Putins Groundhog Day: The Russian

people keep paying the price for their

leaders incompetence

By

Matt O'Brien December 21 at 9:45 AM

In the bad old days, Russia's facsimile of an economy would

crash every time the price of oil did. The government would go broke, the currency
would collapse, and ordinary people would see their standard of living evaporate. Now
if all this sounds familiar, that's because the bad old days never went away under
Vladimir Putin. He just got lucky until now.
So now, like they have for generations, the Russian people are paying the price for
their government's economic illiteracy. And it's a miserable price to pay for the

nation's 140 million people.

The Soviets knew this story well. The oil shocks of the 1970s filled the USSR's coffers
with enough cash to not only mask the massive inefficiencies of its centrally-planned
economy, but also launch its own imperial quagmire in Afghanistan. It was enough to
make Americans think they were losing the Cold War.
But then, like that, the USSR was gone. All it took was Saudi Arabia deciding to let oil
prices fall, and the Soviet empire did too. The whole Marxist-Leninist thing didn't help
either. Supermarkets went empty. People went hungry. And then nobody would lend
them any more money. That's how the Cold War ended: Not with a bang, but a bailout.
The Westloaned the bankrupt Soviets $100 billion, and, in return, the USSR let its
satellite states go.
The end of communism, though, didn't bring prosperity. The opposite, actually.
Russia didn't (and still doesn't) so much have an economy as an oil exporting
business that subsidized everything else. And with oil prices averaging just $17.50-abarrel in the 1990s, that business was in bad shape. Russian companies that were used
to getting handouts from the oil-rich government had to get loans from the central
bank instead. This created so much new money that inflation, which had already built
up due to just-ended price controls, exploded to over 800 percent. The government
was able to bring this down to merely painful levels of 10 to 20 percent, but only at the
cost of a protracted slump. Unemployment climbed into the double digits, all while the
cost of basic goods rose out of reach for even people who managed to keep their jobs.
The result, as you can see below, was a lost decade for Russia.
Gross domestic product per capita, adjusted for local prices, actually fell in the eight
years after the USSR did.

Source: IMF
Russia was still basically bankrupt, but without the benefit of bankruptcy. It simply
owed the West more money than it could reasonably pay back. That, as Jeff
Sachs points out, was different from how the U.S. treated other post-communist states.
Sachs, you might remember, was the economist who advised the former Iron Curtain
countries on the, as he called it, "shock therapy" they needed to save their failing
economies as they transitioned to capitalism. The U.S., he explains, helped ease
Poland's inevitable pain by giving them $1 billion to stabilize their currency and
forgiving much of their debt.
But the U.S. wasn't so magnanimous with Russia. It wasn't magnanimous at all. Russia
was required to pay back everything it owed. And in the meantime, even more debt
was piled onto its rotting husk of an economy in the form of emergency IMF loans.
Because a nuclear-armed country would never be allowed to default, right?
Well, no. It's hard to say whether Russia was the victim of bad leadership and worse
luck or bad luck and worse leadership. The government's incompetence, you see, was

only matched by its corruption. Economic reforms were always a day away. And
behind closed doors, state-owned monopolies turned into privately-owned monopolies
thanks to sweetheart deals that made government officials rich and the new oligarchs
regally so. Russia, in other words, traded one gangster state for another. And its
economy, so far as it had one, was still entirely based on extracting natural resources.
That's why, when oil prices tumbled from their already-low levels in 1998, Russia
found itself back where it'd been a decade before: bankrupt. Under pressure from
markets, it devalued the ruble and defaulted on its debt.
Then a miracle happened: oil prices started rising. Okay, it was more China's miracle
than Russia's, but, after two decades of decline and fall and even more declining, that
was more than good enough for Putin. He'd become president in 1999, when oil prices
averaged just under $18-a-barrel, and watched as China's insatiable demand for raw
materials helped push the price up into the triple digits over the next decade. That gave
Russia so much money that even after the oligarchsPutin's real political basetook
their cut, there was still enough left over for ordinary people's living standards to
improve.
But despite this, Russia's economy didn't really improve. Putin didn't diversify it at all,
not if you don't include braggadocio. It's still all about digging things up out of the
ground and selling them. That, of course, was all Putin needed to do what Russia's
rulers have always doneinvade a neighboring country or twowhen they're feeling
flush with petrodollars. But it left Russia vulnerable to the same kind of crisis that's
always hit it when oil prices have unexpectedly fallen.
This time, at least, the government has built up a war chest of dollars to keep the ruble
from falling too much. But Russia's companies became the epicenters of economic
doom instead. They borrowed a lot of dollars, in part, as Paul Krugman points out,
because the ruble's rise the years before had made these debts look smaller than they
actually were. It didn't help that Western sanctions over Putin's incursion into Ukraine
kept Russian companies from rolling over what they owed by shutting them out of

international credit markets. So now that the ruble is plummeting, those dollar debts
are harder to pay back, and it's sucking the economy into a death spiral.
This is Russia's version of Groundhog Dog. Oil crashes, so does the ruble, and then
unemployment balloons. Sometimes the government goes broke. Other times
companies do. In any case, it's the ordinary people who suffer. They get hit by the
double whammy of unemployment and inflation. So even if they're lucky enough to
keep their jobs, their budgets still get squeezed by the rising cost of everyday
essentials. It's even worse for imports, which make up a big chunk of the manufactured
goods they buy, and have suddenly become twice as expensive now that the ruble has
fallen by almost half. That's why shoppers are stampeding to buy whatever foreign
products they can get their hands onluxury cars, Apple products, or even Ikea
furniturebefore the ruble loses any more value.
Russia's winter of discontent, though, is about to get even more bleak. Its central bank
just jacked up interest rates to 17 percent to try to prop up the ruble, which is so high
that nobody will want to borrow. But even if they did, nobody will be able to get a loan
on anything less than punitive terms when banks are so scared that they won't even
lend to each other. This credit crunch will turn Russia's already-nasty recessionGDP
is projected to shrink 4.7 percent if oil stays at $60-a-barrelinto a full-on depression.
In a worst-case scenario, the economy could contract as much as 10 percent next year,
even as inflation flirts with double digit territory.
It shouldn't be this way. The one thing Russia doesn't have a shortage of, after all, are
brilliant scientists, programmers, and mathematicians. By all rights, it should have a
booming high-tech economy. A Silicon Valley-on-the-steppes. But that would require
giving people the freedom to challenge authority, which is far too much for Putin when
he thinks that anyopposition amounts to a "fifth column." It's safer just to dole out the
old Soviet monopolies to his cronies, and let the plebes shop in the meantime.
Putinism, in other words, is communism minus the pretense that all animals are equal.

Every happy economy might be alike, but in Russia, at least, the unhappy ones are too.

Matt O'Brien is a reporter for Wonkblog covering

economic affairs. He was previously a senior associate editor at The
Atlantic.
Posted by Thavam