It’s not easy to find a disinterested and well-informed view of the Russian economy these days. I don’t know a better source among economists than Kenneth Rogoff, of Harvard University.
The former chief economist of the IMF (2001-03) has no axe to grind as far as I can tell, beyond a certain taste for good housekeeping and global order. (His wife, Natasha Lance Rogoff, produced Sesame Street for Russian television in the Nineties.) An early diagnostician of the severity of the 2008 financial crisis, he was author, with fellow Harvard professor Carmen Reinhart, of This Time Is Different (Princeton, 2009). As a reformer, he wants to rein in on cash, especially $100 bills. Rogoff wrote up a recent estimate of Russia for Project Syndicate, a source of op-ed articles by economists.
He made two basic points.
The first is that 25 years after the Soviet Union came apart, Russia remains a victim of the resource curse, and therefore highly vulnerable to the cycle of commodity prices. The great preponderance of its foreign earnings come from the export of oil and gas. With the price of a barrel of oil at $119 Russia was riding high as Dimitri Medvedev completed his sole term as president, in February 2012.
Vladimir Putin began his third term just as the cycle turned down. The price of oilfell to $27 a barrel in 2016. A deep recession accompanied the plunge, comparable to what the US suffered in 2008-09, Rogoff wrote, with real output contracting 4 percent. The ruble fell by half against the dollar, forcing consumers to cut back sharply. The Ukraine crisis welled up halfway through the downturn: Ukraine President Viktor Yanukovych fled to Moscow; the annexation of Crimea followed, and brought U.S. and European sanctions that exacerbated the recession, as least somewhat.
That Russia avoided a financial crisis, Rogoff wrote, owed largely to the efforts of the Central Bank of Russia, and its governor, Elvira Nabiullina. Despite strenuous objections by various oligarchs, she kept interest rates high to control inflation (cut from 15 percent to 4 percent) and forced banks to raise capital and write down loans (at least the smaller, less politically-connected banks). Twice Nabiullina has been cited by the trade press as central banker of the year. Putin reappointed her in March to a second five-year term.
Rogoff’s second point: Russia suffers from the failure to diversify its economy. The price of oil is back to around $50 a barrel but growth prospects for the year are barely 2 percent. The Economist reported last week that Daimler-Benz broke ground on a new Mercedes-Benz plant northwest of Moscow — the first such foreign automaker investment since sanctions were imposed three years ago.
Russian media blame the sanctions, Rogoff wrote, but far more pervasive are the problems identified by economist Sergei Guriev – weak institutions, courts inparticular. Guriev, head of Moscow’s prestigious New School of Economics, fled in 2013 rather than risk retribution for his opposition to Putin’s third presidential term. He is today chief economist of the European Bank for Reconstruction and Development. “Without reform” wrote Rogoff, “there is little reason to be optimistic about Russia’s long-term growth trend… despite having an enormously talented and creative population.”
I have a lot of sympathy for central bankers. In principle, and sometimes in practice, they are among the most importantan protectors of social order. Reading about Nabiullina, whose contributions Putin underscores by regularly referring to her in public by her first name, I realized the extent to which I see the story of Russia’s transition through the eyes of Jane Jacobs, the American-born Canadian social philosopher.
In her last major book, Systems of Survival:A Dialogue on the Moral Foundations of Commerce and Politics (Random House, 1992), Jacobs distinguished between two different and distinct ethical systems – syndromes, she called them – that had evolved over millennia to govern human conduct in different spheres of life.
Guardians (a term she took from Plato) are custodians of the political order – leaders, priests, soldiers, police, bureaucrats and, yes, central bankers. An extensive commercial class called the bourgeoisie has grown up in the last several hundred years as well — traders, or commerce-seekers, in Jacobs’s terminology, as opposed to guardians. The two ways of life are essentially incompatible. Problems arise when one moral code or another gets too much of an upper hand in society; or when values are commingled.
Jacobs enumerated aspects of the two codes:
Guardians shun trading, exert prowess, cherish obedience and discipline, adhere to tradition, respect hierarchy, prize loyalty, take vengeance, deceive for the sake of the task, embrace leisure, dispense largesse, behave ostentatiously, remain exclusive, show fortitude, remain fatalistic, and treasure honor.
Commerce-seekers shun force, compete, prize efficiency, are open to inventiveness and novelty, use initiative and enterprise, come to voluntary agreements, respect contracts, dissent for the sake of the task, are industrious, thrifty, invest for productive purposes, collaborate easily with strangers and aliens, promote comfort and convenience, are optimistic, honest.
Russia has been investing heavily in its guardian class since 1993 – the men and women of power known as siloviki. What chance is there that leaders who already recognize the necessity of a rising commercial class will accommodate it with new ways and institutions in the future – sooner or later? Pretty good, I’d say. But what a lot of tension in the meantime!
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Marshall Goldman, a mainstay of the Wellesley College Department of Economics for several decades, died last week, at 87. He was well known, too, as an expert on the mysteries of the USSR’s centrally-planned economy, appearing frequently on television. As a member of Harvard’s Russian Research Center, he wrote six books about the Soviet transition
Goldman had one major scoop as a Sovietolgist, according to David Engerman, of Brandeis University: The USSR in Crisis (Norton 1983) broke the news and galvanized the public debate about the future of the Soviet Union, just as the Reagan arms build-up reached its peak. Goldman followed up with five more books, concluding with Petrostate: Putin, Power, and the New Russia (Oxford, 2012). Those six books constitue an indelible record of what we knew (and thought we knew) and how we knew it (or didn’t) — a first-rate first draft of the history of those years.
David Warsh is proprietor of economicprincipals. com, where this first ran.
