[Overseas view]Moscow, addicted to oil
Their money, the ruble, was worthless ― in any case, there was nothing to buy. The only ones plying a trade were old watch repairers ― a telling sign of how low consumption and innovation had been.
These days, the young and nouveau riche flaunt their wealth and expensive cars. French and Italian luxury goods adorn the shops on Pushkin Square. Money from oil, gas and raw materials flows freely and the biggest gainers are the people in the exporting network: officials, bureaucrats and merchants. Gains, legal or illegal, are used for private consumption in Russia or invested safely abroad. Prosperity has trickled down. By and large, all Russians have stood to benefit.
“In 2006,” says Egor Gaidar, “wages rose by more than 20 percent and the country posted 7 percent growth. Those without a share in this live in towns with less than 1 million inhabitants and in the countryside, still waiting to recover from the trauma of agricultural privatization.”
However, Gaidar quickly points out, soaring oil and gas prices are not the sole reason for Russia’s economic recovery. He claims the recovery began much earlier, crediting the Russian spirit of enterprise and the free market. Is Gaidar to be believed? As Boris Yeltsin’s prime minister in 1992, he was the architect of privatization in Russia. He went for “shock therapy” rather than gradual change. Russians blame Gaidar for the chaos and poverty of the 1990s, though it is unfair to cast him as the villain. He was only the doctor, he says, summoned to do something for an economy in the throes of death. His liberal therapy was the cure, not the illness.
People, adds Gaidar, tend to forget that Boris Yeltsin inherited an economic model wholly dependent on oil and raw material prices. Even then, the Soviet Union was addicted to oil money. We failed to realize this because Marxist rhetoric had clouded our judgment. The Soviet Union, Gaidar reminds us, was only able to feed her people by importing food grains in exchange for oil, a choice made in the 1920s when Stalin destroyed agriculture. As energy prices plummeted in the 1980s, Gorbachev plunged the country further into debt to maintain subsistence levels. When Yeltsin came to power, Russia was again on the brink of famine. The economy had come to a halt and oil production was dwindling. Russians seem to have forgotten these facts. Gaidar says production picked up only after privatization. No sooner was the free market restored then Russians took to business again, mainly the oligarchs and at a more modest level, those in the trade and service sectors. “Their entrepreneurship,” says Gaidar, “saved Russia.”
Is Russia truly a market economy? “We’re almost there,” says Arkady Dvorkovitch, President Putin’s 35-year-old economic advisor. Trained in the United States, he is the icon of the new generation in power. “We still do not have an independent judiciary,” he admits, “nor do we have genuine rule of law and officials who apply the rules rather than embezzle funds. But then, corruption is inevitable in a transitional phase.” No one can function in Russia without protection, complain foreign entrepreneurs.
In local parlance, this is referred to as having a “roof.” Official protection comes at a price, yet foreign investment is pouring in, replies Dvorkovitch, proof that, corruption notwithstanding, profits are good. Of course, a large part of it is really Russian money laundered in Swiss or Cypriot banks.
Like Gaidar, Dvorkovitch has high praise for the Russian spirit of enterprise. I remark that besides restaurants, shops and real estate, there is little investment. “It will come, things are happening very fast,” says Dvorkovitch. The Russians are just beginning to have faith in the stability of the new economy: “The laws have been written and are still fresh.” But there can be no going back; no one is suggesting a return to socialism. As in the West, the debate is confined to the role of the state in the market system. Why doesn’t the state itself step in and invest?
Infrastructure stands as it did during the Soviet era. Roads, bridges and airports ― everything is run-down. Public offices are no better. Dvorkovitch has a ready reply. The first priority of the state was to repay Russia’s debt. The next task was to build a stabilization fund ― 80 billion dollars ― to act as a buffer in case export earnings dropped due to falling energy prices. No Russian economist denies the utility of such a fund. No one wants a recurrence of 1991, when the country was on the brink of disaster. The moot point is how the money is to be spent; currently, most of it is invested in American Treasury bonds. The Russians’ reasoning is that the dollar is the safest investment.
Yet even with the debt repaid and swelling oil and gas profits, the level of investment remains low: 20 percent of national wealth. The most profitable national ventures, such as Gazprom, can hardly be called rolemodels. Gazprom finds it more lucrative to invest its money in the financial market rather than explore new reserves or set up the petrochemical industry. “It will happen,” asserts Dvorkovitch. “President Putin is keen on investing in new sectors such as petrochemicals, food processing, biotechnology and IT.”
“Putin may decree, but nothing happens on the ground,” says Yevgeny Yasin. The Russian president thinks it’s enough to allocate public money for a sector to develop, as if by magic. Putin has yet to realize that in a market economy, development requires an institutional framework. Yasin calls the surfeit of oil and gas “the resource curse.” It exonerates the Russian leadership and people from having to think about reforms. High oil prices anesthetize the desire to innovate.
Is Yevgeny Yasin, formerly Yeltsin’s economic minister, skeptical because he, like Gaidar, has been sidelined? Hardly anyone in Russia knows about this great liberal economist who saved the country from hyperinflation. I ask Arkady Dvorkvitch what he thinks of Gaidar and Yasin, the two men responsible for the shock therapy of the ’90s.
“It is too early to judge,” was his cautious reply.
Vladimir Milov belongs to the same generation as Dvorkovitch, but chose to leave the Putin government on moral grounds. Unable to accept the high oil-price mindset, Milov does not hesitate to speak out, a heroic feat in a regime intolerant of criticism. Milov says, “Marxism is very useful in understanding the political life and ideological development of Russia.” Ideological superstructures are determined by the economic infrastructure.
When Putin came to power in 1999, energy prices were low. As the state had few resources, Putin was happy to adopt a liberal line and leave things to civil society. As soon as energy prices began to rise, Putin re-nationalized the economy, restoring to the bureaucracy and the KGB (now the FSB) to their former power. In foreign policy too, Milov says, one can establish a direct relationship between oil prices and Russian aggressiveness. The resurgence of Russian nationalism exalting national identity and the new dominant ideology of Russianness coupled with orthodoxy, are indexed to the price of a barrel of oil.
Sales of oil and gas bring in $150 billion every year; the sale of arms, a mere $6 billion. This is not sustainable, concludes Milov. No market can stay on a rising curve forever. Sooner or later, oil and gas prices will begin to fall. As things stand, Russia will not be able to withstand a drop in the price of energy.
*The writer is a French journalist, economist, philosopher and civilization critic.
by Guy Sorman