Anatoly Karlin

At present, all we see is chaos, struggle, economic collapse, ethnic disintegration – just as the observers of 1918 did. How could they have foreseen then that a decade or so later the USSR would have begun to produce chemicals, aircraft, trucks, tanks, and machine tools and be growing faster than any other industrialized society? By extension, how could Western admirers of Stalin’s centralized economy in the 1930’s know that the very system contained the seeds of its own collapse?

Preparing for the Twenty First Century, Ch. 11, ‘The Erstwhile USSR and its Crumbled Empire’, pp. 249, Paul Kennedy (1993).

Assessing Russia’s effective strength has been a problem for observers of the country since its inception. It’s a riddle, an enigma and a mystery all wrapped up in one, as Churchill wryly noted long ago, and that’s unlikely to change soon. In any case the paradigm has certainly held these past fifteen years since the Soviet disintegration.

Wildly optimistic predictions of tigerish growth rates and flourishing democracy were confounded, as practically every socio-economic statistic worsened and reforms were perceived to have authorized the wholesale looting of Russia – ‘the sale of the century’ – and the creation of a ‘historyless elite’ focused on the ‘exchange of unaccountable power for untaxable wealth’. By the end of the 1990’s, the state’s monopoly on the legitimate use of violence, tax collection and monetary emissions had eroded; market fundamentalism had transformed the Upper Volta with missiles into a ‘looted and bankrupt zone of nuclearized anarchy’ in a demographic death spiral presided over by the ‘world’s most virulent kleptocracy’ about to splinter along ethnic lines and fall into fascism sometime tomorrow. The Atlantic put it nice and simple: ‘Russia is Finished’.

Since the 1998 financial crisis, the state has reasserted itself. The ostentatious oligarchs who flaunted their power in the 1990’s have been brought to heel and what Kremlin ideologists call a ‘power vertical’ has been established in politics. Growth since then has been around 7% per annum, returning the economy to Soviet peak levels of output by around 2003. Poverty has been slashed and the middle class has exploded, attested to by impressive increases in such areas as car and mobile phone ownership, Internet penetration and living space. Rising oil prices permitted the cancellation of most debt obligations and the creation of gigantic foreign currency reserves; yet since 2003, consumption and more recently investment have played an increasingly significant role. Indeed, the idea that the Russian recovery is due entirely, or even mostly, to high oil prices is a myth – indeed, production has been more or less stagnant since 2005 in the hydrocarbons sector. Retail, construction and late manufacturing have been the key drivers of growth – like in the Baltics or neighboring CIS countries. Big Western firms such as Peugeot, Toyota and Mitsubishi are building up production capacity in Russia. The government is starting moves to diversify the economy by pursuing investment in ‘national priority projects’ (education, heath, housing and agriculture) and targeted investments into ‘strategic industries’ like aircraft and space, shipbuilding and nanotechnology.

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