2 pipeline, as a gesture prior to the forthcoming summit between Putin and Trump in Helsinki.
To complete the picture on the global energy market, it should be noted that Russia now has about 60 per cent of all contracts to build new nuclear power stations. A new market may well open up with the recent introduction of a floating nuclear power station in the Arctic. Another is under construction.
In the meantime, East Asia has become a rapidly growing market for Russia and for mutual trade and investment. Apart from Chinese investment in high speed rail networks, car manufacturing and banking in Russia, there are talks in progress to expand Russian-Japanese economic cooperation. Yet so far the Japanese response to these proposals has effectively ruled them out for the foreseeable future, and there could be opposition within Russia to such expensive infrastructure projects when so much still needs to be done within Russia. There are also discussions regarding rail links from South Korea through North Korea to Russia and China, and thence to Western Europe. It is unclear how the negotiations between the US and North Korea will affect such planned projects, but if implemented they would greatly reduce transport costs for South Korean consumer goods destined to Western Europe. The same should be the case for the Northern Sea Route through Arctic waters for trade from East Asia to Western Europe. Russia has been building new icebreakers to ensure that this trade route can be kept open, and has built or renovated about 10 military bases to safeguard this route from military attack over the North Pole.
Car production is increasingly concentrated in Kaluga Oblast’ southwest of Moscow with about 7 manufacturing companies building new factories there, the latest being Mercedes Benz. This manufacturing cluster includes a Chinese company. Meanwhile, Russia has used a project to develop a Presidential limousine and related vehicles to introduce new automotive technologies and/or replicate best practice from the West. This project will foster import substitution on electronics [90% produced in Russia] and is also notable for its 3-stage consultation for feedback from customers of Rolls Royce, Bentley and Mercedes top-range cars. The most important technological innovations were the tyres (which can take 7 tonnes but perform like car tyres) and aluminium engine casting (upwards against gravity under pressure for a more even cast than in the West: hence stronger). This will be disseminated in other Russian car production fairly soon.
Pharmaceuticals provided by a Danish manufacturing facility are growing rapidly, in sharp contrast to the situation in the Soviet Union. The financial sector is benefiting from ongoing support and reform (including the closure of over 100 non-performing banks in recent years) as well as infrastructural support in the form of the large new financial centre in Moscow.
Many commentators see Russia as technologically backward and yet it is entering the civil aviation market, to some extent in cooperation with China. As with the more recent luxury car project, this started with support from foreign expertise, but rapidly developed into self-generated Russian innovation. Thus the Sukhoi Superjet 100-seat passenger aircraft has been on the market for a few years and is sold in China, but the MS 21 airliner, intended to rival the Boeing 737 Max and the Airbus A320 in the best-selling sector of the global civil aviation market, is showing markedly better performance characteristics in flight tests than these two existing airliners. In other high-tech areas, Russia is manufacturing its own computer chips; it has a search engine (Yandex) that rivals Google in Russia, as well as vKontakte (inContact) which competes with Facebook. On driverless vehicles, the Kamaz truck company claims to be ahead of Google and other Western competitors.
While the Russian economy is seen as relatively small, this is partly because GDP calculations are affected by currency exchange rates. The decline of the Rouble since 2014 has shrunk the apparent size of the economy. Yet there is good reason to think that in this context, Purchasing Power Parity [PPP] is a better measure. On PPP, in 2017 Russia almost overtook Germany as the fourth largest economy in the world. On the same measure, the UK is 9th. Russia is one of the three economies (the others being China and the USA) that operates in all major sectors. In other words ‘it makes everything’. As indicated above, where there are specific product gaps, there are already explicit plans in place to manufacture those as well. This very broad-based industrial, services and agricultural capacity has huge implications that do not seem to register in Western analyses, including the increasing ability to withstand sanctions and embargoes.
The growth in the financial and services sectors (Aeroflot has a very high consumer satisfaction rating these days) means that Russia is increasingly able to withstand financial attack in the form of currency speculation, investors’ strikes, government and corporate debt and so on. It has developed its own software-compatible version of the SWIFT international payments system, and this is also compatible with the Chinese equivalent, making both countries better able to withstand exclusion from Western financial institutions. In addition, both Russia and China have been buying gold on the international markets, as well as increasing their own supplies by increasing gold-mining activity within their own borders. Russia also has the world’s largest supply of super-hard diamonds. So apart from other commodities, it has some that are inherently robust in conditions of financial crisis. The growing maturity of Russia’s financial sector is also reflected in the fact that it has developed its own credit card, and is negotiating with Visa and MasterCard for payments from this credit card to be accepted by those companies.
There is a sophisticated distributed ledger ‘blockchain’ sector, with cryptocurrencies such as Ethereum only forming a part of the activities. Globally, three of the five biggest blockchain companies are Russian, and serious consideration is being given to regulation of this growing sector. The Central Bank is fully aware of the dangers of currency fluctuations from cryptocurrencies. Yet cryptocurrencies are not the only possible application of blockchain technology: for example, an American has started up a private health-care company in Russia based on this technology. More importantly, it probably forms the basis for Putin’s remarks in his recent speeches about the use of digital technologies to provide better-quality government services to Russian citizens, and it also provides a means of making international payments that may avoid financial sanctions, albeit perhaps on a relatively small scale.
As indicated above, inflation has come down much more than the Central Bank expected. Because food prices have declined most quickly, this has benefited lower income families the most, and so the percentage of families living below the poverty line has fallen from 22 per cent in 2014 to 13 per cent in 2017. The macroeconomic result has been a reduction in the very high interest rates that have probably squeezed investment levels with consequent adverse effects on economic growth. The question already posed is whether this interest rate reduction is enough to stimulate faster growth. Unexpectedly, it is now being argued that the growth rate in 2018 is much faster than the government would have us believe.
The economist Jon Hellevig is claiming that the way that the Russian government calculates GDP does not conform to the international norms of the UN System of National Accounts (SNA) because it does not compensate for inflation in calculating the rate of growth, but rather uses a ‘quantity of material’ measure that subtracts far more from the ‘nominal’ growth rate than a ‘deflator’ that uses the current rate of inflation. To paraphrase, he states that the Russian statisticians are subtracting (in fact, discarding) the rise in national income that resulted from the recent increase in oil and gas prices because it was not accompanied by a growth in the volume of oil and gas exported. If this is true, then it is indeed a fundamental departure from the normal SNA method of calculating national income (GNP). The SNA approach measures income, in other words value not volume as he emphasises.
It follows that the real rate of growth for 2018 seems to be about 5.8 per cent in the first quarter of 2018, rather than the 1.3 per cent given in the latest government figures. This issue is discussed in Part 3.
Part 3: UN SNA Calculation and Advantages of International Comparability
Given Jon Hellevig’s claim that the rate of economic growth is now substantially higher than the official Russian government figure, one must return to the basics of how national income is calculated under the UN System of National Accounts (SNA). The latter should be seen as a useful means for countries to analyze their own performance, rather than a rigid orthodoxy, but these UN conventions do enable countries to compare performance at least in terms of income. Given that income taking account of international trade is affected by fluctuating currency exchange rates, it is quite acceptable to include the increased income that results purely from a price rise in the goods or services being exported, just as a decline in the international exchange rate of a currency would give a reduced income.
The latter scenario does not necessarily mean that the results for that economy are entirely negative. For example, Alexander Mercouris has argued that what was reported in the West as capital flight following the rapid decline of the Rouble in 2014 really consisted mainly of state-owned companies paying funds to their own foreign subsidiaries early to enable them to continue functioning in the context of sanctions. He also pointed out that even if hydrocarbon companies were earning less in US Dollars at this time, the decline in the Rouble meant such companies could pay more taxes in Roubles. Recent Russian capital flows can be seen here:
To examine in more detail why the SNA is best considered as a pragmatically useful tool, rather than a reporting straight jacket, one should look at the work of Richard Stone. He was the leading economist who developed this system, starting in the 1930s and influenced by the work of other economists but making an outstanding original contribution. The evolution of these ideas is covered comprehensively by Mauro Baranzini and GianDemetrio Marangoni (2015) Richard Stone: an Annotated Bibliography.
As they point out, at the end of World War 2, Stone began a process of collaboration with the UN that was designed to implement a system of national accounts. This process that lasted for more than twenty years started with the preparation of an Appendix to a UN publication entitled:
Measurement of National Income and Construction of Social Accounts, UN, Geneva, 1947.
The Appendix was Definition and measurement of the national income and related totals. The collaboration ended with the publication of A System of National Accounts in 1968. Two further revisions of the standard system of national accounts have been published in 1993 and 2008, but it remains the case that this Appendix provides the basic framework for the SNA currently used throughout the world. As Baranzini and Marangoni argue, “It presents an economy as a system of interlocking transactions, and the accounting as a way of arranging and recording these transactions. The accounting scheme is a theoretical scheme which however enables many practical applications: it provides an ideal structure for empirical analysis.”
It is noteworthy that in the 1960s three of Stone’s publications were translated into Russian, and a fourth, which was originally published in Polish and later appeared in English actually compared several ways of calculating national accounts, including a comparison of the UN SNA and the Material Products System:
‘A comparison of the SNA and the MPS.’ Paper presented at the Symposium on National Accounts and Balances, Warsaw, 1968. This was later published in:
Mathematical Models of the Economy and Other Essays, Chapman and Hall, London, 1970.
As Baranzini and Marangoni point out: “It provides a comparison between different accounting systems. In particular, it compares the SNA to the Material Products System, a different accounting methodology mostly adopted by socialist countries, especially the Soviet Union.” When I read this book in the early 1990s, I was struck by how well it captured the relative strengths of these two different approaches (SNA and MPS). Stone, rightly in my view, concluded that on the whole the strengths of the SNA to some extent outweighed those of the MPS.
So if Russian statisticians wish to analyze the material flows in the economy, they could revert to the MPS approach, or input-output analysis, or another method, but that would be better conducted in parallel with the SNA approach, to facilitate the desired focus on such issues, rather than to simply mix it in with the SNA analysis. That loses the benefits of comparison with other countries and also clouds the issue. It would be perfectly easy for Russian economists to do this. Indeed in the early 1990s, the econometrics group at the Computer Centre of the Russian Academy of Sciences (led by Professor Igor Pospelov) was engaged in precisely such comparisons using different econometric models running in the programming language APL. They began by using the MPS approach, then constructed a model of a ‘perfect market’ economy and then introduced more realistic assumptions into their models, as I discovered when I visited this team in November 1993. One result of this analysis was that this group had correctly forecast that Yegor Gaidar’s economic policies would lead to hyper-inflation, and the group had thus committed the unforgiveable sin of being right. For this, they were starved of further research funds, in a manner that mirrored the earlier experience of the Department of Applied Economics in Cambridge when its staff criticised the economic policies of the Thatcher government. The now-dominant ideology would brook no dissent.
There is a widespread misconception in the West that fifty per cent of Russian government revenue comes from oil and gas exports. This was recently repeated in a BBC1 TV current affairs programme Panorama. The claim was coupled with the other usual misconception, namely that Russia has failed to diversify its economy. Until about 2017, the official Russian position was that 33 per cent of the state budget came from oil and gas revenues. Hellevig has in the past argued that the real proportion could be even lower, at about 25 per cent. Whatever the truth of that, it is evident that the proportion is probably higher now, and with the new sources of oil and gas sales discussed above, this trend is likely to continue, at least until other sectors of the economy outpace the oil and gas sector.
Now that the Russian government is underplaying real GDP growth, it is unclear, as Hellevig states, whether the government is “wants to play it safe or if they actually don’t get it”. If it is an outdated misunderstanding of the essence of GDP, then: “In general, the quest to try to identify the physical volumes behind GDP growth is outdated as the bigger share of GDP anyway is in the service sector where the output at the end of the analysis is intangible and can really be measured only in monetary terms.” He comments: “Too bad though, that this kind of official reporting hampers Russia’s investment appeal.” I entirely agree with that, and think that Russia is shooting itself in the foot at a time when it presumably wants to encourage Foreign Direct Investment [FDI] in order to help produce the step-change acceleration in economic growth that is required to address the new approach outlined in Putin’s recent speeches and announcements.
So does the government simply want to play it safe? It is entirely possible that “they actually don’t get it” because the marginalisation of Pospelov’s research team in the 1990s may have resulted in a serious loss of institutional memory since then, as has happened with the UK government’s macroeconomic modelling and management. Yet it seems to me that the government, or elements within it, does not simply want to play safe but rather prefers to downplay anything that could bolster President Putin’s position. Putin is arguing that a rapid improvement in Russia’s economic performance is both necessary and possible. It is necessary because the alternative at best is an ongoing process of falling behind and at worst is no future for Russia. That is a strong reason to take a bold path, and so this downplaying of what should look like a statistically promising beginning seems deliberate to me. To those who would claim that this is paranoia, I would ask them to seek out further evidence rather than jump to conclusions. I will consider one piece of relevant evidence in Part 4.
Hellevig goes on to point out that the high rate of growth fits with other positive economic indicators. Industrial production in the first quarter [Q1] of 2018 was up by 1.9 per cent, rising to 3.2 per cent in May. Exports increased in Q1 by 26 per cent. Capital investment grew by 4.2 per cent to 4.4 per cent each month from January through March. Salaries grew by 12 per cent in this period, giving 9.6 per cent if adjusted for inflation. Real disposable income grew by three per cent. Retail sales grew by 2.2 per cent. Unemployment stayed at the record low of 5 per cent. (This is particularly impressive when one considers that migrants from the Ukraine conflict in the last few years number roughly 1 million.)
So if the prospects for further economic growth look good, why are some prominent Russian economists worried about the current approach of the government?
Part 4: Prospects for Accelerated Growth: A Eurasian Sovereignist Analysis
Having pointed out that the Presidential inaugural address did not specify objectives in any detail, and noted Putin’s explanation for the continuity of senior personnel in government as being necessary to move quickly to implement the new approach, I should not have been surprised that a more detailed statement was soon forthcoming in the form of a Decree signed on 7 May 2018: On national objectives and strategic tasks of Russian Federation’s development in the period up to 2024.
Whatever criticisms might be made of this decree, it is markedly more clear and specific than the UK Industrial Strategy published in November 2017. As such, it might be considered as having more in common with the halcyon days of French indicative planning in the 1950s and 1960s than the vague rhetoric of the UK government’s recent attempt to increase growth, on which no visible action has been taken almost 8 months later even at the level of appointing a committee to oversee its implementation. The latest British attempt does not even approach the level of organisational capacity shown by the UK government in the 1960s with the establishment of the Department of Economic Affairs, the National Economic Development Office, and the National Incomes Commission: an attempt to emulate the French experience that failed within a few years.
The Russian Presidential Decree consists of 16 detailed paragraphs, with the measures to be taken assigned to the relevant government agencies. Hence there is seen to be no apparent need to set up any new bodies to deal with this six-year national programme. This may well be a valid judgement, and does not in itself preclude internal organisational changes to secure the implementation of these new measures. The Government is obliged to adopt General Directions to implement this programme by October 2018.
The main objectives are: demographic improvement; rising real incomes, halving poverty levels, improved living standards for at least five million families; accelerated technological development, ensuring the implementation of digital technologies in the economy and social sphere; securing the Russian economy’s place amongst the top five world economies, ensuring growth above the world average and keeping inflation no higher than 4 per cent; and creation of high-productive export-oriented subsector(s) in (the) basic sectors of the economy, initially in manufacturing and agriculture. Each of these objectives is then elaborated in a series of specific targets, some of which are quantified.
Given the recognition (discussed earlier) of the importance of improving education, especially higher education, it is worth briefly noting the context in which this is deemed a priority. Educational objectives are specified in Paragraph 5 of this Decree, and it is noteworthy that the objectives are not only ‘technocratic’ but also spiritual:
“Ensuring global competitiveness of Russian education, securing Russia’s place amongst [the] top ten leading countries for [the] quality of general education;
Raising harmoniously-developed and socially responsible individuals on the foundation of [the] moral and spiritual values of [the] peoples of Russia.”
This implies a serious commitment to the ongoing cultural changes that are happening in Russia. Such changes are the foundation for the improving demographics and other positive social changes in Russia. One is not dealing with a discredited ‘human capital’ approach to education.
Looking at this Decree as a whole, it seems that some of these objectives could be construed as reflecting the concerns of the Eurasian Sovereignists, but it remains to be seen how such priorities will be implemented in a context that includes other objectives that might not be compatible. In any case, such objectives could be subject to political ambush, as seems to have been the case with the decision to raise the age at which pensions will be paid, thereby obliging people to have a longer working life than they otherwise would have. This new measure was announced at the start of the World Cup football tournament and resulted in widespread protests. It was apparently influenced by the work of Kudrin who had publicly been pressing for such a change for some time.
The recent discussion by The Saker of a 5th Column, which was cited near the beginning of Part 1, rightly focuses on this pension ‘reform’ because it had already been shown that raising the age at which pensions would initially be paid was not required by a demographic crisis in Russia, and indeed was likely to have adverse effects on pensioners’ incomes with onward ‘multiplier’ effects probably reducing overall economic growth:
This link in English relies on a formal dissertation in Russian published this year by the Russian Academy of Sciences entitled The Pension System in the Structure of the Contemporary Russian Economy. It runs to 150 pages:
Judging by the Contents (since I have not had time to read it) this dissertation includes an analysis based on economic modelling, takes account of comparative experience in other countries and discusses outcomes in various different scenarios. Part 1 covers the functioning of the Russian pensions system. The modelling is discussed in Part 2 as well as an evaluation of the demographics, and Part 3 discusses the consequences of maintaining and of raising the boundary age of eligibility for pensions, as well as variants of outcomes in terms of two different economic scenarios (inertial and basic). The Stalker Zone link above concentrates on Part 3, as well as the inter-country comparisons, in its exposition. The conclusion is that it would do no great economic harm to increase pensions by 2-3 per cent in the long run. In any realistic scenario, and without even taking account of future increased productivity, it would be quite reasonable to increase pensions, rather than effectively reduce them by raising the age of entitlement to a pension. The latter, which is now actually official policy, is more likely to slow down economic growth. So the issue cannot be avoided: why raise the pension entitlement age when it is known to be unpopular just a few weeks after a detailed study is published showing that it will probably do more harm than good?
Glazyev’s Recent Analysis
Returning to the overall economy, it should be recalled that if one uses Purchasing Power Parity (PPP) then Russia is already quite close to being one of the top five world economies, but presumably it is intended to measure this outcome in terms of GDP, and so the use of the rate of inflation as a ‘deflator’ for nominal growth should now be seen as a priority, as discussed in Part 3 above. In view of the ‘rose-tinted’ account given in Part 2 and the auspicious recent figures discussed in Part 3, why should there be much doubt as to whether these objectives specified in the Presidential Decree of 7 May 2018 will be achieved? One answer can be found in the alternative views recently expressed by the prominent economist Sergei Glazyev, a leading member of the Eurasian Sovereignists, although there is no self-defined group with that specific name. Glazyev’s views were expressed in a paper at the 18th annual Likhachev Conference held in St. Petersburg on the 17th-18th May 2018. These papers were posted on the Web before the conference and Glazyev’s paper can be found here:
The entire proceedings, including transcripts of panel discussions, will appear in print in Russian and English in due course. Glazyev’s paper The Contours of the Russian Economy’s Future in the Context of the World Crisis focuses on possible scenarios for the future of the Russian economy, depending on differing changes both internationally and within Russia. Influenced by the work of Giovanni Arrighi, as well as his own earlier work, Glazyev’s conception of the crisis has both political and economic aspects. He argues that there are systemic cycles of accumulation such that world economic development and related political changes take place by way of a periodic change of global economic patterns. Each of these patterns consists of a system of interrelated international and national institutions that provide for the expanded reproduction of the economy and determine the mechanism of global economic relations. In each case, the institutions of the leading country are of dominant influence on the international institutions that govern the global market and international trade, including economic and financial relations.
Each global pattern has limits to its growth, determined by an accumulation of conflicts as an integral part of the institutions that it includes. Such conflicts are deployed until the moment of destabilization of the system, and at that point the relations have thus far been ‘solved’ (restructured) by world wars. A new world order is formed during such periods. At the present time (as in earlier cycles) the possibilities of socioeconomic development on the basis of the existing system of institutions and technologies are being exhausted. Leading countries are encountering insuperable difficulties in maintaining the previous rates of economic growth. Over-accumulation of capital in production and (existing) technological complexes are becoming obsolete. This casts such economies into depression and the established system of institutions complicates the formation of new technological chains. This ‘blockage’ combined with the formation elsewhere of new institutions for the organization of production opens the way for these new institutions to cut a path for themselves in other countries which then break through to become leaders of economic development.
The former leading countries try to retain their dominance of the global market by strengthening control over their economic periphery, including by military and political enforcement methods. The resulting armed conflicts result in the aging leader squandering resources without achieving the ‘proper’ effect. A potential new leader tries to avoid such conflicts, conserving its productive forces, building up its capabilities and entering the international scene when opponents are weakened enough, in order to appropriate the fruits of victory.
The present dominance of the USA is based on an economic supremacy that is now protected by military and political methods. It finances the deficit of its national budget (caused largely by inflated defence expenditure) by having the global reserve currency. (This currency dominance enables it to emit fiat money in the knowledge that it will be required by many countries for international trade.) This system, including US allies in the G7, was boosted by the opportunities for extracting resources from post-Soviet countries through privatization and establishing their own corporate structures. Financial dominance is also now exhausting itself because the ‘war’ against unprotected currencies with the help of the IMF, rating agencies and by other means no longer produces a big enough capital inflow into the American economy. Thus such inflows cannot fund the avalanche of US liabilities that are now approaching one-third of US GDP. The resulting exponential growth of US national debt and financial derivative ‘pyramids’ (known as Ponzi schemes in the USA) certifies that the US financial system is nearing its own self-destruction.
Glazyev then provides further details to show that the era of American global hegemony is reaching its end. “The rise of China entails reformation of the global economic order and international relations.” Hence methods of economic management that had been prohibited by the Washington financial organizations’ “menu” are now becoming available again, and may indeed turn into generally accepted tools of international economic relations. These tools include the revival of planning of socioeconomic development and state regulation of the main indicators of capital’s reproduction, an active industrial policy, control over trans-border capital flows and limitations for currency. “A number of scholars are already speaking about the Beijing consensus as a counterweight for the Washington consensus…” The former is more attractive for emerging economies in which most people live. The Beijing consensus is based on non-discrimination principles, orienting them not to servicing international capital but to the advancement of people’s well-being. “At the same time, a new regime may emerge to protect intellectual property and transfer of technologies, it’s possible that new standards will be approved for foreign trade in energy and resources, new rules of international migration will be approved, new agreements may be signed on limitation of harmful emissions etc.”
The Chinese approach to international politics provides a real alternative for emerging countries to build mutually advantageous relations enjoying equal rights with other states. This implies a rejection of the use of force, trade embargoes, sanctions, interference in internal affairs, and armed intervention. There is currently a nucleus of the new global economic order around China consisting of Japan, Singapore and South Korea, but other nearby countries are approaching, themselves forming part of the nucleus of the new global economic pattern. These include Russia, India, Vietnam, Malaysia and Indonesia. They could soon also include Brazil, Venezuela and Cuba as well as other states in Latin America. Africa is also becoming attracted to this nucleus. The total economic power of these states is already comparable with that of the countries from the nucleus of the American accumulation cycle. [My emphasis.]
In the context of this ‘transitional’ situation with the dominant nucleus in crisis and the new one being formed Glazyev outlines seven possible scenarios for the development of Russia. These scenarios depend on internal and external factors in the triangle of Russia, the USA and China. One can start with the supposition that China will continue on its present course, preserving the new global economic pattern’s current institutions, and continuing the process of formation of the new global system’s centre for the foreseeable future. In that case there are two variants for both the USA and Russia.
Firstly, US politics may stay mostly unchanged, with global domineering, continuing hybrid warfare against Russia and constraining China. Secondly, there could be a switch to acknowledging the realities of a multipolar world and the transfer to a new global economic pattern. This second variant would require a major renewal of the American ruling elite and looks unlikely.
For Russia, the variants differ depending on whether domestic economic policy remains unchanged or not. Firstly, an unchanged Russian national economic policy would mean a growing technological backwardness of the Russian economy, a decline in competitiveness and a final loss of the capacity for independent development. The second variant supposes switching to a policy of outpacing economic competitors like the USA on the basis of new technological and global patterns. This new variant assumes a sovereign monetary and credit policy and a mixed strategy of economic development [my emphasis]. This mixed strategy would entail an accelerated increase in investment; dynamic catching up in spheres where there is a relatively small technological lagging behind; and in areas where Russia lags hopelessly behind, a strategy to catch up based on the importation of the most modern technologies. He then moves on to the seven variants or scenarios.
1 Status quo: If each of the three countries continues with their current policy, then for Russia the lag behind both the old and new centres would increase. It would lead to a weakening of military and technological power, a comparative worsening of the standard of living and a reduction in social support for the authorities. This weakening of support would provoke an increase of US aggression against Russia and destabilisation of the social and political situation in the capital cities of the Eurasian Economic Union [EAEU]. Simultaneously China would increase its influence on the economy of Russia and the EAEU. Massive Chinese investments under the Belt and Road Initiative (BRI) would adapt Russia and the rest of the EAEU to the requirements of the Chinese economy’s development. The EAEU would probably break up under the divergent, opposite pressures from the USA and China, with a weakening Russia. Previous Eurasian integration would be tested by the pull from the old and new global centres. The Russian economy would become a set of enclaves, each poorly tied with the others, serving various segments of the global market. That weakening would thereby create the prerequisites for political destabilization and the transfer to the next development variant.
2 American colonization: The domination of pro-American forces in domestic policy restores in Russia the former environment of increasing socioeconomic difficulties. Concessions are made under pressure upon Russia by the West in order to lift sanctions, and that entails an intensification of American aggression to the point where a puppet regime is established in Russia. Then nuclear disarmament of Russia followed by its disintegration is brought about by this puppet regime. Russia loses its sovereignty, and the EAEU ceases to exist. Central Asia becomes the area where China dominates.
3 Chinese periphery: Russia’s strategic partnership with China has real content, but in the environment where domestic policy has not changed, with a consequent increasing falling behind and a worsening economic situation in Russia. Joint programmes for interlinking the EAEU and the BRI are implemented with Chinese financing. Massive Chinese investment develops the Russian fuel and energy, agribusiness and transport complexes, which are reoriented to the demands of the Chinese market. The military-industrial complex is developed according to the goals of external protection of the Collective Security Treaty Organization [CSTO] and the Shanghai Cooperation Organization [SCO]. The remains of the civilian high-tech industry’s potential are absorbed by joint Chinese-Russian ventures. Russia preserves political sovereignty and equal military and political partnership with China while its economy becomes a Chinese ‘periphery’.
4 Isolation and intervention: This is the worst variant for Russia, where China joins in anti-Russian sanctions. Russia finds itself in total isolation, losing both foreign currency reserves and foreign markets. If the current economic policy is maintained, this entails a catastrophic worsening of the standard of living and destabilization of the social and political situation, with a high probability of EAEU disintegration. This destabilization in Russia provokes external aggression that may take the form of the country’s division into areas of influence between the old and new global economic centres.
5 Isolation and Mobilization: The potential still existing in Russia in spheres such as research, production, military and technological, intellectual and spiritual, coupled with natural resources, permit it to survive and develop independently. This is based on the formation of a mobilization variant of the integral global economic pattern in the case of a global anti-Russian front. It supposes the complete ‘de-offshorization’ of the economy, the transfer of most of the foreign currency reserves into gold, the introduction of currency controls and limitations on cross-border capital operations. It would also require the obligatory sales [to the government] of all revenues in foreign currencies.
In addition, it would require a review of the results of all privatizations, the introduction of progressive taxation of incomes and property, and a resource rent in favour of the state. Without these it would be impossible to achieve the restoration of justice required for the mobilization of public opinion. Monetary and credit policy would need to be subject to the goals of modernization and production growth. State corporations, banks, ministries and government departments should operate according to strategic and indicative plans, and be responsible for their fulfilment. However, the present-day ruling elite is incapable of doing all that, and so practically the full replacement of this elite would be required – both in administrative authorities and in business.
6 Russian-Chinese strategic partnership: This would become a reality [if and] when the institutions of the new global economic pattern are formed in Russia and there is a transfer to the development strategy of outpacing [the West]. Common development plans are worked out, big joint investment projects are implemented, [and] the interlinking of the EAEU and the BRI is filled with real content. A big Eurasian partnership is established. Russian high-tech products are sold on the Chinese market. Russia joins the ‘nucleus’ of the new growth centre of the global economy. In the case of this variant, the growth rates of the Russian economy achieves the maximum figures – up to 10 per cent growth of annual GDP and 20 per cent growth of investment. An expanded anti-war coalition is established, in which China, Russia and preferably India participate. In this case, it is also supposed that the Russian ruling elite will be considerably renewed.
7 United States, Russia and China partnership: At the moment this is an unlikely scenario with the lifting of anti-Russian sanctions and the establishment of friendly relations based on acknowledgement of joint liability for keeping peace and the inevitability of transferring to a new global economic pattern. The criterion of this variant’s reality is the cessation of American occupation of Ukraine and anti-Russian aggression. This is the most comfortable for Russia but it is an unstable scenario, the efficacy of which will depend on the economic policy that is carried out. In the case that it remains unchanged, events may leave this track and take scenario 4 [Isolation and intervention].
“Variants 4 and 2 are impossible while V. V. Putin is the President of Russia. They may become actual only as a result of a ‘color revolution’ or a coup d’état.
Proceeding from the definition of politics as the art of the possible, the preferential for us is movement according to variant 6. It practically does not depend on the United States influence, allows protection of ourselves from threats coming from them by cooperation with China as well as achieve[s] the maximally high rates of economic growth. In case this variant is realised, there are prerequisites for bringing the seventh, the most favourable scenario, into life.”
Discussion of Glazyev’s views
Given the dramatic nature of some of these potential scenarios, and given the virtual certainty that Putin is aware of Glazyev’s views, it is now much easier to understand why Putin has been arguing for a step change in Russia’s economic performance, and has stated that one possibility of failure in this objective is that Russia has no future at all. It now seems clear that Putin fully realises that the policies of the Washington Consensus faction within the Russian government will not deliver the improved living standards that are required now that the economy is much more resilient.
Indeed the fact that a minimum wage has already been introduced in May 2018 is an indication that Putin now believes that increased regulation is necessary to deliver a better quality of life. It is perhaps no coincidence that in 2015 Professor James K. Galbraith of the University of Austin, Texas delivered a paper at the annual Likhachev conference arguing in favour of wage regulation. That paper was based on a global data set on the effects of wage regulation. What undermines any sense of complacency about recent improvements in Russian economic performance is that almost twenty years after Putin first become President, living standards for many remain low and growth has been slow in comparison with the potential of the Russian economy, given the factor endowments in terms of natural resources, high educational level and technological capacity.
Yet the clear implication of Glazyev’s work is that even being in the top ten of the world’s economies at a time when there are two ‘centres of gravity’ in the form of the much larger economies of the USA and China carries the implication that Russia has to raise its performance dramatically to have any serious prospect of retaining national sovereignty. The EAEU is seen as one means of achieving this, because some capitalist version of ‘socialism in one country’ (variant 5) while feasible in principle would be a much harder path and require even more radical changes to current institutions and policies than other variants. The political difficulties of implementing such an approach indicate that it would be high-risk and depend on a high level of social support for the government’s decision to pursue such a radical path. In addition, the long-term danger of indicative planning is that can become too institutionalised and difficult to change, as can be seen from the French experience. Unless accompanied by strong technological change and institutional flexibility, it can simply repeat past priorities and lead to investment in sectors that fail to enhance growth, but instead become mere employment maintenance policies in a stagnating economy.
Variant 6 (Russian-Chinese strategic partnership) increases the possibility that the sheer momentum of the scale and pace of change would build support for the necessary changes such that internal political opposition from the Washington Consensus group would be seriously weakened, if not totally discredited. For these reasons, the description of those whose views are similar to the analysis of Glazyev as Eurasian Sovereignists seems entirely appropriate.
However, there is little discussion of potential problems of the Chinese economy in this analysis. Glazyev rightly points out that on principle China rejects the use of force as well as imposing sanctions in its foreign policy. In doing so, he refers to a published work by Professors Piotr Dutkiewicz and Vladimir Popov. These are two very distinguished analysts who have each published many substantial works, both individually and in collaboration with other authors. Dutkiewicz is based at Carleton University in Ottawa, Canada while Popov is based at the New Economic School in Moscow, with a visiting position at Carleton. Popov has for well over ten years been rightly critical of those predicting the imminent collapse of the Chinese economy.
Yet China is well aware of its own demographic problems and seems to have difficulty in confronting them. One analysis has argued that even if China immediately and completely abolished its ‘one child’ policy, it is now too late to avoid a demographic crash, with the concomitant decline in effective demand. This knowledge seems to be one of the drivers for the Chinese policy of exporting capital, namely the need to create new markets elsewhere. The BRI with its land-based and maritime variants can be seen as an attempted solution to this problem, as can the Chinese investment in Africa which is not geographically central to the BRI programme. For some decades to come, Africa will be showing strong demographic growth, at least in sub-Saharan Africa with the exception of South Africa and Zimbabwe. Will these measures be enough to keep Chinese growth going while gently deflating its enormous, historically unprecedented credit bubble?
Discussion of Glazyev’s views at the Likhachev conference.
Glazyev actually chaired the panel at the Likhachev conference in which his paper was discussed, and it dominated that panel’s discussion for roughly half the time allotted. He added new remarks under two headings: the need for international economic and political changes, and the need for an international convention on cyber security.
On the first point, he stated that there was a need to stop the issuance of fiat money by the USA. [This implied a critique of the entire present Western-dominated institutional structure of international finance which he did not have time to develop, but his paper pointed to the incipient financial crisis in the West. It is one symptom of the transition to the new global economic order.] Still under the first heading, he pointed out that the USA had responded to the Presidential Address to the Nation on the 1st March by moving towards a new arms race. There was a need to restructure the world economy through the EAEU institutions. The US dollar was toxic for Russia now. It even affected Chinese financial settlements with Russia. There was now an anti-war coalition and this plus the growing use of national currencies to settle international debts, and the development of virtual currencies (digital or cryptocurrencies) threatens the collapse of the US dollar. The Chinese Yuan is now an international currency although it is not yet convertible.
On the proposed international convention on cyber security, this could become the framework for a new coalition against US hegemony. The US was not interested in cyber security because it uses cyber security activities as part of hybrid warfare.
These ideas provoked a lively discussion. One interesting comment was about the difficulties of cooperating with China. The example was that of China allegedly being vociferous and intransigent over a proposal to exploit an oil field in the sea near the Chinese border. China refused even to discuss the matter, it was claimed, and the Russian oil well was constructed anyway. Evidently ongoing large scale collaboration between Russia and China, as is envisaged, will require constant high level diplomatic contact and skill.
The need to chart a future path for the Russian economy so that it can break out of its present constraints is now clear and urgent. It is evident that the Eurasian Sovereignist ideas do not constitute some sort of Panglossian vision of the future, but are rather an attempt at a realistic assessment of the possibilities that assesses challenges, dangers and opportunities. The fact that both official government policies and remarks by Glazyev point to the spiritual aspects of such necessary cultural changes means that those of us who wish Russia well need to acknowledge the growing role of Christianity in Russian culture. Russia faces a set of stark choices, but they could be summed up as one that atheists and people of other faiths also need to face up to: Christianity or subversion?
Gary Littlejohn: MA, DSS, MSc, PhD: former Head of Department of Social and Economic Studies, University of Bradford, UK.
Following retirement: Hon. Senior Visiting Research Fellow, Department of Peace Studies, University of Bradford 2003-2008.
Member of Steering Committee, Socioeconomic Aspects of Humanitarian Mine Action, International Peace Research Institute Oslo, 1999-2006.
1982-83, Professor Associado, Centro de Estudos Africanos, Universidade Eduardo Mondlane, Maputo, Mozambique.
1977 & 1978: Visiting Lecturer in Sociology, University of Dar Es Salaam, Tanzania, lecturing on the Soviet Union and theories of the peasantry. (3 months each year). Several publications on Soviet Union
1986: British Academy/Soviet Academy of Sciences Distinguished Scholar Exchange Programme visit to Central Asia, investigating the social situation of Muslim women. (Uzbekistan, Tajikistan and Kazakhstan)
1994: attended NATO conference on ecological problems of the Aral Sea in Tashkent, Uzbekistan.
1997: Socioeconomic impact study of investment in Ispat Karmet steel plant, Temirtau, Kazakhstan.
2015-2018: attended Likhachev conferences in St. Petersburg, Russia.
At various times, member of the Editorial Boards of Economy and Society, Review of African Political Economy, Journal of Southern African Studies and the Mozambican history journal Não Vamos Esquecer.