13th annual Municipal Finance Conference


13th annual Municipal Finance Conference



Is Putin Running Out of Steam?

May 29, 2003

President George Bush’s meeting with Russian president Vladimir Putin [on May 31] drew attention to Putin’s character and policies. The Russian leader’s annual message to parliament on May 16, describing “the situation in the country and on basic directions of the internal and external policies of the state,” revealed little new about Russia but a good deal about Putin’s state of mind. That message was not encouraging. Lacking logic, focus, and intensity, the speech suggested that Putin is running out of not only ideas but also energy. As a consequence, perhaps more by default than by design, Russia’s “internal and external policies” both seem to be headed in the wrong direction.

Although he achieved a measure of prominence by opposing U.S. policy in Iraq, Putin said little about foreign policy. Indeed, he did not even mention the word “Iraq.” He made an oblique reference to “certain countries” that, under the guise of fighting terrorism, use their “well equipped national armies” to “expand their zones of strategic influence.” Otherwise, he made a half-hearted endorsement of sticking to the rules of the international order and using the United Nations.

But it would be short-sighted to welcome Putin’s relative withdrawal from global politics. His previous engagement in international affairs had the important side effect of ensuring that Russia itself would try to live up to international standards. He had to allow all aspects of Russian behavior, at home and abroad, to be subject to scrutiny—and criticism—by the world community. If Putin abandons his effort to help shape the new international order, Russia will have diminished incentives to play by international rules across the board. Instead it will look to cut deals with individual countries (mainly the U.S.) on specific issues, leaving all else outside the discussion. One of the leading models for this approach is in Russia’s own neighborhood, the former Soviet republic of Uzbekistan. Thanks to its enthusiastically pro-American stance on Iraq, Uzbekistan feels it has to listen to no one’s criticism of its abysmal record on human rights, market reform, or democracy.

Judging by his speech, Putin’s three main goals for Russia are all related directly to economic policy. “By 2010,” he said, Russia can and must double its GDP, “overcome” poverty, and modernize its armed forces.

What is one to make of such patently unrealistic objectives? Doubling Russia’s GDP by 2010 would require average annual growth of 10 percent. This is easily three to four times the current rate of growth (once one removes the windfall effect from high world oil and commodity prices). The other two goals are more abstract but equally unrealistic. To call them “strategic, vital, historical” tasks smacks of the rhetoric used by Soviet leaders, who regularly urged their countrymen to perform “heroic feats” in 10 years or so.

But the real problem with Putin’s economic goals is not that he can’t meet them. It is that he will try to. The only way Russia could come close to achieving the goal of doubling GDP in the requisite time period is to further crank up—not, as it should, shut down—the wasteful production that it inherited from the Soviet Union. Since much of that is based in the old military-industrial sector, this is consistent with his announcement of a new arms production program. The key to making it all work is continued subsidization of value-destroying industries by the energy sector. Putin therefore strongly rejected the idea of raising energy prices closer to world market levels.

Until now, Putin has tried to avoid choosing between two conflicting imperatives: modernization of the economy, on the one hand, and social stability and cohesion, on the other. They conflict because modernization—which would entail not just building new industries but closing down old ones on a large scale—would lead to a more productive and efficient economy, but only down the road. Along the way things would be messy and painful. Output, especially in physical terms, would initially decline, unemployment would rise, and poverty would increase. Regional disparities and social dislocation would intensify.

In his address, Putin made clear that he is not going to let Russia proceed along this risky course. He criticized those who would put priority on further structural reforms. Such people, he said, advocate “reform for the sake of reform.” There will be no “permanent revolution,” he said, evoking the language that Stalin used to disparage the policies of his rival, Leon Trotsky, in the 1920s. Stalin portrayed himself as the apostle of stability. His opponents were the adventurists.

By rejecting destabilizing economic reforms, Putin is making a choice with political implications as well. In 1999 Russia’s most liberal market-oriented reformers decided to back Putin as a means to an end. They were convinced that a couple of years of political stability under a firm leader would help build the strong central government they needed in order to push through radical reforms. Meanwhile, they would lie low and demonstrate their loyalty to the new president. The price of admission to Putin’s team was high: they had to agree to voice no dissent whatever to his renewed war in Chechnya.

In his speech, Putin said that the foundation for achieving his economic targets is a “consolidation of the forces of society.” This is code language for no dissent. The political parties will have to demonstrate their “civic responsibility”—in other words, refrain from opposing the government’s economic plan. Having sacrificed their principles on Chechnya, the reformers now risk seeing their economic policies falling prey to a new test of loyalty: Do you or do you not advocate growth without pain or instability?

The promises to double GDP and eliminate poverty in 10 years or less are not the only statements in Putin’s speech that were detached from reality. He talked about the end of hostilities in Chechnya and asserted that the holding of a constitutional referendum in that region earlier this year showed that Chechens “consider themselves to be a inseparable part of a single Russian multinational people.” He claimed that military reform has begun. Within seven years, he said, Russia will have a strong, professional army equipped with modern arms. In fact, there is no momentum towards reform at all. The Russian military remains abysmally underfinanced. Units still depend for their very survival on handouts by regional and city officials. Sometimes cities “adopt” ships or units named for them, sending packages of clothing, cigarettes, and other basic goods. The military in Chechnya is clearly not under the full control of anyone in Moscow, least of all Putin.

Why does Putin engage in these fantasies? Perhaps it is merely a phase of fatigue, leading him to temporarily succumb to the age-old Russian imperative of pretending. But it may be more serious. Putin is halfway through his fourth year as president. Attempts to reform Soviet and post-Soviet economies have a distinct life cycle. They generally don’t last more than four or five years. By that time, they either work or they don’t. They are implemented or they are not. In the Soviet period, when the reform impetus flagged, leaders felt compelled to revive ideological fervor and artificially inject dynamism into a system that otherwise would slip into inertia and stagnation. The role of ideological mobilizer of the masses is not one that Putin would either enjoy or play well. In his speech to parliament, he went through the motions and spoke of “restoring Russia to greatness.” But the words were empty, and the spirit was lacking.

Putin comes across as a man defeated on all fronts. This is a disturbing prospect. Without his energy and leadership, Russia is likely to lose its way—drifting toward isolation in foreign policy, abandoning economic reform, and rejecting political pluralism.