Russia's Wartime Economy

Russia's Wartime Economy
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A Russian military honor guard.

Will Vladimir Putin ever make Russia great again? Early on a warm summer evening this year, at the end of an alleyway, a leather-clad biker gazed up at a projection of Ivan the Terrible. The biker’s colors showed he was with the Night Wolves, a nationalist, homophobic, Orthodox-church-loving motorcycle gang artfully coopted some time ago by Putin. He shows up at their rallies in a Harley Davidson trike; they give material support to his annexation of Crimea.

The Night Wolf, some comrades, a few young families, and a clutch of wealthy (judging from their lovely sports cars) thirty-somethings had gathered for an outdoor screening of Sergei Eisenstein’s classic Ivan the Terrible (1944). At that hour, the filigree of lights along the embankments and bridges of the Moskva River was blinking on, the party boats turning up their music. From the rubble of the Soviet Union Moscow has rebuilt itself, sanctions or no sanctions, into a glittering city of pedestrian malls, food stalls and buskers warbling folk songs or blasting “Smoke on the Water”. The Ivan screening was on the newly built Alley of Rulers, a short walk from Red Square. The alley featured two dozen or so sturdy pedestals topped with sculpted busts of Russian monarchs. About a third of the pedestals were empty. Presumably Putin will occupy one in due time.

Russian nationalism is a work in progress. The Alley of Rulers is a project of the Russian Military-Historical Society, formerly the Imperial Russian Military Historical Society. The society was disbanded as a result of the revolution in 1917; it was revived by President Putin in 2012 and is run by his culture minister, Vladimir Medinsky. By late September 2017, the tsars had been joined on the pedestals by Stalin and Lenin. Typically, the Kremlin refused to comment on what this might mean.

Lengthy conversations this year with senior Russian foreign-policy experts and other Russian analysts suggested that this lack of clarity about Russia’s past and Russia’s future is becoming the uneasy norm.

On one hand, everyone assumes that Putin will be re-elected in 2018 and he and his United Russia party will therefore be in power until the end of his next term in 2024, when Putin will be 72. This gives clarity of a neo-tsarist sort.

On the other hand, the same people shared the sense that Russia is profoundly fragile.

Part of the reason is political. The Kremlin’s constant extension and refinement of its authoritarian apparatus humiliates anyone opposed to it, laying up a supply of social resentment. The 2011 announcement by President Medvedev and Prime Minister Putin that they had decided between themselves to swap jobs was decisive. It mocked both the citizenry and the elite. Putin keeps the political elite constantly auditioning for greater power; in his eventual absence, it is hard to see how politicians reared in such a school will do anything but tear each other apart atop a population warmed up, come 2024, by two decades of official disrespect. Putinism is impermanent, and so therefore is the stability of a state built upon it.

Yet the deeper reason for this latent fragility is economic. As Andrei Kolesnikov has written, “the Russian version of authoritarianism leaves no room for modernization”. Putin has tried: in 2000; again in 2008-12; after 2013 with Strategy 2020. These efforts have not been particularly effective; a new effort is being headed, in the run-up to the 2018 election, by Putin confidante Alexei Kudrin, who was active in some earlier attempts. The essential problem is that the immense human and industrial capital built up over generations in a mobilizational, or militarized, economy has proved incapable of turning itself, or being turned, to other purposes. Total-factor productivity growth has declined over the Putin years and is now negative. Without a war, ideological or actual, there is nothing to mobilize for; yet Russia has been unable to develop a vibrant peacetime economy. Russia remains dependent on oil and gas extraction, agriculture, and the defense sector, serving what Kolesnikov describes as “a commercialized Soviet regime that has replaced Marxism-Leninism with an eclectic ideology centered on the idea of resurgent great-power status”. That hobbles the economy at least as much as it does the polity.

It perpetuates a war economy without, for now at least, much of a war. The contradiction does not seem sustainable; thus the ingrained expectation of eventual collapse. Perhaps the deepest question is whether such a militarized political economy will, when a moment of adequate stress arrives, be capable of anything other than militarized solutions.

An Idea Whose Time Has Gone

Stephen Kotkin argued recently in Foreign Affairs that Russia’s problem is the idea of resurgent great-power status itself: “What precluded post-Soviet Russia from joining Europe as just another country or forming an (inevitably) unequal partnership with the United States was the country’s abiding great-power pride and sense of special mission. Until Russia brings its aspirations into line with its actual capabilities, it cannot become a ‘normal’ country.” Kotkin points hopefully to the example of France, “which retains a lingering sense of exceptionalism yet has made peace with its loss of its external empire and its special mission in the world, recalibrating its national idea to fit its reduced role and joining with lesser powers and small countries in Europe on terms of equality.”

It might be a bit early to assume that “normal” and “having a mature sense of your own limits” have become geopolitically congruent. France, England, Holland, Germany, and Turkey, all in some sense ex-imperial states, are also all experiencing a renewed sense of national distinctiveness and even national destiny, as of course are not-too-imperial China and even anti-imperial India.

But in any case the Russian elite remains attached to the idea of Russian great power status. There is not a lot of discussion in Moscow about finding the best way to shrink expectations. Rather there is pride, among foreign-policy experts and the general public, in how Putin has managed in Syria and Ukraine to restore Russia to the world stage. In vibrant Moscow, at least, the delusion Kotkin warns against is waxing rather than waning.

Great Power Lite

Nonetheless, Russians also know that great-power status is expensive, in many ways. “Ever since Peter the Great,” Andrei Tsygankov wrote recently in Russia in Global Affairs, “the government has had to spend about a quarter of the budget to maintain the status of a great power and invariably demanded the people’s readiness for self-sacrifice. Widespread poverty and serfdom were a means to achieve rapid mobilization of the armed forces. The development of society lagged behind and invariably followed mobilizational templates — for the sake of fast accumulation of resources crucial to maintaining national security. Systemic reforms were either postponed or curtailed. Instead, taxes on society were raised and increasingly new mechanisms for exploiting society were introduced. Nikita Khrushchev’s policy of global support for ‘Socialism-oriented’ countries, in combination with the lack of internal reforms, weakened the country and brought about its eventual collapse.”

To a significant degree, Russia is again following in this tradition. Having gone through an unexpected, shocking and brutal social collapse in the 1990s, with rebellious states and sub-states on its borders and within the Russian Federation itself — with sizable ethnic-Russian minorities being victimized outside the mother country, the Russian language losing its international status, and the West seeming to see Russia as a rather wearying exercise in decline management — Russia after Putin’s election in 2000 began to indulge that imperial swagger that had animated it in the past. A thorough state-led rewriting of Russia’s history soon got under way: the Russian past would be reconfigured as a story of benevolent autocracy, civilizational genius and serial triumphs over foreign-inspired adversity. (See Konstantin Sheiko and Stephen Brown’s fascinating book History as Therapy: Alternative History and Nationalist Imagining in Russia, 1991-2014.) Meanwhile, with the economy in kleptocratic hands, the state had only its military — once again — to give it meaning. Putin used that military successfully in Chechnya, which was part of the federation, and eight years later in Georgia, which wasn’t. Over this same period the U.S. pursued various anti-ballistic-missile plans in allied countries on Russia’s western border, while the West more generally sought to bring Russia’s Western neighbors into its own economic and security institutions.

The Russian military budget increased in every year from 1998 to 2016. Security accounts for about a third of Russian federal spending (versus 2.5% for health and 3.5% for education). It finances what amounts to an employment program spread across the federation. Meanwhile, pensions are indexed below inflation. This is the combination of “mobilizational template” and “taxes on society” that Tsygankov identifies as recurring since its invention by Peter the Great.

The pattern seems unlikely to change without a change in government — that is, after 2024. Putin simply doubled down on the imperial option in both Crimea and Syria.

Nonetheless, it remains imperialism lite. Putin’s Syria policy aimed simply at establishing a Russian role as a broker in the region; it adroitly exploited Western weaknesses to that end. Its China policy is mainly one of subservience, its Europe policy mainly dedicated to sowing discord. Meanwhile Russia focuses on keeping its smaller neighbors unstable (Ukraine, Georgia, Armenia, Azerbaijan) or submissive (Belarus). There are limits even to this relatively modest policy. Belarus’s president Alexander Lukashenka wittily remarked, in a September 2017 meeting with Chechnya’s warlord ruler Ramzan Kadyrov, that cooperation with "Russia's multiethnic regions had saved Belarusian-Russian ties when there were misunderstandings with the center.” This was a light-hearted allusion to Belarus’s standoff with Russia in 2014-16. Kadyrov himself, despite governing a country that is part of the Russian Federation, essentially commands a private army. Kadyrov is not independent of Putin but he is not exactly submissive either. With one of the world’s best militaries, Russia still struggles to impress even its allies.

Putin has also decided to test his power by asserting the importance of Russian-language instruction in federation territories like Chuvashia, Bashkortostan and Tatarstan. But there again his efforts have met with immediate and significant resistance. Politically micro-managing ethnic Russia’s outliers is notably time-consuming.

Like other countries, Russia is seeing that wielding soft power requires some subtlety, and hard power — even with “successes” like Syria and Crimea — has sharp limits.

Breathing Space

People in Moscow still mention Thomas Graham Jr.’s 1999 essay “World Without Russia?” Graham, a career U.S. government Russia hand since the early 1980s and now managing director at Kissinger Associates, pointed out that “Great Powers rise and fall; some states disappear forever,” and that “it behooves us to think through seriously and systematically the possibility of a world without Russia.” The article is haunting because it shows just how bad things got in the late 1990s, and how willing even a sympathetic and experienced observer like Graham was to contemplate Russia’s demise.

Given Russia’s recovery under Putin, Graham’s essay shows how much has changed. (Graham’s long discussion of possible Yeltsin successors did not mention Putin; two months after the essay was first presented, Putin was prime minister and six months after that was elected president.) Russia is not disappearing forever.

A re-reading of Graham’s essay also shows continuities: “The attention now focused on Aleksandr Gorchakov, Russia's Foreign Minister of the mid-nineteenth century, is indicative of Moscow's mood. Gorchakov is being lauded for a foreign-policy approach that seems well suited to Russia's current situation. Despite Russia's stunning defeat in the Crimean War and its deep domestic troubles, Gorchakov - or so the Moscow consensus portrays him - pursued an active, multipolar policy that both maintained Russia's prestige as a major European power and, more importantly, created a breathing space for it to rebuild internally. In other words, acting like a Great Power created the conditions for Russia to rebuild the economic basis needed to back Great-Power pretensions.”

This seems to have been roughly what Putin had in mind, even as he changes up strategic metaphors from time to time (currently it is “Eurasianism”). There is renewed interest in foreign-policy circles in the Island Russia concept of Vadim Tsymbursky, developed in the early 1990s. It is a cousin to the Gorchakov view. In Boris Mezhuyev’s paraphrase, Tsymbursky believed that “Russia could strengthen its security only if it abandoned the idea of reunification with Europe or any plans to create a new empire under the umbrella of anti-Western ideology.” Tsymbursky stressed decentralized development of the Russian domestic economy and the cultivation of soft-power ties on the periphery of the Russian world. Mezhuyev believes that “Tsymbursky, like no other thinker in modern Russia, combined pragmatic realism in foreign policy with civilizational identity politics. It would be very important if realistic Western politicians had an opportunity to see that the geopolitical concept of ‘Island Russia’ carries great weight among the Russian foreign-policy elite and that Tsymbursky is not a mere name for people in charge of strategy in Russia.”

The main difficulty here is that the inward rebuilding keeps not occurring. The state continues to spend its money on the explosive baubles of great-power status; the average Russian continues to pay for them. A small number of people control the heights of the economy and have very little incentive to cooperate in its modernization. The militarized economy lumbers onward.

Perhaps the worst of it is that the United States and China, the two largest economies in the world, each of which dwarfs Russia in almost every way except extent of territory, are embarked on a process of military modernization that Russia will not be able to match. The re-militarization of Russia’s political economy is a trap that Russia, under Putin, has set for itself. Unlike the U.S. and China, Russia does not integrate military-industrial innovation into private-sector products and processes. The military-intelligence officer and analyst Vitaly Shlykov pointed out in the 1990s that in the U.S. “the defense-industrial base is part of a much larger and often more efficient civilian economy. In Russia, which inherited its defense industry from the former Soviet Union, it was the very core and substance of the national economy. The civilian part of it was merely an adjunct to the defense sector… The main reason for the low productivity of the civilian sector is that for more than half a century all the best technologies, material, and human resources of the country were being channeled into defense and related industries, while civilian industries and the economic infrastructure were doomed to partial or complete inefficiency. The backwardness of the civilian industries is proportionate to the funds diverted from them into the defense sector.”

Unfortunately, that fundamental reality has not changed. This means that Putin’s hand is going to get weaker as Russia struggles to maintain the two capabilities — strategic nuclear weapons and cyber — that alone give plausibility to its great-power desires. He might cling to these capabilities even more tightly, engaging in more useless cyber-skirmishing and perhaps bankrupting the country in a doomed effort to match America’s and China’s mid-21st-century arsenals: a grinding and utterly pointless asymmetric conflict. A more likely, and in a way hopeful, scenario is that Putin will continue to use foreign policy as one part of his cultural-nationalist theater, which will mean that policy will remain basically defensive. It will be subordinate to domestic politics, which in an authoritarian society means ensuring the prestige of the leader. (Last year, Putin appointed Sergey Naryshkin — his long-serving ally, head of the Russian Historical Society and of a commission for rewriting Russian history textbooks — as head of foreign intelligence. This illustrates Putin’s increasingly personal, and provincial, approach to foreign affairs.) One can then hope that, behind the scenes of this outsized vanity project, Russia can find ways to take the human capital built up over many decades of militarism and turn it to innovative civilian use. There is every reason to be pessimistic but it still seems the most realistic way forward.

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