Introduction to translation

The American magazine "Foreign Affairs" published an analysis dealing with the similarities and differences between the economic stagnation that Russia is facing today and that faced by the Soviet Union in the decade before its collapse.

The analysis questions the possibility that this stagnation in light of the current geopolitical conditions could lead to Russia's weakness and the loss of its influence in the international arena.

The analysis was prepared by Richard Connolly, Director of the Eastern Consulting Group and Associate Fellow at the Royal United Services Institute, and Michael Kaufman, Director of the Russian Research Program at the Center for Naval Research and Senior Associate Fellow at the Center for a New American Security.

translation text

When the Soviet Union dissolved 30 years ago, on December 25, 1991, its end came after decades of economic failure.

Then-Soviet President Mikhail Gorbachev described the period between 1970-1980 as a "zastoy," or stagnation era, while at the same time hoping to implement a set of reforms.

Although Gorbachev recognized the problem, he could not save the ailing socialist system, whose failed attempt at systematic reform eventually led to the Soviet Union's eventual collapse.

On the surface, the Russian economy today appears to be in a similar state of failure, as the country's per capita income has not improved over the past decade, and Russia's share of global production has declined since 2008. Large sectors of the Russian economy remain technologically backward or in dire need of modernization, and therefore We can describe the general economic situation again as in a state of "recession".

Vladimir Putin (right) and Mikhail Gorbachev (Routers)

But it is unlikely that President Vladimir Putin and his government will meet the same end as their Soviet predecessors.

Like the leaders of the Communist Party in Beijing, who studied Soviet history to avoid repetition;

Leaders in the Kremlin did the same, and learned the lessons of the failure of Soviet attempts to reverse the decline in the 1970s and 1980s. Many key features of Russia's economy and policy reflect a desire to avoid the Soviet experience under Gorbachev.

As the Russian economist Sergey Guriev recently pointed out: “Russian macroeconomic policy is highly conservative, inflation is under control, in addition to having a large cash reserve and a budget without deficit, with no external debt.” As a free market economy, Russia” It is far more efficient and flexible than the Soviet Union."

Of course, Russia is still struggling to find an economic model capable of generating continuous growth, and that depends less on the export of natural resources.

Nevertheless, Moscow was able to fortify itself for sustainable competition with the United States.

Rather than being a major weakness, the economy today represents a solid aspect of Putin's strategy to ensure the stability and continuity of the regime, and to overcome Western-imposed sanctions.

Lessons from the last years of the Soviets

Russian lawmakers drew lessons from the turmoil of the end of the Soviet experience, as well as the economic turmoil of the 1990s, when the oil market crashes of 1986 and 1997 caused massive financial shocks to the Soviet Union and the nascent Russian Federation, and these shocks spread deep fears among Moscow policymakers for fear of the impact of fluctuations in the economy. Natural resource markets influence the financial stability of export-dependent economies.

The establishment of Financial Stability Funds, shortly after Putin took office in 2000, is a direct response to these concerns. These funds have allowed Russia to accumulate cash reserves from export earnings, to help it reduce the macroeconomic vulnerability to oil price shocks or lower export earnings.

Despite both the sharp decline in oil prices, after they rose to their highest levels in the last years of the 2000s, and the economic stagnation in 2014 and 2015;

Russia has succeeded in maintaining its levels of foreign exchange reserves, and assets that are less vulnerable to future US sanctions.

So, Russia has adapted to the sharp drop in oil prices, and in the meantime has created “financial shock absorbers” that reduce the vulnerability of dependence on energy exports.

In addition, under Putin's leadership, Russia has sought to reduce its dependence on imports.

Political thought in this regard was also shaped by the experiences of the late Soviet Union, when the chronic failure to produce sufficient quantities of strategically vital goods - including consumer goods such as grain as well as high-tech appliances - led to the country's heavy dependence on imports, which increased its dependence on imports. on oil export earnings.

When the oil shock hit the country in 1986, one in three loaves of bread in the Soviet Union was produced using imported grain.

The Russian leadership has learned a lesson that financial weakness limits the country's freedom of action in the international arena.

At the end of the 1980s, Gorbachev faced limited options when faced with turmoil in the "Warsaw Pact" (the Mutual Security Treaty between the Soviet Union and seven socialist republics of the Eastern bloc) with the prospect of German unification.

The major powers of the Warsaw Pact were mired in debt to the West, Moscow was constrained in its ability to support the faltering economies of these dependent communist regimes, and German financial support was a factor in the Soviets' grudging acceptance of German unification.

Thus, in the eyes of the majority in Moscow, Russia was marginalized on foreign policy matters during the 1990s, and was a superpower in name only.

The country began to regain its global standing once the Russian leadership repaid the country's debts and reduced its dependence on external financing.

The Art of Recession Management

Today, Russia is the world's largest wheat exporter and is close to becoming a net food exporter.

Despite the apparent similarities, especially with the eras of Leonid Brezhnev and Yuri Andropov, the Kremlin faces the world today with an economic system completely different from the one that hindered the ambitions of its Soviet predecessors in the late period of the Union.

Despite Russia's current economic malaise, the policymakers who oversee the system have learned from failed Soviet attempts to manage social and economic stagnation.

Here a number of fundamental differences between the Soviets and Putin's Russia stand out.

Consider food production, for example. The Soviet Union had one of the least efficient agricultural systems in history, and by the 1980s a large portion of the Soviet budget was devoted to subsidizing food production.

The Soviet Union got stuck in countless contradictions: it was a pioneer in the production of agricultural equipment, but at the same time it was the largest importer of food in the world, which severely squeezed the country's budget and required huge sales of oil to finance its exorbitant food import bill.

By contrast, today Russia is the world's largest wheat exporter and is close to becoming a net food exporter (net exporting countries are countries whose total exports are greater than their imports).

While the Russian economy is still state-dominated, it is largely a market economy, and is far more efficient in vital sectors than the Soviet economy.

The Russian leadership is keen to avoid the extravagance of military spending that characterized its predecessors, and estimates of Soviet military expenditures vary, but most contemporary analysts estimate Soviet defense costs at a rate ranging between 15-25% of the annual output, and this huge military spending often caused the deprivation of sectors Other economy of resources.

Today, Russia's total defense spending is less than 5% of GDP.

It is quite clear that this level of military spending is sustainable under conditions of low growth, and is unlikely to destroy the Russian economy.

Most importantly, unlike its Soviet counterpart, Russian military spending is not seen as a fuel factor for economic inefficiency at home, nor does it deprive other economic sectors of resources.

Moscow has learned that it should play an active role in key global markets such as oil to shape the external environment in its favour.

In addition to the enormous defense burden that the Soviet Union bore, the country's leadership financed a high-cost foreign policy to compete with China for leadership of the socialist world and confront the capitalist world led by the United States.

Moscow has also raised the standard of living in Eastern Europe, supporting its loyalist states around the world.

In practice, Russia today does not bear the burden of such commitments, and compared to the expensive Soviet foreign policy of the 1970s, Moscow's current and foreign relations are less expensive, and many of these relationships are based on commercial interests. on the chances of material gains.

Russia has focused more on its status as a global power than on taking over the global leadership on its own. It has also maintained its vital interests by focusing on neighboring countries and in the former Soviet regions.

Finally, in the eighties, the Soviet economy faced a systemic crisis caused, in part, by its integration into the global oil and grain markets. The Soviet collapse clearly demonstrated the dangers of exposure to global market winds on economic security.

Today's policymakers in Moscow are acutely aware of these risks, especially with hydrocarbons continuing to capture the lion's share of Russian exports.

Ensuring the country's economic security, while controlling the risks of integration into the global economy, is an essential component of Russia's broader strategy to enhance its sovereignty and independence.

Moscow has also learned that it should play an active role in key global markets such as oil to shape the external environment in its favour.

At the same time, Russian leaders have reinforced the existing system to reduce vulnerability to coercive economic measures imposed on others by countries like the United States, by virtue of their position and influence in the structure of the global economy.

Chronic economic crises

Russia today faces three overlapping problems.

First, the level of investment is low, amounting to about 20% of GDP, which is thus too low to allow the modernization of the economy on a large scale.

Russian leaders also openly acknowledge that investment levels of 25-30% of GDP need to be sustainable for a few decades for the country to become high-income and technically competitive.

Second, due to a combination of chronic ills such as low investment, rent-seeking among patronage networks, and inefficiency of state-owned enterprises, the annual economic growth rate has been stable at 0.8% since 2013, which is lower than the global average of nearly 3%.

This means that Russia's share of the output of the world economy will decrease, which leads to a third problem: declining living standards.

The disposable income (net income of an individual after deduction of income tax) is lower than it was a decade ago.

However, due to the conservative approach to macroeconomic management, these weaknesses do not pose an existential threat to the Russian leadership, as Russia demonstrated its resilience and resilience during the 2008 economic crisis, the recent recession of 2014-2015, and even during the global recession in 2020 due to the pandemic. COVID-19".

Despite its many ills, Russia's political elite has built a system that is more resilient than ever before to oil price shocks, recessions, and external sanctions.

When oil prices collapsed in 1986, the Soviet leadership was forced to run massive budget deficits, print money (which caused inflation), and borrow huge sums from international creditors.

In 2020, the Russian budget deficit reached an estimated 3.

Despite slow economic growth, the current Russian leadership favors a gradual adjustment of its existing economic approach rather than paths of radical reform.

Dangerous are the long-term economic challenges that Russian leaders face today, but they are not inevitable for Russia's future.

Throughout Russia's history as a great power, its per capita income has been much lower than that of Russia's main adversaries, and it has rarely had the wide-ranging technical capabilities of its peers.

Nevertheless, security-oriented Russian leaders were able to muster sufficient military force in a relatively underdeveloped economy;

To do more than just defend themselves on the international stage.

Russia's small share of global GDP may dwarf the country economically (particularly using market exchange rates), but these metrics are misleading, and refer more to economic leverage than to the country's actual ability or potential to remain competitive, as Russia still has significant potential on mobilizing resources.

Those who expect a repeat of the events of the 1980s should look back and recall that the recession itself did not destroy the Soviet economy at the time.

Economic stagnation prompted Gorbachev to undertake extensive comprehensive reforms, setting off a chain of events that contributed significantly to the collapse of the Soviet Union.

However, what happened was the result of a set of events, ideas and material influences, chief among them the choices made by the elite of the Federation.

Despite the slow economic growth, the current Russian leadership favors a gradual adjustment of its existing economic approach rather than the paths of radical reform.

Moreover, the leadership continues to avoid comprehensive reforms that might undermine the foundations of the system, its ability to adjudicate disputes between different elites, or its ability to manage change.

The problems of the Russian economy today have less impact on Moscow's ability to pursue its interests globally than they did in the context of the Cold War.

Because world politics has changed, and Beijing has become Washington's main rival, the economic stagnation that Moscow is currently facing is unlikely to cause the same result and the decline of Russian power as it did in the Soviet Union during the last era of the Cold War.

In fact, while the United States appears caught up in confrontation with China, Russia, despite its weak economy, may find that it has growing room to maneuver, with its influence increasing rather than declining on the world stage.

As for Washington making assumptions and expectations about the strategic environment around it, it will have to ask itself an obvious question:

After years of economic stagnation, is Russia's dilemma easier to deal with today than it was ten years ago?

If the answer is no, then why does Washington expect that recession will ease this geopolitical burden over the next decade?