Thursday, June 18, 2015

Russian Economy Will Stagnate After Recovery Unless Kremlin Changes Course, Papp Says

Paul Goble


            Staunton, June 18 – Even when the Russian economy recovers from its current recession in a year or so, economist Yakov Papp argues, it will remain in recession unless and until the Kremlin changes its approach to the economy, an approach that has already added to Russia’s current difficulties and makes “significant growth” in the future “impossible.”


            But the senior specialist at the Moscow Institute for Economic Forecasting says, there is a chance the Kremlin could correct things. After all, “there are many examples when an authoritarian regime has changed its economic policy 180 degrees.” No change in personnel or “even in rhetoric” is required (


            He tells Irina Fedotova of “Profile” that in order to see what must be changed, however, it is necessary to recognize the mistakes Moscow has made in economic policy and to understand how those mistakes, however tactically justified, have proven to be strategic disasters for the country’s economy, compounding rather than countering the impact of sanctions.


            According to Papp, the Russian leadership sent several “very poor signals” in 2012 that meant that the Russian economy would have been in trouble even if there had been no sanctions regime: it nationalized several major companies thus reducing the willingness of foreign and domestic investors to put money in the Russian economy.


            Then, later, it tried to prevent the devaluation of the ruble for too long and thus was confronted by a far larger fall over a shorter period.  And, worst of all in the wake of sanctions, it pushed the idea of “import substitution,” “the very worst economic step that could have been proposed.”


            The idea spread in Moscow that “as a result of the market transformations, we had become “too open” and needed to quietly shut ourselves off” once again.  That reflected a mistaken judgment that the 2008 crisis was not an ordinary economic event but reflected “the failure of the Western economic model,” Papp says.


            In addition, many in Moscow came to believe that the US was reindustrializing and that Russia should follow course. But the Russian government failed to understand that what the US was doing was not a return to the past but rather building on the business model of Silicon Valley. Indeed, the revolution in oil extraction was part of this.


            Few in Moscow understood or understand even now, Papp continues, that “not a single country in the world by making use of import substitution has broken out of the developing world in to the developed one.” And they have not understood that openness to the world economy, not closing oneself off from it is the necessary path forward to development


            Papp says that Moscow’s policies of import substitution have been especially pernicious in the information technology areas. Russia has numerous good programmers, but if they are cut off from contacts with the outside world, they won’t keep up and “this sector will rapidly degrade.”


            Another mistake the Russian authorities have made was to have chosen to launch an anti-corruption drive exactly now.  Fighting corruption is a good thing, but because the government is so involved in the economy, Papp says, the anti-corruption effort has left many officials gun shy about taking risks – and that too has hurt the economy.


            What should happen instead, is the reversal of all these policies and the formation of new ones based on the understanding that “now, we are a small open economy” and that “in a market economy, priorities are set by private business and the task of the government is support them.” Instead of import substitution, Moscow should support exports in the non-petroleum sector.


            If the Russian government does not make these changes, the future for the Russian economy will be bleak, even when the sanctions regime ends.


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