America Obsesses About a Russia That Misses the '70s
Americans are seeing lots of stories about Russia in the news these days, mainly because of that country’s attempts to interfere in the U.S. presidential election and other episodes of meddling in other nations' affairs. This has led many Americans to believe that Russia is the U.S.'s main global rival, and that its president, Vladimir Putin, is some kind of a genius. But a closer look reveals that in the economic arena, Putin hasn’t done so well. While he has managed to avoid an outright crisis, he's done little to address his country’s fundamental economic liabilities.
For example, Russia’s economic growth has stalled since about 2012:
But although income has stagnated, the gains of the 2000s haven't been reversed -- there has been no return to the dysfunction of the 1980s and 1990s. Part of this is due to prudent macroeconomic management. As the economy weakened, Russia let the ruble fall starting in 2014, though the currency has had a good deal of volatility since then:
But through skillful use of informal capital controls and judicious devaluations of the ruble, Putin and his administration managed to prevent a currency crisis without depleting the country’s stock of foreign-exchange reserves:
So while things aren’t looking rosy for Russia, they aren’t dire either -- good macroeconomic management has afforded Russia a modicum of stability even in the face of low oil prices.
Still, Russia’s leaders shouldn’t become complacent. In the past, periods of stability have masked structural rot that later came back to bite. Long-term trends contain reason for Russia to worry.
One problem is creeping state control of the economy. A recent policy brief by Simeon Djankov of the Peterson Institute for International Economics reveals the extent to which Russia’s economy has been re-nationalized after the chaos of the 1990s:
While in 2005 the share of private commercial banks in total [Russian] assets was nearly 70 percent, by 2015 it had shrunk to half that percentage…By mid-2015, about 55 percent of the Russian economy was in state hands, with 20 million workers directly employed by the government.
Djankov attributes some of this change to the sanctions the U.S. and Europe placed on Russia after its intervention in Ukraine -- deprived of Western financing, many Russian companies turned to the government. But whatever the reasons, the shift toward government industries is bad news. State-owned enterprises tend to have serious corporate governance problems -- inadequate transparency, political cronyism and lack of discipline from financial markets. Despite some improvements, Russia’s state-owned companies are still much less productive than its private enterprises.
Russia’s second main problem is excessive reliance on fossil-fuel extraction. As Bloomberg View’s Leonid Bershidsky has reported, about two-thirds of Russia’s exports now come from oil and gas, and some analysts argue that 70 percent of the country’s entire economy is oil-related.
That’s bad for several reasons. First, it creates huge macroeconomic risk -- when oil prices fall, Russia’s economy staggers. Oil prices are traditionally very volatile. Having an entire economy depend on something as fickle as global oil prices puts Russia in constant danger. The country’s decline in per-capita gross domestic product in 2015 was probably caused by the plunge in oil prices. And with natural gas rapidly transforming into a global market, its price will also be increasingly determined by factors beyond Russia’s control.
But if short-term risk is a problem, long-term technological change is an even bigger risk. Rapid development in car batteries, combined with the advent of renewable energy, threaten to make Russia’s main commodities less and less central to the world economy. Oil has enjoyed a long reign as a transportation fuel with no real substitutes, but the next decade may see that run of luck come to an end. This is why countries like Saudi Arabia are so keen to diversify their economies.
The long-term threats of economic nationalization and oil dependence should worry Russian leaders. They are uncomfortably reminiscent of the 1970s, when Leonid Brezhnev ruled over a Soviet Union that was outwardly strong but sclerotic and stagnant at its core.
In the 1970s, as today, Russia appeared very formidable on the international stage. The U.S.'s loss in Vietnam weakened its main rival, and high oil prices, caused in part by the Arab oil embargo and the rise of OPEC, hobbled the economies of the West while sending Soviet GDP steadily higher. Soviet influence is generally believed to have hit a high point in that decade. But economic evidence shows that in the 1970s, Russian industrial productivity stopped rising. When oil prices fell in the 1980s, Soviet leaders were not prepared for the shock.
Putin has praised Brezhnev’s leadership, but he should see the 1970s as a warning. Victories abroad, and the troubles suffered by the U.S., shouldn't distract him or his administration from the need to put the economy on a stronger long-term footing. Reducing the twin trends of economic nationalization and oil dependence should be top priorities.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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James Greiff at email@example.com