Wednesday, April 23, 2014

Window on Eurasia: Russians Want to Live Well in a Strong State but Lack of Modernization Forcing Choice between Guns and Butter

Paul Goble

            Staunton, April 23 – Russians want to live well in a strong state, according to discussions at the Valdai Club last fall ( But an economist says Moscow’s failure to modernize the economy could soon force a choice between guns and butter – or even put Russia at risk having less of both.

            That Russians should want to have both at the same time should not be a surprise to anyone: it is an attitude shared by the populations of many major countries. But as economist Yevsey Gurevich notes “only a highly developed country can act as a super power without harm to itself (

            Gurevich makes that argument in detail in a 2200-word article in yesterday’s “Vedomosti” in the course of which he notes that “the overwhelming majority of Russians approve” what Putin has done in Crimea but these same people have not yet faced up to the costs because their “public discussion has largely been reduced” to the issue of Western sanctions.

            Western sanctions by themselves are not going to have a major impact on the Russian economy, he says, nor will the direct costs of integrating Crimea. But “the losses in the final analysis will turn out to be very large,” although indirect, and they “won’t be limited to a few months or even years.”

Just how large these losses will be depends on how far and long Moscow continues on its current course, Gurevich says.

It is obvious that one of the reasons Moscow has done what it has done in Crimea is “to demonstrate to itself and to the rest of the world that Russia remains a super power, cable of setting the global agenda and introducing changes in the map of the world.” But the costs of being a great power are not small, and they are not one-time but constant.

According to the World Bank, Russia in 2012 spent 4.5 times a share of its GDP on the military than did NATO countries, but now the budget calls for increasing defense spending by 61 percent over the 2014-2016 period.  That money has to come from somewhere, either other programs or higher taxes which affect growth.

The Russian Federation is already spending far less on public health and education than most countries, and spending more on defense will further depress those rates.  On the one hand, it will worsen life expectancy – Russia now ranks 134th out of 207 countries on that measure.  And on the other, it will lack the educated population needed to be a super power.

Under these conditions, Gurevich argues,”sooner of later the [Russian] economy will simply not be in a position to bear the burdens of being a super power.”  And Russians do not need to look far to see what that could lead to: The USSR ultimately was incapable of bearing them and disintegrated.

“Do Russians want to go down this path again?” he asks.

The economist says that the greatest impact on the Russian economy from the Crimean events will be on investment. Neither foreign nor domestic investors will look on Russia as a low-risk and predictable place to put their money anytime soon. Investors will put money in high-risk countries but only if there are high rewards for doing so.

Until a few months ago, he continues, Russia was “a member of the club of the most influential countries, the Big Eight.”  But “now Russia is viewed as an eccentric lone wolf player which acts according to its own rules which are known only to it and therefore is capable of surprise moves.”

That makes it more like North Korea, Venezuela and Iran than like the members of what is now the G-7. And it certainly sets it apart from the US which “not infrequently acts” according to its own interests. That sometimes creates “local economic problems” for the Americans, but there are two reasons why these are limited.

On the one hand, the US typically coordinates what it is doing with other major powers like Europe.  And on the other, “the advanced position of the US in economic, financial and technological development guarantees the invariable trust of investors.” For example, although the 2008 financial crisis began in the US, it lead to “the flight of capital to the United States.”

The conclusion from all this should be obvious, Gurevich says. “Only a highly developed country (with some qualifications) can act as a super power without harm to itself. In other words, geopolitical ambitions must not exceed the economic potential of the country.”  That is something Beijing understands, but it appears that Moscow does not.

Moscow’s moves in Ukraine are occurring as the situation of the Russian economy is deteriorating and capital flight accelerating, and they are taking place without any evidence that the Kremlin or the government understand the reasons for those trends. At least, they “have not worked up a clear explanation” for them.

Even without the Ukrainian events, the Russian economy was not going to grow much this year. Now, it will grow even less or perhaps even slide into recession – and this will take place when the economies of most of the world are recovering thereby leaving Russia even further behind in the future.

To understand what that means, Gurevich said, consider the following: In 2013, the Russian economy formed 2.9 percent of the world’s GDP. By 2020, that share will decline to two percent, and by 2030, to “less than one percent.” Indeed, at that point, Russia will be “only a little above Venezuela and Argentina and somewhat behind Turkey and Indonesia.

That will have a direct impact on Moscow’s ability to project power.  If its educational system lags, it won’t be able to produce and use the most advanced military technologies and thus will be at risk from those who can.  “This projection,” Gurevich says, “is impossible to ignore or avoid – the laws of economics are as inviolable as those of nature.”

Russia thus faces a choice that “will define its fate for decades.” If it continues as now, it will suffer both economic and geopolitical decline. If it changes course, restrains its actions abroad and modernizes its economy, Russia and Russians will have an entirely different future. Gurevich says that he “very much hopes that the country will make the correct choice.”

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