Traps in Putin’s Path
This arsenal of economic tricks doesn’t guarantee the Russian government an easy life. In times of global economic turbulence and diminishing popular support, the price of making mistakes in economic policy will be unprecedentedly high.
Like most nations today, Russia needs to navigate between austerity and growth-stimulating economic policies. The Russian government is also particularly vulnerable to high-level lobbying from special interest groups, leaders’ personal mistakes, and the pitfalls of an overly centralized power structure.
Every government needs accurate data about what’s happening in its economy. On the one hand, aggressive budget and monetary stimuli could bring about inflation, as well as various financial and real estate bubbles (and defaults). On the other hand, austerity measures might kill anemic economic growth and lead to social unrest.
The Kremlin's decisions will ultimately be based in its previous experience such as it is. The 2008 crisis was largely unanticipated by Russian leaders. Now the government prefers to overreact to any negative signs, thus strengthening markets’ pessimistic expectations. At the same time, during the previous crisis, the Russian government demonstrated effective crisis management strategies, quickly flooding the economy with public money. As a result, many people haven’t even noticed the 8% drop in the GDP. The approaching crisis might not be as acute, but this time, the government can’t afford to spend money without counting.
Because financial resources are limited, the government needs to spend them more efficiently. This is a challenging task in the absence of transparent democratic procedures. Dmitry Medvedev, now the Prime Minister, has attempted to make up for the absence of many democratic institutions with his so-called “open government” that mainly entails numerous committees of specialists, business leaders, NGO heads, academics, journalists and even some members of the opposition.
These structures are likely to produce a lot of discussion and even specific recommendations, but they won’t be able to stop powerful oligarchs from channeling budget resources into their own projects and companies. The opportunistic behavior of “well-connected” businessmen could hollow out budget, which may lead to Putin being unable to fulfill his promises to his electorate, which expects further rises in pensions, salaries, and social welfare.
The most striking example of ineffective public spending from the 2008-2009 financial year was the construction of the gigantic bridge to Russky Island, which has a population of around five thousand. Normally, infrastructure projects at least create jobs. In this case, a market-minded contractor hired the majority of the work force—everybody from engineers to construction workers—from abroad. The recent project to expand Moscow’s administrative borders might be a similar project. Many experts agree that the whole project and especially the peculiar form of Moscow’s new borders were most likely shaped by the business interests of powerful stakeholders.
A fire at the construction site for the bridge to Russky Island, December 2011
The increasing scarcity of budget resources will trigger ruthless competition inside the ruling clan. Many businessmen tied to the current regime might consider the coming crisis their last chance to make money through government influence. They will do their best to secure new public contracts, cheap credit, or sell their assets to the government or state-owned corporations at bargain prices.
The Kremlin’s centralized, hands-on management style may be efficient in implementing a limited number of relatively straightforward decisions, but this rigid system is incapable of processing large quantities of information without making mistakes.
For example, during the previous crisis, Vladimir Putin, then Prime Minister, concentrated on bailing out the Soviet automotive giant AvtoVAZ. To protect the domestic market, the government banned the import of right-hand drive vehicles from Japan. This decision cost thousands of jobs in car dealerships in the Russian Far East. Furthermore, the government spent billions on subsides to deliver AutoVAZ vehicles from the Volga region to the Far East. Nevertheless, the Far East consumers, used to Japanese quality, didn’t buy any of the discounted cars. The bottom line is that public money was wasted, jobs were lost, and the struggling automotive producer gained nothing from it.
On April 4, 2012, Vladimir Putin launched the production of the Lada "Largus," and even signed the hood of the first model manufactured
The number and the cost of the government’s economic mistakes could accumulate rapidly. Within the centralized management system, information isn’t freely exchanged. As a result, those who have a better access to decision makers attract more government resources while those who really need help often don’t get anything. This time around, every government mistake will be scrutinized and discussed on social networks and Internet media, multiplying the public relations damage for the government.
Putin’s administration has all the necessary resources to prevent serious economic unrest in the next six years. To secure personal power, Putin needs to strengthen discipline among the elites (the bureaucracy, siloviki, and the oligarchs) and rely more on his competent economic ministers instead of his own populist instincts. The demonstrative persecution of leaders just recently considered a part of Putin’s establishment (Sobchak, Gudkov, and others), counterbalanced by liberal developments in the new economic policy hint that Putin’s new course will involve the combination of strict discipline within the ruling class and responsible macroeconomic policy.
