Putvedev is Russia’s White Rider

In April 2007 Peter Zeihan of Stratfor wrote a thought-provoking article The Coming Era of Russia’s Dark Rider, which tries to pin down the metahistory of Russia’s socio-political evolution and perhaps even inspired a book. The basic idea is that following its cyclical collapses (the Mongol conquest, The Time of Troubles, the Civil War and the post-Soviet transition), there eventually emerges a messianic “white rider” who heavy-handedly restores order and national morale (the early 16th C princes of Muscovy, Peter the Great, Lenin). Putin is the current white rider, intimately cognizant of Russia’s weakness from his intelligence background and determined to once again play state-driven catch-up to the West.

Disappointed by slow and stunted progress, the white rider  “realizes that the challenges ahead are more formidable than he first believed and that his (relative) idealism is more a hindrance than an asset”. In steps the “dark rider”, who unburdens himself of the white rider’s moral restraints in an all-out drive to fulfill the state’s goals through strict internal controls, subjugation of the economy and military expansionism. The most famous examples are Stalin and Ivan Grozny in their later years. Yet the dark rider sows the seeds of destruction by overextending his realm, ushering in a period of stagnation and increasing socio-economic strains. Half-hearted attempts at reform fail and the country slides from decline into a new collapse, thus closing the cycle.

Mostly agreed so far, even despite the latent simplifications and semi-mystical approach to history, but we diverge on the interpretation of the current situation. Zeihan now writes “Putin’s efforts to stabilize Russia have succeeded, but his dreams of Westernizing Russia are dead. The darkness is about to set in”. The main evidence? The crackdowns on liberast protesters in Moscow and St.-Petersburg, in the same month that the article was written. But as I’ve pointed out many, many, many times, these folks are by and large jokers who enjoy no support from mainstream Russian opinion – points that Zeihan actually concedes. Yet though undoubtedly heavy-handed, there is absolutely no evidence for interpreting this as an omen of impending despotism.

Instead, I think the Putin circle of siloviks (Sechin, Ivanov et al) and patriot-liberals (Medvedev, Surkov, etc), constituting an organic whole whom I’ll henceforth refer to as Putvedev – was, is and will remain a white rider for at least the next decade. In support of this view I’ll draw in the ever incisive Nicolai Petro, or rather his most recent article The Great Transformation: How the Putin Plan Altered Russian Society.

The Putin Plan – Russia’s victory; an ever better life; the success of every Russian citizen.

As a presidential candidate, Medvedev said that as early as 2000, the government had begun to “think seriously about how we might work for decades ahead thinking also about morality and values”. This would later metamorphose into the Putin Plan – a strategy for building an advanced industrial economy by 2020. Though pessimistic commentators dismissed it as a Kremlin dream reminiscent of the vision of building Communism by 1980, the objective evidence – Russia’s high human capital, energy wealth and already existing basic infrastructure – suggests that this is entirely feasible.

According to Petro’s reading of the situation, there are two pillars of the Putin Plan – (1) stable economic growth; and (2) a stable legal environment. Each one is in turn divided into two phases, the first of which is “consolidation” and the second “reconstruction”. The first phase, which I would consign to 1998-2008, is largely completed; the second began around 2006 (coinciding with a sustained rise in national morale and demographic indicators) and should last well into the 2010’s, despite the economic crisis.

In the late 1990’s, Russia may have been at real risk of collapse. According to Vladimir Popov, the state needs to have a monopoly on three things – legitimate violence, tax collection and monetary emissions. All of these were seriously undermined in the transition period. Murder rates soared, Chechnya was afflicted by violent separatism and mafias controlled several cities. Until the financial collapse of 1998 the country ran perpetual budget deficits, with state spending shrinking slower than plummeting revenues. State servants turned into stationary bandits. The 1990’s were marred by hyperinflation, barter and chronic payment arrears. To restore law and order, Putin re-centralized power in time-honored white rider fashion, and by 2007 Popov was writing, “the first signs have appeared of a real, rather than an ephemeral, stabilization”. This conferred legitimacy on the Putin system, explaining its consistently sky-high popularity ratings – returning to Petro, “in a survey taken at the end of 2008, 80% cited the Putin era as the best Russia has had in a century”.

These kinds of headlines were typical in the 1998 to mid-2000’s period.

Aware that the old system was bankrupt, the Putin government introduced tax reductions (including a flat tax on personal incomes of 13%), insisted on budget surpluses, repaid foreign debts and declared a tax amnesty in 2006 so as to encourage the shadow economy to come into the light. Industry went from being fully state-owned in the early 1990’s to 90% private by 2002.

(The period since 2003 saw a partial reversal, with the state clawing back a portion of the oil sector and consolidating several heavy industrial conglomerates under its wings. That said, both steps are rational. It is a wise idea to extend control over diminishing energy resources in the coming post-peak oil world, especially when its prior owners  like Khodorkovsky defied national security plans and sought to undermine the state with foreign backing. And many of the formerly private industrial enterprises were inefficiently run by managers more interested in asset stripping than international competitiveness. There are long-term plans to re-privatize these enterprises in the mid to late 2010’s once the Russian economy matures.)

Petro points out that the extent of re-nationalization should not be exaggerated. State support for industry is statistically no higher in Russia than in the US. The coal industry, electricity sector and numerous mid-sized airlines, banks and car plants were privatized in the last decade. As I wrote a year ago on Russian corporatism, the private sector of GDP only declined from 70% to 65% since 2007 – the main structural change was that a big chunk of strategic industries particularly in energy, minerals, defense and aerospace) came under the control of Kremlin-connected oligarchs in place of old “offshore aristocrats”.

Whether these new captains of industry are conscientious patriots or state bandits is a matter of heated debate, running as it does through the heart of the Putin system. My view is that they’re somewhere in between, and certainly better than the old red directors, not to even mention the straight-out thieves like Berezovsky – and ultimately probably little different in terms of corruption or venality than Westerners, who just conceal or legitimize themselves better. Speaking of whom…

The spirit of corruption fuels all societies – it’s just that not everyone can call a spade a spade.

The ongoing Great Recession is throwing doubt on the real degree of transparency and accountability  at the heights of the US economy. Some revealing quotations from The Quiet Coup in The Atlantic by Simon Johnson, former IMF director:

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them… [AK: entrenched elites, institutional myopia, shadowy state capture – where have we seen that before? More support for my USA 2009 = USSR 1989 thesis and Fedia Kriukov’s idea of Western convergence with Brezhnev era USSR. I should also point out that Johnson is hardly alone in raising this point about systematic corruption – William Buiter has written prolifically on this]

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. [AK: Sounds like Ukraine, 1990’s Russia, etc] Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. [AK: Again, much like Soviet socialism. All nations run on hard (but fragile) belief systems. Incidentally, I agree with those analysts who believe Putvedev is resurrecting the belief in Russian exceptionalism – most of them think it’s a bad sign, I believe it’s natural and inevitable. Yet another example of Russian-Western convergence] Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world…

…everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it. [AK: Well, what can one say? Let’s hope The Atlantic is as prescient on US prospects as it was in 2001 when it headlined the article Russia is Finished].

Back to Petro. He believes the crisis will not be protracted in Russia – as pointed out here (and by Eric Kraus), state and household debt is minuscule; the peak of the repayments crisis has passed and a positive current account means there’s little chance of a balance of payments crisis. The main task now is to develop sources of financing independent of the sinking Western financial system, which would require cleaning up and consolidating the currently fragmented Russian banking system.

In the legal sphere, in his firm term Putin introduced habeus corpus, trial by jury, reformed juvenile justice and legal aid for the indigent. The second term saw landmark court decisions strike down compensation limits in the case of government disasters, expanded the rights of defendants to gather evidence, alibis and witnesses and ordered the state to pay compensation for those wrongfully detained. A network of free legal aid centers is being created. Citizens win 80% of suits against the government and the numbers of people going to the courts for redress of grievances increased sixfold in the past decade. The new code of criminal procedure raised acquittal rates from just 0.2% to 10% under Putin. Another whimsical observation of mine is that the drug laws were liberalized, with up to 6g of personal marijuana possession now legal. These are all hardly the actions of a state pining for theocratic totalitarianism.

Now we are moving into Phase 2, what Petro calls “reconstruction” or the “Medvedev Liberalization”. This emphasizes personal opportunity and responsibility, with the sole aim of government being to help Russian companies become globally competitive and to alleviate poverty – according to Medvedev, “if government participation is not essential, then the government involved” (see Conservative Russia by the Parallax Brief). There is a renewed anti-corruption drive and measures to ease the regulatory environment for small businesses.

Ushering in the new era of legality, markets and social activism is the so-called Putin generation, which has vastly differing values from those of older generations – initiative, boldness, hierarchy, individualism and Westernized patriotism (consult Economic Modernization and System of Values by Evgeny Yasin for an interesting study that shows that the values of the new Russia differ much more from traditionalist / Tsarist and Soviet values, which are surprisingly similar).

The Putin Generation.

In 2008, Petro wrote an excellent article The Putin Generation: How Will Its Rise Affect US-Russian Relations?

…what young people admire most about the past is not the regime or its ideology – words like “socialism,” communism,” and even “USSR” are perceived positively by less than five percent of young people, and only six percent say they would have liked to have lived in Soviet times… [but] the sense of common purpose their grandparents shared and how it united the country and made people feel proud. Young Russians growing up during the 1990s saw this inheritance trashed in the mass media and along with it any sense of pride in the country’s history. Not surprisingly, as these young people matured, it has spawned a counter-reaction.

…During his travels across the country lecturing to young audiences, Tsipko said he was struck by their yearning for a contemporary patriotic agenda. His own generation, the generation of the Sixties, discovered patriotism “through books, through the beautiful minds and words of pre-revolutionary Russian thinkers.” By contrast, the current generation has embraced patriotism as a defense mechanism against the blanket criticism of Russia’s past that left them with nothing of their own to believe in. “Just as Christian asceticism was a moral protest against the debauchery and dissipation of decrepit Rome,” he writes, “our youth conservatism and youth patriotism is a protest against the defeatism of the liberal elite. We now see the emergence of a Russian conservative elite that we didn’t have in late 1980s and early 1990s, when the fate of the country was hanging in the balance…

The Putin Generation is the first politically active post-Soviet generation. According to Alexander Oslon, general director of the Public Opinion Foundation, they are “entirely different” from previous generations. A 2006 survey conducted by the All-Russian Center for the Study of Public Opinion (VTsIOM) focused on some of the personality traits that set the Putin Generation apart. They tend to be bolder than their parents, viewing aggressiveness as a manifestation of self-confidence and initiative. Unlike their parents and grandparents, who are appalled by the emergence of the “super rich,” they are proud that Russia has the world’s second largest number of billionaires and either hope to make the list of Russia’s richest individuals themselves or see their children on it.

Having only the vaguest memories of the end of the Soviet era, they have little or no nostalgia for it and are quite comfortable in this new era of capitalism, electoral and media pluralism, and travel abroad. They shift primary responsibility for economic welfare from the state to the individual. In morality and religion, they “demonstrate almost Protestant attitudes,” emphasizing personal salvation and communication with God much more than participation in church life and the observance of religious customs. A 2007 study of 17-26 year olds, conducted by the Russian Academy of Sciences, concludes by describing them as “relaxed about planning for the future. They not only talk of wanting to achieve success in various forms – they actually believe they can do it.”

The emergence of this new personality type was foreshadowed by a little noted 2005 survey of college educated young persons, aged 18-31…It compared young people in Russia to their counterparts in seven West European countries and came to some startling conclusions. Young Russians turned out to be much more optimistic about their future than their European counterparts (79 percent to 46 percent), and more motivated to achieve their ambitions. While their European counterparts wanted to earn just enough money to retire as early as possible, young Russians were described as “active and optimistic. They are insatiable and they like the word ‘more’: more work, more money, more sex.” Notably, personal ambition was matched by a greater sense of patriotism, as well – 64 percent of young Russians said they would be willing to protect their Motherland, nearly twice as many as in Western Europe.

The next phase of the Putin Plan is to to create an “an effective civil society composed of mature individuals ready for democracy”, according to Medvedev – as noted by Popov, introducing full democracy before law and order have been established is not going to produce positive results, as testified to by post-Orange Revolution Ukraine.

He ends by cautioning the West against self-righteously pressing its own (ever more bankrupt, in substance as in spirit) belief systems on Russia to avoid alienating it – particularly in light of its own numerous hypocrisies, from economic neo-imperialism (see Those Russian Bastards by Jon Weiler) to their own human rights violations.

Russia is developing an increasingly mercantile, heavily state-influenced industrial policy geared towards achieving import substitution and an innovation economy. It is frequently condemned as antithetical to Pareto optimality and hence detrimental to the welfare of ordinary Russian citizens, even hinting it is all a huge scam to enrich corrupt Kremlin insiders. Though this viewpoint no doubt contains a kernel of truth, it misses out two big things:

1. Historically, all of the major industrial powers today rose to prominence through selective protectionism – especially those paragons of neoliberal capitalism, the US and the UK. From Kicking Away the Ladder by economist Ha-Joon Chang:

Contrary to the popular myth, Britain had been an aggressive user, and in certain areas a pioneer, of activist policies intended to promote its industries. Such policies, although limited in scope, date back from the 14th century (Edward III) and the 15th century (Henry VII) in relation to woollen manufacturing, the leading industry of the time.  England then was an exporter of raw wool to the Low Countries, and Henry VII for example tried to change this by taxing raw wool exports and poaching skilled workers from the Low Countries. [AK: There is an analogous situation with Russian raw timber exports, hence plans for an 80% export duty on them from 2009 so as to shift production to higher-added value paper, pulp and other mananufactured goods. See the article The Medvedev Economy by Josh Wilson for Russian state plans for the development of the agricultural and forestry sector, which are potentially very profitable but currently too risky for individual private entrepreneurs to undertake]

Particularly between the trade policy reform of its first Prime Minister Robert Walpole in 1721 and its adoption of free trade around 1860, Britain used very dirigiste trade and industrial policies, involving measures very similar to what countries like Japan and Korea later used in order to develop their industries. During this period, it protected its industries a lot more heavily than did France, the supposed dirigiste counterpoint to its free-trade, free-market system. [AK: very true – the ancient regime was liberalizing rapidly at the dawn of the French Revolution] Given this history, argued Friedrich List, the leading German economist of the mid-19th century, Britain preaching free trade to less advanced countries like Germany and the USA was like someone trying to “kick away the ladder” with which he had climbed to the top…

In protecting their industries, the Americans were going against the advice of such prominent economists as Adam Smith and Jean Baptiste Say, who saw the country’s future in agriculture. However, the Americans knew exactly what the game was. They knew that Britain reached the top through protection and subsidies and therefore that they needed to do the same if they were going to get anywhere. Criticising the British preaching of free trade to his country, Ulysses Grant, the Civil War hero and the US President between 1868-1876, retorted that “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade”. When his country later reached the top after the Second World War, it too started “kicking away the ladder” by preaching and forcing free trade to the less developed countries.

The UK and the USA may be the more dramatic examples, but almost all the rest of the developed world today used tariffs, subsidies and other means to promote their industries in the earlier stages of their development. Cases like Germany, Japan, and Korea are well known in this respect. But even Sweden, which later came to represent the “small open economy” to many economists had also strategically used tariffs, subsidies, cartels, and state support for R&D to develop key industries, especially textile, steel, and engineering. [AK: Russia’s key (non-extractive) industries are things like electricity-generating equipment, nuclear technology, aerospace, etc – hence the greater role of the state in them. This accords well with long-term plans for their re-privatization, by which time it is hoped Russia will have developed a modern, international competitive economy]

There were some exceptions like the Netherlands and Switzerland that have maintained free trade since the late 18th century. However, these were countries that were already on the frontier of technological development by the 18th centuries and therefore did not need much protection. Also, it should be noted that the Netherlands deployed an impressive range of interventionist measures up till the 17th  century in order to build up its maritime and commercial supremacy. Moreover, Switzerland did not have a patent law until 1907, flying directly against the emphasis that today’s orthodoxy puts on the protection of intellectual property rights (see below). More interestingly, the Netherlands abolished its 1817 patent law in 1869 on the ground that patents are politically-created monopolies inconsistent with its free-market principles – a position that seems to elude most of today’s free-market economists – and did not introduce another patent law until 1912. [AK: Though I was always intuitively against IP laws, here’s a good argument for Russia’s, and much of the developing world’s, unofficial disregard for the IP scam]

That said there are two other prerequisites for successful catchup. One is you need the enterprising culture and institutional framework. Second, you need a high enough level of human capital as embodied in skills and education, as I wrote here and here. The book The Wealth and Poverty of Nations by David Landes illustrates well the follies of ignoring the intricate linkages between social modernization, industrial policy and economic development.

Glory to Soviet science! The Kurchatov Institute at the heart of Russia’s nanotechnology program.

2. A typical, succinct criticism of the Russian state’s approach by George Handlery:

Could it be? The instinct-driven policy objective of Russia for more recognition as a major world power, is realizable only if pursued by system akin to that of the Tsars or the Commissars. In this case, the limited existing resources allotted by lacking development  (not the country’s unused potential) need to be enhanced by dictatorial methods. These can concentrate the available means to overcome qualitative handicaps. Essentially, like the sun’s ray’s are concentrated by a magnifying glass, “limited” resources become bundled by dictatorship to achieve maximal effect at a chosen point. The problem with using autocracy as a multiplier of laggard means pit against an advanced opponent, are twofold. (A) It diverts energies from stimulating general internal advancement for the pursuit of domination abroad. Thereby the developmental lag is perpetuated. (B) Playing a power-role not commensurate to the country’s comparative modernization, and not corresponding to her development, risks destroying the system. (World War One, Cold War.)

First, the same arguments apply here as above. You can use the magnifying glance to turbo-charge general internal development itself, as seen in the state capitalisms of East Asia, China and arguably Russia today, by intelligently concentrating resources into things that may have small short-term payoffs, like education and nano-technology, but are game changers in the longer term. Russia has a long tradition of using the state to leverage resources to catch up with more developed nations (the West), never mind the costs in inefficiency – otherwise, nothing would happen at all.

Second, whenever Russia tries to become less “authoritarian”, it devolves into illiberal anarchy and is taken advantage of by predatory foreign powers, an old lesson that was reinforced during the 1990’s. (This is not a xenophobic victimization complex – moving in to take advantage of a power vacuum is completely natural and understandable, and this indeed what they did by expanding NATO into eastern Europe and subverting Russia’s financial sovereignty – paradoxically, much like a white rider they were actually attempting to restore order, albeit one arranged to serve their own interests). It should be noted that Russian and Japan, nations which realized the necessity of sovereign economic development and military modernization, were the only two civilizations never to be properly colonized by the West.

Third, due to its geography, climate and derived cultural traditions, Russia’s natural state is the natural state. The cold winters, vast distances and unlinked rivers discouraged economic activity and created strong centrifugal tendencies. The hand of the state lay heavy on a people traditionally at the edge of subsistence. As such the past and future path of the Eurasian landmass is bifurcated into a) illiberal anarchic stasis – its natural state, and b) a higher degree of centralization and coercion, which is nothing more than a  Russian social preservation mechanism for allowing them to enjoy the benefits of sustained social complexity – security from foreign marauders, a big enough contiguous market-space to enable autonomous economic development and imperial pride.

The reasoning behind Catherine the Great’s claim, “I have no way to defend my borders except to extend them”.

As such, it is delusional to think that the loose and responsive self-correction mechanisms that work in Western Europe or the US, such as full democracy and strict adherence to the rule of law, could work in today’s Russia. Its traditional self-correction mechanism – strong personalities and a fluid, flexible system of understandings – is strong and rigid, but fatally unresponsive. This means that not only are crises rarer in Russia than in the West, they paradoxically become all the more catastrophic when they do occur, because of the unusually big “potential gap” inherent in Russia’s Sisyphean struggle against dissolution. This is the root cause of highly cyclical history – times of trouble followed by consolidation, reassertion, over-extension, stagnation and collapse.

The correct response is to try to find a golden mean between the state and society, between authoritarianism and democracy, so as to allow for an optimally quick but self-correcting development path (incidentally, this is also the gist of Surkov’s much misaligned political philosophy). This is the essence of the Putin Plan.

There is very little evidence Putvedev is preparing to change his colors. The terrain in front of him is still relatively even, and though he recently stubbed his toe against a hidden rock, the peak of the mountain is clearly visible and he is making good progress. The last time the rock slipped in the late Soviet era, it resulted in an avalanche of chaos and destruction; he had spent the 1990’s in sullen despondency. But now his faith that he would one day push the rock to the top of the mountain – by around 2020, in his estimation – was growing. And in any case it is necessary to stay happy and continue to believe – otherwise, your life has no point and you might as well commit suicide.

(Even though the struggle is futile, it is too Romantic to abandon – indeed, Russia does not want to abandon its endless, sordid and tiring, but ultimately uplifting and self-defining struggle towards universal utopia. And when it does commit suicide, it will just be replaced by another Eurasian civilization which, younger and more naive, will continue doing the same until it too realizes the meaningless of its existence)

Uncertainty looms beyond 2020. By that time Russia may start to experience increasing problems due to adverse demographic trends (an aging population and a much smaller cohort in their childbearing years), slowing growth due to, paradoxically, successful “catch-up”, and perhaps waning European demand for its natural gas and dissatisfaction with an increasingly atrophied descendant of the “Putin system”.

It is at this time that there may come a dark rider. One who realizes that the only terminal solution to the struggle is to just dynamite the whole mountain – perhaps by initiating a full-scale nuclear exchange with the rest of the world. That would be the rational response of a suicidal Russian civilization.

Pray that Russia continues its insane struggle. For only suicide – universal suicide, can break the loop of the struggle. Much like Samson bringing down the Temple, a glorious nuclear conflagration will sweep the Faustian West with its machines and intellect and hypocrisy into the vortex of sublime oblivion, freeing it from the overlong, tyrannous daylight of the unnatural state and once again ushering in the primeval mysticism of the dark forests, where blood and instinct can once again reign dominant over the biosphere. As they should, according to the true dissident.