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Tuesday, 5 February 2019

The Russian Crisis (GPF)

GeoPolitical Futures titleThe Russian Crisis

GeoPolitical Futures subtitle: Vladimir Putin failed to keep his promise to create a modern economy. Now he has to pay the price.

By: George Friedman

Date of publishing: 29 January 2019

"Russian President Vladimir Putin’s trust rating has fallen to its lowest point in 13 years. According to a poll conducted by the Russian Public Opinion Research Center, only 33 percent of Russians said they trusted the president. Polls can be unreliable and opinions fickle, but a survey like this in a country like Russia can be an indicator of deep discontent arising from significant social and economic problems.

Hope Fades

Over a quarter of a century ago, the Soviet Union fell because things stopped working. The state was the center of society and managed the economy. After Josef Stalin died, there was a sense of hope in Russian society about the economy – and that hope sustained the government, even when it failed to meet expectations. But by the 1980s, ordinary Russians’ belief that they could provide for their families and that the gulf between them and the nomenklatura (or bureaucratic elite) would diminish had faded. What changed their minds was not envy or anger – Russians had grown to expect a certain level of inequality – but a lack of hope. They had little and were not going to get more. Worst of all, they lacked hope for their children.

This situation was a result of four factors. First, the inherent inefficiency of the Soviet apparatus, which could not build a modern economy. Second, the divergence of available goods, not only to the elite but also to a thriving black market that frequently operated in foreign currencies, which most Russians lacked. Third, the decline of oil prices, which shattered the state budget. And finally, a surge in defense spending, designed to both match U.S. spending and convince Russians that although they might be poor, they still lived in a powerful country. This was not trivial for a nation that had lived through the German invasion.

In 1991, when the Soviet Union collapsed, there was no revolution. There was simply exhaustion. The elite were exhausted from trying to push the boulder of the Soviet economy and society up a steep hill. And the people were exhausted from standing in lines for hours to buy basic necessities. The general sense of failure was apparent not only in faraway capitals but in Russians’ own lives.

The Politburo selected Mikhail Gorbachev to solve these problems. He promised openness and restructuring. But the openness only revealed the catastrophic condition of the economy, and the restructuring, carried out by those who had created the disaster in the first place, didn’t work. All Gorbachev did was legitimize the fears and fatigue that had festered in the Soviet Union and allow them to eat away at what was left.

Boris Yeltsin replaced him but did nothing to solve the lingering economic problems. The Soviet Union was gone, and many took advantage – from Western financiers, consultants and hustlers, to Russians who figured out, frequently with Western advisers, how to divert and appropriate what little wealth Russia had. Privatization requires some concept of the private. In a country that had lived for generations by the old socialist principle “money is theft,” the oligarchs embraced the concept with a vengeance. Russia’s nomenklatura was just as inefficient as the Soviet Union’s, and, as shown in Kosovo, other nations held it in contempt.

Yeltsin couldn’t last. His replacement was Vladimir Putin, who had roots in the old Soviet Union and in the new Russia. He had been an agent of the KGB, the Soviets’ main security service. (For a country as vast and poorly connected as Russia, a strong central government and secret police have always been key to holding the nation together.) And through his time as deputy to the mayor of St. Petersburg, he was enmeshed with the oligarchs who became the holders of Russia’s wealth.

Putin came to power because of these connections. After Yeltsin, Russians craved a strong leader, and they drew comfort from the fact that Putin had ties to the KGB. They accepted his links to the oligarchs as simply part of how the world works.

Putin’s Promises

Putin promised to make Russia prosperous and respected in the world. To do so, he had to build a modern economy. Russia was highly dependent on the export of raw materials, particularly oil and natural gas. Putin couldn’t control the price of these commodities, so Russia was always vulnerable to fluctuations in global supply and demand. Putin had a choice: allow the economy to deteriorate and the country to descend into chaos, or centralize governance once more. He chose recentralization, concentrating power in Moscow and distributing funds from the state budget to the regions. When oil prices were over $100 per barrel, Putin had an opportunity to make massive investments in new industries. But he was beholden to the oligarchs, and they to him. Any economic reforms could have jeopardized this relationship. It’s not so much that Putin missed the chance to modernize but rather that his path to power prevented it.

Then, in 2014, oil prices plunged. Though they have recovered somewhat from their lowest point, they remain low. Western sanctions have also taken a toll. Until 2018, Russia had two reserve funds, stocked with profits from the oil boom. But following the collapse in energy prices, one fund was depleted, and since January 2018, only the National Wealth Fund remains. To try to replenish the state budget, Putin decided to reform the pension system. Just seven months after his re-election in March, he signed an unpopular bill into law that will gradually raise the age of retirement for women from 55 to 60 and for men from 60 to 65.

Hence the 33 percent trust rating. That rating is more socially significant in Russia than it would be elsewhere. Putin promised to make Russia a modern, powerful nation. He has failed to deliver on the first point, and his forays in Syria and elsewhere haven’t compensated for deteriorating economic conditions. Older Russians are reminded of what was and what had been abolished; younger Russians are encountering conditions similar to those their grandparents told them of.

There are two possible paths forward. One is the old Russian solution of empowering the secret police to crush the opposition, though it isn’t clear that today’s Federal Security Service, or FSB, has the same power its predecessor organizations had. I suspect that the poisoning of a former Russian spy in Britain is intended in part as a message to the FSB, not only to frighten it but also to tell its agents that they need to uphold the integrity of the Russian nation.

The other path is a re-enactment of the fall of the Soviet Union. Few are eager to relive the 1990s, but collapse is not always the result of a vote. If oil prices remain low, sanctions remain in place, reserves continue to dwindle, and the FSB is more interested in doing business than in sacrificing for the Russian state, then it’s hard to see an alternative scenario.

No foreign power can come to Russia’s aid. Each one demands too much and offers too little. There’s a fantasy in Russia about an alliance with China, but Moscow is far away from Beijing, and China’s problems at the moment are even more intense. The Kremlin could try engaging in a war to boost morale, but there’s the risk it could lose or that the conflict would last longer than those at the top anticipate.

Russia now faces conditions similar to those it faced in the 1980s: low oil prices and high defense costs. The people aren’t angry, but they are resentful, and in due course they may become simply exhausted, as they were in the 1980s. Russia is vast and needs a strong central government to hold it together, but central governments are not good at managing economies. Thus, the secret police must hold the country together. If it can’t or won’t, then a Gorbachev-type leader may rise up to reform the economy, and a Yeltsin-type leader may follow to preside over the nation’s revolutionizing.

Karl Marx once wrote that history repeats itself, first as tragedy and then as farce. How this maxim may play out in Russia is becoming clearer by the day."


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