Thursday, February 21, 2013

Window on Eurasia: Russia Faces Same Macro-Economic Problems USSR Did 40 Years Ago, Moscow Economist Says

Paul Goble

            Staunton, February 21 – The Russian economy today despite some very positive numbers over the last year suffers from four macro-economic problems that not only will be difficult to correct but also resemble those the Soviet leadership faced in the 1970s and 1980s, according to the rector of the Presidential Academy of Economics and State Service.

            Writing in “Vedomosti” yesterday, Vladimir Mau says that these similarities do not mean that Russia will repeat “the difficult late-Soviet experience,” but they do mean that no one should forget how close stability is to stagnation and how rapidly a country can move from stability to catastrophe (

            Russia today “is a country with stable growth, oriented toward domestic demand, with a balanced budget, low debt, significant hard currency reserves, and positive numbers” on other measures. But despite that, Mau says, “at the strategic level, the situation does not give a basis for an entirely optimistic prognosis.”

            That is because behind these good numbers are “four long-term problems of the social-economic development of Russia” which will keep growth relatively slow.  The first of these, the presidential economist says, is “the lack of modernized structural changes.”  Over the last two years, the Russian economy has recovered, but it has not fundamentally changed.

            The second of these problems is the negative balance in capital flows, with more money leaving the country than coming in, something that reflects the market’s judgment that there are few good investment opportunities in Russia compared to other countries and that the risk of investing domestically is higher than doing so abroad.

            The third underlying problem is “the unprecedentedly low level of unemployment.”  This contributes to political stability, but it points to “the absence of real structural shifts.” Were Russia’s economy undergoing modernization, the country would have more unemployed as workers shifted from one sector to another.

            And the fourth of these problems is the inclination of “a significant part of the educated strata of the population (the creative class) to leave the country.”  More and more Russians are prepared to study, work, and live abroad, “a strategically extremely dangerous” trend because it means that the demand for quality education and health care in Russia will remain low.

            These four problems “are not subject to rapid correct and reflect the qualitative problems of Russian society and its limited possibilities for modernization, not to speak about the capacity to make an innovative breakthrough.” And it is not just a matter of time: there will have to be a political willingness to carry out “serious institutional reforms.”

            To understand just how deep-seated these problems are, Mau suggests, it is useful to compare the Russian Federation now with the USSR 40 years ago because “measured by  its basic macro-economic characteristics, the present Russian situation recalls that of the USSR on the cusp of the 1970s and 1980s.”

            “Then as now, the Western world was seized by a structural crisis, which the ideologues of the CPSU characterized as ‘the third stage of the general crisis of capitalism,” especially since the Soviet economy was growing albeit at moderate levels, Mau argues.

            Just as today, “prices for oil [then] were at their height and measured in constant prices approximately correspond to their current level, and the country was actively involved with energy exports.” The Soviet budget “was balanced but all the income from the export of oil and gas were used to cover budgetary expenditures.”

            Moreover, then as now, “the country was actively building gas pipelines to supply gas to Western Europe … in exchange for food and equipment.” And “inflation was low, there was a moderate state debt, and there was universal employment.

            And, Mau continues, “the political system of the USSR was exceptionally rigid and incapable of flexibly responding to the appearance of new global challenges, technological, economic or political.”

            Having said all this, the economist says that of course “the situation at present is somewhat different.” Russia has taken its past experience into account and it has “significant financial reserves.” Its fiscal house is in better order, and Russia is not dependent for food imports to the degree the Soviet Union was.

            In addition, Mau writes, “the political system undoubtedly is much for flexible than was the Soviet one.”  The current leadership understands the problems it faces far better. “However, a number of institutional problems have not changed over the last three years,” the biggest being a lack of interest in real innovation and “more generally” modernization.

             Russia’s natural resources and financial reserves, he continues, are in fact “serious obstacles on the path of institutional and technological renewal.”  They allow those in power to believe that they do not have to act quickly to overcome them. But that is a trap which could mean far more trouble ahead than the currently positive figures suggest.

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