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A bad record

12 March 2014 By Edward Hadas

The revival of East-West tension over Ukraine looks thoroughly geopolitical. But the context is bad economics. In the last century, Russia was damaged by flawed ideologies which originated in the West. And today it is damaged by Western economic policy.

It is easy for Western Europeans and Americans to look down on the Russian economy. Since the breakup of the USSR, the nation’s real GDP per person has increased at a 3.9 percent annual rate. That is a modest accomplishment for a middle-income country with a great deal of resource income. While Ukraine’s 1.7 percent growth rate is even worse, Armenia, Poland and Romania have all grown faster than Russia.

Now look at it from the other side: what the West has given Russia. There are good things, from markets for energy exports to many types of sophisticated technology. However, these positives are dwarfed by two disastrous ideologies in the past and two selfish and hostile policies in the present.

When the Communists took over Russia in 1917, they imported a theory that had been thoroughly discarded in its European homeland. Under the influence of Eduard Bernstein, Karl Marx’s own political party, the German Social Democrats, refused to support an attempted Communist revolution in 1918. The Marxist USSR made some economic progress, but growth eventually dwindled as the system was frozen by inefficiency and corruption.

When the Soviet Union finally collapsed, Russia imported another Western idea which had basically been discredited at home: blind confidence in free markets. By 1989, the wise minds in development economics knew very well that markets are only healthy when they are set in a favourable institutional environment. And the Chinese had already shown a better way to organise post-Communist economies.

The experts who were sent to help Russia seem to have ignored all that. With the help of Russian collaborators, they imposed a “shock therapy” of massive privatisation and price liberalisation on an unprepared country. These ideologues were genuinely shocked by their failure. While they licked their intellectual wounds, the Russians ended up with new varieties of crippling inefficiencies and corruption, including a class of hyper-rich usurpers of the nation’s wealth.

Whether or not Vladimir Putin is fully aware of the damage done by the two radical Western notions, it is hard not to sympathise with an immediate Russian mistrust for any well-meaning Americans or Europeans explaining that they only want to help Russia adjust to modern reality. 

There are few Western sympathisers left for either of the ideologies which so damaged Russia. That is not the case for the West’s present harmful economic policies. Start with the easy monetary policy that has helped keep oil and gas prices high. Or course, the relationship between the cost of money and the cost of energy is not direct. Still, abundant money explains at least some of the gap between the $20 a barrel average for Brent crude in the five years before the U.S. Federal Reserve came to the rescue of the stock market in 2001 and the $70 average since. The current price is $109.

Russia, which gains 72 percent of its export revenue from energy, has used the monetary windfall to enrich a few people, subsidise otherwise unaffordable pensions and generally avoid helpful but hard economic decisions. In a country traditionally plagued by an overly powerful government, the Western-funded state energy bonanza has been little short of disastrous. The Russians are responsible for mismanagement, but the Federal Reserve and other central banks deserve some of the blame for creating the opportunity.

Putin has led Russia through most of this period. His governments and his friends have gained from the willingness of developed nations to distort the global economy – even at the cost of paying more for vital commodities – for the sake of slightly higher GDP growth at home. However, those policies can only reinforce Putin’s view of the West as weak and narrowly self-interested.

The West’s enthusiastic welcome offered to Russian oligarchs and their capital supports that view. If European governments were seriously committed to Russia’s welfare, they would not be so anxious to help people taking wealth, legitimately earned or otherwise, out of a country in desperate need of investment.

It was much the same in pre-revolutionary Russia. Westerners gave Russia lectures about their dangerous irresponsibility, while happily sharing its spoils. Back then, Crimea and most of what is now Ukraine were then part of Russia. Putin seems to want to restore some of the old borders. That would go along with the renewal of the old hypocrisy.

Putin may believe that when the crunch comes, countries which are happy to ease Russia’s unfair play at home will struggle to back up any noble words about Ukrainian self-determination with significant actions. It is too early to tell if he is right, but it is easy to see why he would not take the West at its word.


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