Saturday, 3 January 2015

Scenarios for Russia

The sentences handed down to the Navalny brothers last week confirm many observers' fears about Russia - there is no opposition to speak of; in the absence of Vladimir Putin at the helm, there would be a vacuum of power. Mikhail Khodorkovsky's in Switzerland, Mikhail Kasyanov's keeping his head down, and, er... that's it. (Correct me if I'm wrong. I hope I am.)

The Navalny cases show clearly how the law is Putin's plaything. The message is clear - if you wish to go into business, the law is sufficiently opaque and contradictory, that should you put your foot out of line politically, there will always be some paragraph that will allow a pliant judiciary to nail yo' ass.

Going into business is risky enough; you can expect to be shaken down legally (by a grasping public administration, on the take with blessings from the top) and illegally (by local mafias operating with the connivance of the authorities). This discourages all but the bravest from trying to make a living from free enterprise. So the bulk of Russians work for someone else - either for Western corporations - as in the case of Alexei Navalny's brother Oleg - or for native private-sector firms (which represent a smaller percentage of employers than in the EU or US) - or in the public sector. The latter is the career choice of most Russians; keep your nose clean, stay politically loyal to your paymaster - and you'll manage OK.

Manage OK as long as the state can afford to pay you. With so many Russian citizens living as clients of the state, the predicted implosion of the rouble economy (contracting GDP, double-digit inflation, Western disinvestment) will mean that once Russia's not-inconsiderable cash reserves have run out, there will be massive discontent from a massive public sector. [Some good background here.]

It is easy to portray Russia as a country where 15% of the population live a Western lifestyle, travel abroad, eat fancy food and drive BMWs while the remaining 85% survive on buckwheat, beetroot and vodka. A small minority of the 15% can see the writing on the wall; if pushed, they will march to protest against the imprisonment of opposition leaders, Ukrainian incursions - or falling living standards. The 85%, fed a constant diet of propaganda on the state-directed media, is prepared to tighten its collective belt for the Glory of a Greater Russia. As long as Putin can call on the 85%, his future is secure.

In this regard, Russia is quite different to Poland in 1989. In Poland, there was an entire cadre of opposition leaders, toughened by imprisonment or internment during Martial Law; there was an underground media; no one believed the official 'news' put out on state television or in the Party-run newspapers.

Back to the Russian economy. Because it is so difficult to set up and run a business in Russia, the Russian economy has failed to diversify. Putin is aware of this, making some vague promises in his annual speech to the Duma and in his annual press conference to make life easier for entrepreneurs. Too little too late. By the time the Russia runs out of cash (in about two years at the current rate), there will not be a brand-new, globally competitive Mittelstand of Russian medium-sized, family-owned businesses manufacturing agricultural machinery, food packaging, fork-lift trucks, building materials or motorcycles. Not to mention computers, smartphones, operating systems or broadband routers.

In other words, Russia is entirely dependent on the global economy for the things it needs to remain modern. Cut off from the Western world, Russia can survive but will not return to growth. Russians will become introspective, sullenly defiant and loyal to their leader until the penny drops - quit interfering in Ukraine and the good old days will return. But certainly not under Putin. Politically, the strains will grow. Putin will not quit of his own accord - he and his buddies have too much to lose. He cannot forget the fate of Ceausescu or Gaddafi.  He has nowhere to run, unlike Yanukovych. There will be no chance of him living out his remaining years in a villa in a pretty part of the capital, like General Jaruzelski did. For Putin it's all or nothing.

Faced with a scenario of power loss, Putin will turn the screws tighter. The economy will get worse. The ordinary Russian (unaccustomed to Mercedes-Benzes and Mozzarella cheese) is already noticing the rising prices of buckwheat and other staples. Putin's adventure in Ukraine has bagged one great prize - Crimea - but the rest is not going well. Despite boasting that his armies can be in Warsaw in two days, eight months has not been enough to capture Donetsk airport.

Putin's popularity will wane, but his regime is vastly more popular than the old Communist Party was in the dying days of the USSR. In this context, it is important to recall just how the Soviet Union fell - it was not brought down by oppositionists, fed up with 70 years of slaughter and economic mismanagement - the change happened from within the ruling elite.

Putin is running his elite with the same tight fist that Stalin once did (though with the bullet in the back of the head replaced by prison or exile). There is no chance of a Khrushchev scenario, in which Putin is deposed by rivals from within his inner circle. Khrushchev was only in power for six years, Putin has run Russia for 15. And Putin's KGB background gives him an acute sensibility to potential threats.

Yet there are inconsistencies within his coterie; notice the hysterical braying from some of his supporters to remove the head of the central bank after the rouble plunged to 79 to the dollar. Should Putin follow a pragmatic economic course - or an ideologically driven one? He has advisers urging him in both directions. Impose foreign exchange controls, causing panic in the short term and deeper, self-imposed isolation in the longer term? Hunt down speculators of foreign currencies and food staples? Or continue to let the market work things out? As the economy worsens, the temptation to take a controlling hand over it, Venezuela-style, will grow. Watch out for sackings of economic liberals in key ministries and in the central bank.

It is the contradictions inherent in Putinism that will lead to his downfall. He will be faced with increasingly difficult choices between laissez-faire and micro-management.

Politically, dealing with individual oppositionists will be easy - trump up charges and imprison them. But facing large protests involving tens or hundreds of thousands of Russian citizens will be more difficult. Of course Putin's propaganda organs will bray that these traitorous Quislings are paid-for agents working for the US State Department. The question is, at what stage will Putin resort to violence to disperse such gatherings and discourage more from forming. And if he does so, the Russian people will slowly cease believing what their televisions tell them. This may be a long way off. A Russian commentator recently wrote that Russians will vote Communist, Fascist, Liberal - whoever holds control of the TV stations for two months before the elections.

Sadly, I cannot see change happening quickly. For the foreseeable future, the West has to gird itself for living with an intransigent, sullen, introspective, paranoid Russia, with a frozen conflict in Ukraine hurting that country and slowing its longed-for progress towards the stable prosperity offered by Western Europe.

A Russia without Putin could turn out to be like any one of those Arab countries where the evil dictator was deposed and the outcome was total chaos. Should the Russian army depose Putin, the outcome would be militarist fascism, revanchism, bloodshed and eventual global war. The chances of the Russian people creating a state with independent, strong, well-functioning institutions, a thriving civil society, a wisely-regulated free market with respect for the rule of law and private property are currently small, but - unlike the Arab world - they are not zero. That's the spark of hope.

I forecast that the next two years will be grim for Russia. After that - really grim.

This time last year:
The benefits of extending the human lifespan

This time three years ago:
Light show at the Presidential Palace

This time five years ago:
About juice - and empty supermarket shelves

This time six years ago:
That's what I call Winter Vol. 12

This time seven years ago:
When the days start getting a little longer...


Anonymous said...

Very well written and thought provoking essay Michael. Having around half of my business in Russia currently causes me many sleepless nights - the sad thing is that of the 15% you mention as being more internationally minded my experience is that many of them toe the party line of the other 85%. There is no grass routes support for regime change in Russia. Any critisim of the government will invariably be directed at the officals around Putin - "I am sure this is not Putin's fault and if he new about it he would reprimand the appropriate Ministry accordingly." As a Western minded investor with a large cost base in dollars and a revenue stream predominantly in roubles this will cause many to reassess their Russian investment or at a minimum the strategy around running such a business.

Keep up the great analysis and providing us with your insights. Best wishes for 2015

AndrzejK said...

Very good analysis. One of the issues us that Russia suffers from the raw materials syndrome. So long as the economy is dependant upon exports of raw materials (gas and oil, gold etc) there is little economic chance of domestic production of consumer and investment goods developing. Exports of raw material do not generate value added but keep the currency high meaning that mediumn term domestic production cannot compete with imports. That a country as large as Russia has to import basic foodstuffs such as Polish apples and pork says it all. Liberalising the economy of itself is only one of the pre conditions necessary to stimulate growth!

Michael Dembinski said...

@ AndrzejK

Alexei Kudrin in Saturday's Gazeta Wyborcza wrote that the only way that Russia can get its economy right is by thorough, deep rooted liberal reform. In other words, Russia can only compete with the West by being like the West - the state must aspire to high standards of transparency, accountability and predictability, a real civil society based on NGOs (not GONGOs, or Government Organised NGOs). Of course Kudrin did not go as far as saying that Russia should pull out of Crimea or quit interfering militarily in Ukraine. Or that there's an alternative to Putin. That would be going too far. But it does show that the brightest minds in Russia accept that there's no systemic alternative to the one working in the West.