Russia’s Economic Policy at a Crossroads

February 18, 2009

Editor’s Note: Russia expert Clifford Gaddy discusses a range of Russian economic and political issues in an interview with Bloomberg’s Tom Keene. From U.S.-Russia relations to Russia’s current economic challenges and the Russian perspective, Gaddy offers insight into Russia’s policies.

TOM KEENE: Clifford Gaddy, Senior Fellow, Foreign Policy at the Brookings Institution. Russia confronts $35 oil. Russia’s addiction is resource dependence, they don’t go together. Also Gaddy on Putin’s summer reading list. Not Yeltsin, Gorbachev, Jeffrey Sachs or Lenin, Putin reads Yegor Gaidar.

Let’s get right to the immediate moment. We see the tick-by-tick, the Austrian credit default swaps, like Ireland’s, are in a chaotic state, we see Eastern European currencies giving way, the Russian ruble gives way. With all of your sense of the drama there, how critical is it right now for Eastern Europe and for Russia?

CLIFFORD GADDY: I think it’s extremely critical and I must say that you began a few weeks ago projecting a kind of worst case scenario that you could see on the basis of what’s happening globally and frankly I find that day by day you have to refine these and it’s getting even worse.

KEENE: On a day by day sense of it, and certainly folks we’ve captured that both on Bloomberg Surveillance and Bloomberg on the Economy just in the last 48 hours. Dr. Gaddy, I was at Alan Greenspan’s speech last night at the Economic Club of New York and that’s all anyone was talking about was your sphere of influence. If you could speak to any of my listeners, what’s the one thing we need to know right now about Russia?

GADDY: I think Russia’s standing before a crossroads in terms of its economic policy and that obviously will influence a lot more the politics and the foreign policy. Putin has had eight years to put in place a particular system, I can talk more about that if you like, that has functioned extremely well from his point of view up until the global crisis began, especially the fall of oil prices last summer. For a few months it seems like his system and his preparations, frankly preparations for a crisis, was going to pull Russia through this thing. I think now, I begin to wonder, I think the Russian population begins to wonder, and I suspect that Mr. Putin himself begins to wonder whether things might require a radical rethinking of the direction in which the Russian economy has been going up until now.

KEENE: From his Davos speech, did the tone of the language in the Davos speech surprise you?

GADDY: Maybe a bit. I think I’m rarely surprised by Putin because he is so flexible, so adaptive, and one has to assume that he’s sort of thinking ahead of the curve. You have to sort of take it for what it is and try to analyze it and figure out what he really might be suggesting with the tenor of some of his remarks.

KEENE: Russia’s Addiction, when do we see this novel on Russia?

GADDY: Well, we expect to have that out later this year.

KEENE: Is it going to be the dry text of a typical Brookings survey or is there a sweep to it? Are you going to look back in history?

GADDY: We will be looking at a sweep, we will be. My co-author, Barry Ickes, and I are actually going back, looking at Russia’s economic history from the Soviet period, through the 90s and now into the current situation and of course trying to project forward as best we can from what’s happening right now.

KEENE: I have this brilliant sentence, November of 2005, Clifford Gaddy: “Unraveling how the wealth from Russia’s energy production is redistributed back into the economy remains key to understanding the country’s political economy.” Ok, that’s brilliant as we saw oil go up and then boom up, how do you reverse that process? What is the mechanism to get to political stability in Russia if you have to unravel those surpluses?

GADDY: Exactly, this is the key because during the boom period, or the bubble period, Russia’s rents, it’s windfall, from the high oil prices was being distributed throughout the economy, much of it through formal taxation collected into the center, put in a stabilization fund, a big oil-petroleum fund, as well as in it’s foreign exchange reserves, but much of it, and this is really key to the Russian political economy, much of it was being distributed informally. It was being distributed in the form of off-budget, so-called “voluntary contributions” by companies to local and regional governments. I say that in quotation marks because they weren’t voluntary at all, they were sort of an informal tax. Similarly, these big oil and gas companies and some of the other commodity companies are expected to place orders with large, Russian so-called dinosaur industries, the old manufacturing industries from the Soviet days in order to keep those politically and socially important entities afloat. Now when the rent shrinks, then how is it going to be shared downward, who is going to suffer, who is going to get relatively more of what is left? In other words, the old question of dividing a shrinking pie, and that is politically explosive in Russia.

Listen to the entire interview » (mp3)