Fast growth and price controls, glory and misery, ambition and sloth do not mix well. Russia is relapsing into its old ways.

The first half or so of Vladimir Putin’s presidency started to look as if Russia were embarking on its history’s third great attempt at becoming a “normal country” with a middle class filling the vacuum between her thin ruling elite (if “elite” is the fitting word) and her mostly miserable, passive masses, and with the benign consequences of such a structure for the country’s stability, prosperity and good-neighbourly conduct. This column, under the timidly hopeful title of “Third Time Lucky” (5 April 2004), speculated that after the liberation of the serfs in the 1860s and the Stolypin reforms of the 1900s, both of which ended in miscarriages that seem so typical of Russia, the Putin experiment might turn out to be the one that defies and lifts the old curse that sits on the country. Privatisation of more than 60 per cent of non-farm production seemed to have passed the point of no return that would be followed by an irreversible loosening of the government’s grip on the economy, on people’s livelihoods and hence also on their political obedience. It is now clear that this was a false hope.

Anatoly Chubais, the privatisation tsar under Boris Yeltsin, held that it did not much matter who got hold of state assets and by what corrupt manoeuvres. The important thing was to get the greatest possible volume of state property into private hands as fast as possible before the political climate changed and further privatisation was stopped. He thought that there might be no time to arrange for a wide distribution of state property and for thus laying the foundations of a property-owning middle class of small shareholders and small entrepreneurs. The result was that many, probably a majority, of state enterprises were simply stolen by their previous “red directors” and wheeler-dealer insiders, creating some astronomical fortunes out of thin air. But unlike Schumpeter’s “private fortresses” (the great business empires that acted as counterweights to the state), these concentrations of wealth depended to no small extent on the Kremlin’s grace and favour, if only because their illegitimate origin gave the authorities some hold over them. The fate of Mr. Khodorkovsky, now in an obscure Siberian prison, and his giant oil company Yukos, driven into bankruptcy by bizarre tax claims, was a shrill warning signal to the other “oligarchs” to very closely heed Mr. Putin’s wishes. By all accounts, they now do. And are repaid with favours.

Ambition and Squalor

Mr. Putin rose from middle-level provincial KGB officer in occupied East Germany to all-powerful president, reputedly as part of a complex and secret deal between his secret service and military backers and the Yeltsin family. The deal has supposedly secured immunity for Mr. Yeltsin’s daughter Tatiana for amassing a fortune by unorthodox means. His elevated role fitted President Putin like a glove. He soon perceived that the common Russian’s and his wife’s desire for normalcy, an end to queuing, more variety, less drabness, a modicum of free speech and foreign travel was really not their first priority. He did satisfy it to a limited extent, though in time-honoured Potemkin for-show fashion the effect was mainly confined to central Moscow shop windows, with the provinces and in particular the villages getting little uplift from their Soviet-era squalor.

However, the real priority of the Russian people has proved to be the restoration of their pride in holy Russia, her greatness and virtue. They did not want it to be like “any normal country”; they wanted it to be unlike any other, once again a colossus feared by its adversaries and admired by the rest. The deep humiliation of the failed Soviet experiment, the bitter insult of the Baltic states, the Ukraine, Georgia, Azerbeijan, Kazakhstan and some smaller fry all rushing to shake off Moscow’s rule the weakness of the Yeltsin years, the shame of the 1998 financial collapse, left deep wounds in Russian self-respect. The first priority of politics became to reassert Russian might. It is proving a stretch to do it with inadequate means.

In the service of this ambition, incipient democracy is now giving way to barely veiled dictatorship and covert re-nationalisation of what they call “strategic” resources. Such liberal economists as Greef and Ilianorov who had directed much of economic policy until recently, have little or no influence left and the winner of the 2008 presidential elections, reputedly already chosen by Mr.Putin, is likely to be an army Marshal.

Clay Feet Showing

The perception in the West is that Russia is advancing by leaps and bounds. To a critical eye, the advance is more like hopping along on clay feet. Admittedly, economic growth is proceeding fast at about 6 per cent p.a. and has done so since 2000. However, some of this growth is clearly a catching-up after the shrinking during the 1990s. More sobering, though, is that once past the catching-up phase, little or no growth might have occurred if the oil price had stayed at its turn-of-the-century levels. Now, with $60 a barrel, oil money is pouring in and sloshing around the economy, forcing up prices and wages (the latter at a hardly sustainable rate of the order of 15 per cent p.a. for industrial wages), sucking in imports and making non-oil exports uncompetitive. Oil slipping back to $40 or less a barrel would be a nightmare scenario for Russia.

Another weakness, this time actual and not just potential, is the severely strained power generating capacity. Present capacity is 150 gigawatts, still below its Soviet-era peak. This is wholly inadequate. Many industrial companies are now rationed, and in Moscow no new consumer may be connected to the power grid, which has led to new housing being connected in exchange for fabulous bribes.

The root cause is not so much the typical Russian vice of careless, slothful maintenance, but rather the equally typical waste of power brought about by low state-controlled tariffs. The giant state-owned power utility UES which controls 70 per cent of all generating capacity needs to install 23 gigawatts of new generating capacity by 2010 to meet demand and needs $83 billion to do it. It has neither the money nor the extra supply of natural gas to fuel the new power stations if it contrives to build them. Ironically, it is money and natural gas that Russia is supposed to have most of. The key reason is price control. Controlled prices in most provinces are either just below or just above break-even for “social reasons.” De-control is promised, but comes slowly. In 2007, only an extra 5 per cent of power consumption will be de-controlled. Meanwhile, UES is seeking investment from abroad. In 2007, it plans to float between 5 and 10 of its constituent companies on the admirably patient and tolerant London Stock Exchange, raising $10 billion. Even that much would not begin to ward off the looming power shortage.

A word needs also to be said about the clay feet of the much-feared giant Gazprom. It is alternating between assurances to Western Europe about how reliable it will be as its principal supplier of natural gas, and flexing its muscles and threatening to restrict supplies if it gets no direct access to the retail market that is more remunerative than bulk contracts. At home, however, it must sell gas at small fractions of export prices, starving itself of investment funds. Consumption at these controlled prices is appallingly wasteful and rising fast. Pipelines are decrepit, poorly maintained and leaking badly (as do most of the oil pipelines). Gazprom has a monopoly of gas pipelines and exports from Russia, and is categorically refusing European demands to relax it.

Perhaps even more ominous than the rickety economic infrastructure is the biological future of the Russian people itself. Life expectancy, rising virtually everywhere else in the world, has fallen drastically in Russia. The population is already decreasing and a further and faster decline in the next two decades is written into the demographic statistics. Moreover, public health outside select spots is worthy of some poor third world country.

In this as in so much else, Russia conceals what the now happily defunct Marxist language used to call “internal contradictions” behind a bold front of sham greatness.


*Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride (Oxford 1989) and Against Politics (London,1997). His latest book, Justice and Its Surroundings, was published by Liberty Fund in the summer of 2002.

The State is also available online on this website.

For more articles by Anthony de Jasay, see the Archive.