Friday, October 4, 2019

Post-Soviet NEP Ending like Soviet One with Triumph of Siloviki and a State Economy, Inozemtsev Says

Paul Goble

            Staunton, October 2 – Russian officials are saying all the right words about making the country more attractive for investment, but the Kremlin is taking action which means those words won’t be realized and that the post-Soviet NEP ending as its Soviet predecessor did, with the triumph of the siloviki and a state economy, Vladislav Inozemtsev says.

            The Russian economist says the gap between words and actions in this sphere is only growing but that the facts on the ground and not the words are what are going to determine the future (

            No one today would dispute the idea that Russia’s attractiveness as a place for investment is “about zero,” Inozemtsev says.  Six years ago, before Ukraine, 94 billion US dollars flowed into Russia as investment. Last year, in contrast, 23.1 billion US dollars flowed out, one of the signs of disinvestment.

            But there are others as well. Since 2014, “more than 200 fooreign companies” have shut down in Russia, he continues; and last year, 2.15 times as many Russians firmed closed as opened (  And as that has happened, the role of the Russian state in the economy has shot up.

            According to Inozemtsev, there are two reasons why the investment climate in Russia isn’t going to change anytime soon whatever those seeking more money from the West say, the first is “purely economic;” the second is completely political.

            The economic reason arises from the fact that “Russia which demonstrated in the first decade of this century a powerful recovery was not able to shift to stable development.” Instead it continued to rely on the sale of raw materials to get money to purchase manufactured goods from abroad. 

            The fall in prices for oil, sanctions and devaluation of the ruble all made the impact of this failure to shift directions more serious with investors taking out their money either directly or via expanded dividends and the population seeing its income decline for the last six years in a row.

            Given all this, Inozemtsev continues, “investing in this market is equivalent to insanity.” Unless growth resumes, that won’t change; and without it changing, a shift those in the Kremllin do not appear interested in, there won’t be growth, “a vicious circle” from which Putin’s Russia can’t escape.

            The political reason is this:  “The system of power Putin has built is based on the principle of the conditionality of property: it is guaranteed only to those who follow the rules of  the game the Kremlin establishes.”  For the first decade, things more or less worked, but “beginning in 2012, the situation changed. The regime lost its legitimacy both among its own citizens and in the international community.”

            Under these new conditions, Inozemtsev says, the siloviki either seized businesses directly or imposed their managers on them; and the Kremlin had little basis for opposing them because it needed their loyalty  and as the economy slowed and then contracted, this was the only way to purchase it.

            “In essence,” he continues, “we are at a point like at the end of the 1920s: NEP has ended and targeted repressions are occurring, repressions which in the future will have to be replaced by the destruction of entrepreneurs ‘as a class.’” In such a system, no one can expect anyone to invest.

            Now, the authorities “understand that economic growth of five or six percent a year, which would return the country to ‘the Putin consensus’ of the first decade of his rule which was based on a rapid rise in the standard of living is impossible.”  In this situation, those in power need the loyalty of the siloviki who can demand a high price.

            As a result, Inozemtsev concludes, “the post-Soviet NEP is coming to an end just as the Soviet did, with the triumph of the siloviki and of a statist economy.”

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