The immediate causes of Russia’s financial crisis severe fiscal imbalance and inability to service the debt, especially short-term dollar liabilities are clear. But the roots of the problem are deeper. They lie in the emergence of a new kind of economic system in Russia that Clifford Gaddy and Barry Ickes call the “Virtual Economy” because it is based on illusory, or “virtual,” prices, sales, wages, taxes, and budgets. Far different from the conventional wisdom of a reforming economy moving progressively closer to the market, the non monetary Virtual Economy protects huge parts of the value-subtracting Russian economy from the market.
The Virtual Economy is robust, deep-rooted, and enjoys strong popular support. Gaddy and Ickes argue that it has defined a new “reform” agenda for Russia that is already setting the tone for current and future governments.
Observers came to Brookings for a luncheon discussion with Gaddy and Ickes on the logic of the Virtual Economy and its relevance for the following questions:
- What does the existence of the Virtual Economy imply about the true state of the Russian economy today?
- Will a Western bailout of Russia only strengthen this system?
- Can we attach strings to a bailout that would challenge the system? Do we even want to challenge it?
- How long can this system be sustained, and what happens if it breaks down?
- What are the implications for future debt crises and bailouts?