The President's Turn Away from the Market
by Anders Aslund, Peterson Institute for International Economics
Op-ed in the Moscow Times
November 8, 2006
© The Moscow Times
Under President Vladimir Putin there has been a buildup of grievances about Russia's political development, but the economy has appeared to remain safely in the free market zone where his predecessor, Boris Yeltsin, left it. Unfortunately, Putin's televised question-and-answer session with the nation on October 25, 2006 marked a radical departure from his prior market economic rhetoric. Having lived in the Soviet Union, I experienced déjà vu while reading Putin's restoration of old-style Soviet economic language.
Just as it was in the old days, the patriarchic state has authority over everything but responsibility for nothing. The economic essence of Putin's three hour exposition was that he favored ethnic discrimination, trade and price regulation, protectionism, state intervention, industrial policy, subsidies and, most of all, centralized micromanagement. Conspicuously absent were ideas like deregulation, the rule of law, and private property rights.
Putin's starting point was ethnic discrimination. With reference to the ethnic strife that flared up in the small Karelian town of Kondopoga at the end of August, he fanned the racist flames by siding with Russian farmers who complained that merchants of unspecified ethnicity paid them little for their produce. Putin wants “to assure that the interests of Russia's native population are the priority on the labor market and in the sphere of trade." The question does not just concern immigrants, but also Russian citizens of other ethnic backgrounds. The Kremlin has long allowed aggressive Russian nationalism free reign in the media, but here Putin himself came out as a Russian nationalist.
One major economic concern is the labor shortage generated by low birth and high mortality rates. One resource for dealing with the problem is the large number of people in former Soviet republics willing to immigrate to Russia. Rather than facilitate this, Putin is encouraging the same brand of Russian chauvinism that has resulted in the murders of Russian citizens from different ethnic groups.
Putin's answer is more regulation. When a farmer complained about poor market access, he advocated further restrictions on the already overregulated, old collective-farm markets. They should not be allowed "to sell processed goods such as smoked sausage" or "clothes imported from China." This was probably the first time since the battle against "unearned incomes" in 1986 that a Russian leader raged against the sale of the "wrong products" in the old-style collective-farm markets.
Putin has proved equally fond of price regulation. Last summer, people had to stand in long queues for alcohol for the first time since the fall of communism, and the culprit was none other than the government. The introduction of new excise stamps for alcohol, which the government then failed to deliver, caused severe shortages. Commenting on this Kremlin-instigated calamity, Putin mildly said some officials had "turned out to be unprepared," while he saved his condemnation for "unscrupulous producers" who raised prices because of the shortages. Welcome back to Soviet orthodoxy, the classic Marxist labor theory of value!
In the same vein, Putin referred to the disparity in prices between agricultural and industrial products as the "most serious problem today." Unwittingly or not, he repeated the Bolshevik argument about the so-called "scissors' crisis" for collectivization that brought the happy period of the New Economic Policy in the 1920s to an abrupt end.
The most dramatic turnaround concerned the World Trade Organization (WTO). In his annual address on May 10, 2006, Putin advocated accession to the WTO, talking about the need for "more rational participation in the international division of labor" to make "full use of the benefits offered by integration into the world economy." This time he did not even mention the WTO while proposing measures in direct contradiction to the organization's rules. For example, he called for increased subsidies for animal husbandry in agriculture, the stimulation of automobile production by raising customs duties and higher export tariffs for lumber.
Meanwhile, US-Russian negotiations on a protocol for Russia's accession continue. A meeting between Putin and US President George W. Bush at an Asia–Pacific Economic Cooperation gathering on November 18, 2006 is being viewed as a last chance to conclude an agreement. But Putin's statements seem to indicate that he has abandoned his long-professed intention of bringing Russia into the WTO.
Rather than favoring the international division of labor, Putin is now advocating industrial policy, import substitution and state subsidies for priority industries. As a boost to the forestry industry he suggested "the import of equipment" and the "development of the relevant branches of machinery manufacturing in Russia." For every industry mentioned Putin referred to a specific national project or program to stimulate that very sector with significant government attention and subsidies. He praised the formation of the state investment fund and the venture fund, despite the clear evidence of already abundant and inefficient state investment.
The only Soviet economic tenet missing was the nationalization of the means of production. In reality, this drive is already well advanced. Poorly run state-dominated enterprises have acquired efficient private companies rather than carry out productive investment in their existing assets, while private corporations are afraid of investing because property rights remain terribly weak. As a consequence of the resulting near-stagnation in oil and gas extraction, industrial production is growing by only 4 percent per year, a figure about which Putin actually voiced concern. But he did not utter a single word to try to reassure private investors.
On the contrary, Putin seemed to declare open season on private enterprise. A retired St. Petersburg actress complained about the condition of her retirement home, which a major company wanted to take over. Putin readily named the corporation in question, Sistema, and called on it to provide $5 million in financing—"small money for this company," he said—to solve the pensioners' housing problem. This little show was designed to demonstrate Putin's concern for the elderly. What it revealed, instead, was his disrespect for the legal system and private property rights.
In his marathon three hour performance, Putin presented an economic vision very different from earlier statements. His new policy aims at unlimited state intervention, centralized micromanagement, state investment, price regulation, higher custom tariffs, export taxes and import substitution. This well-known model has failed all over the world. Putin is only able to pursue this economically harmful advocacy because of high oil prices and thanks to his predecessor, Boris Yeltsin, who created a critical mass of private enterprise and a market economy. To judge from his words, Putin has gone back to the Brezhnev tradition, which led to the Soviet economic collapse. But even Leonid Brezhnev would be embarrassed by Putin's open nationalism.
Putin held his national conversation on the third anniversary of the arrest of Mikhail Khodorkovsky, an important milestone in the transformation of Russia into an authoritarian state. October 25, 2006 might go down as another black day in recent history—the day on which Putin abandoned the market economy. The best we can hope for is that he did not actually mean what he said.