Politician and economist Grigory Yavlinsky on why the discussion on economic reforms has lost any sense

Grigory Yavlinsky for Vedomosti, 8 November 2015    

Photo: Forums still hear empty words that Russia should finally diversify its economy. Valery Sharifulin /TASS

The profound systemic crisis of the Russian economy is beyond doubt. In June, at the Saint Petersburg Economic Forum, the elites were still trying to pretend that this was not so much a crisis. However, this is how Russia is going “its own way.” Admittedly, the group with which the Russian President spoke from the rostrum (Deputy Prime Minister of China, Deputy Prime Minister of Myanmar and Greek Prime Minister Alexis Tsipras) was unconvincing.

However, the autumn forums – in Vladivostok, Sochi and especially the VTB forum with the amusing title “Russia Is Calling” – represented a statement that growth without the development of the previous years was replaced by a situation where there was no growth or development, and things would no longer be as they had in the past. Confusion, contradictory assessments by officials and top managers, and extravagant statements that there was no need to support small business in the present circumstances (it will survive if it is to survive, and if it does not, then that’s fate – the fate of an unviable business), and empty words that Russia should forever abandon the strategy of economic catch-up and finally diversify the economy …

It is not interesting to listen and discuss this, all the more so that the Minister of Finance reported that the reserve fund was close to exhaustion, while the Ministry of Economy does not rule out the possibility of an oil price of about USD 40 per barrel.

However, now, in principle, there is nothing to say about economic problems.

If Politics Goes Backwards and Sideward, Does the Economy Go Forward?

There is nothing more bizarre in the discussions about the Russian economy than statements that “the difficulties will make everyone sober up and force them to go about their work and implement real reforms.” Anyone who knows at least a little bit about Russian bureaucracy, business and government, has no doubt at present that this is impossible.

Institutional and structural reforms in the economy cannot be carried out with dramatic political kickback in all directions. The concentration of power in the hands of a single person in the absence of any checks and balances, combined with the focus of the upper segment of the unchanging powers-that-be on political fantasies (the idea of Eurasianism, a “special path”) and economic fantasies (“import substitution”, war and isolation as the drivers of the economy) create a situation when the reforms themselves, and the public pressure required for their implementation, become completely unrealistic.

Even such limited measures as the cancellation of Russia’s self-imposed sanctions on food, a reduction in military expenditures and dismissal of the most odious corrupt officials are impossible, as the self-imposed sanctions and military expenditures represent important components of the course. And the fight against corruption by the present power system has always been and will continue to be primarily a key tool to control the bureaucratic elite.

The Russian economic model developed by now is no longer subject to any “reform”, and  any discussions on this topic are no more productive than talks about improving the economic framework of the USSR under the governments of Nikolai Tikhonov and Nikolai Ryzhkov.

Systemic transformation is only possible if it is driven by a very powerful and long-term political impulse and it is accompanied by the necessary minimum economic, social and external conditions. From the perspective of the state of the global economy and the situation globally in the first decade of the 21^st  century in general, our chance of making such a transition within a historically reasonable timeframe looked less than zero. However, Russian authoritarianism has overshot the moment that could have transformed it into an instrument for the modernisation of the economy and society, and assumed the form of an authoritarian system of the stagnant form of “demodernisation”. The opportunity to create a broad coalition in support of reforms involving the authoritarian regime, which had been discussed in the early 2000s, was hopelessly squandered both as a historical chance and as a possible mechanism for forced modernisation.

Russian authoritarianism and the political system as a whole have demonstrated their conscious unwillingness and absolute inability to transform their economic base – peripheral capitalism.

The Russian Economic System Cannot Have a Strategy

Everybody is well aware of the common features of peripheral capitalism: exports of raw materials as a vital component of prosperity, foreign investments as the key and virtually only element of technological change, foreign financial markets as the main source of funds for investments, close ties between the state and business, the exceptionally important role of an administrative-based corrupt rent system as a configurator of internal financial flows, and so on.

It is namely the remoteness of Russian capitalism from modern economic institutions and, consequently, from the core of the modern world that determines the characteristics of the Russian economy: the nature and pace of the  accumulation of capital, the sources and directions of investments, their possible volumes, and the nature of relations between business and the administrative authorities, industry priorities, and the ability to manage economic growth and its objective limits.

The main feature of modern Russian peripheral capitalism from a development perspective is that it does not and cannot have a development strategy.

It goes without saying that tactical variations are possible within its framework –  in the budget ,  fiscal and monetary policies, in the support programmes for certain industry segments or in stimulation of demand, in regulation of foreign economic activity and improvements to certain characteristics of the business environment.

However, they do not change the state of the national economy in the global system of world capitalism. This is what we have been constantly facing over the past fifteen years in Russian economic and political practice, where active manipulation of the instruments of the present economic policy has been accompanied by the government’s inability to influence the long-term strategic parameters of the economy.  Something originally conceived and even elaborated as a long-term strategy for economic development and structural reforms has in the end been reduced to maintaining at best some parameters of macroeconomic stability.

This is not due to the personal qualities of their architects and the parties entrusted to implement such strategies, but instead due to the fact that the only possible line of behaviour in peripheral capitalism is to adapt passively to the conditions created by the activity of the global capitalist core, the “collective West,” and to use these conditions to obtain the current revenues that are captured and distributed by the political elite. The Russian economy and society can only be catapulted into an orbit closer to the core of modern capitalism though the purposeful creation of prerequisites, first and foremost, the existence of the institutional framework required to achieve this goal. However, attempts to create institutional conditions for qualitative changes have throughout the post-Soviet period invariably encountered stubborn resistance from the institutions that have emerged in the system and that ensure the prosperity of a specific elite.

In the 1990s – early 2000s, resistance was facilitated by such factors as the social weakness of the advocates of reform and the lack of political will to implement reforms “from above”; the corrosive influence of the external and internal environment, which submerged the specific strata of the “captains” of Russian entrepreneurship – akin to the elite as a whole, which were “steering” most of the biggest  economic assets available in the country.

Then the authoritarian political superstructure formed by the powerful impact of the laws of the peripheral economy assumed the rule of consolidating the status quo and cementing such systemic features as the absence of the rule of law and an efficient independent court, the ever-changing and vague rules of the game in economic activity, the existence of large and significant differences between formal regulatory acts and actual relations in the economy, extensive opportunities for the arbitrary redistribution of assets between legal entities and individuals that depend on the state, and conditional nature of the private ownership of large economic assets.

Economic Growth Without Modernisation Leads to War

Today, despite the anti-Western rhetoric of the past year and a half, the peripheral essence of the Russian economy has been preserved and consolidated. There was no seismic shift, no unilateral and voluntary rupture of all economic contacts with the West. And this is naturally connected first of all with the understanding of the insurmountable fact that the Russian economy, in the form in which it has developed over the past 25 years, is dependent on the global capitalist economy and cannot exist without it or cannot be isolated from this economy. Moreover, this is the economy that is the source of enrichment for the authoritarian leadership, the bureaucratic and business “elites”.

However, economic growth without development, that is, in the absence of political, social and economic modernisation of the country and society, has had extremely dangerous consequences. The governing elite has formed and consolidated exaggerated ideas about their own capabilities, and their unsubstantiated ambitions have increased immensely. Now, without departing from peripheral capitalism, they want to assume economic, military, political and ideological domination on the part of the periphery, and to retain unconditionally their rules in their province, whose borders are arbitrarily defined. Growing and apparently unlimited material resources have enabled them to create corrupted support groups in the society. Extensive demodernisation of the elite, degradation and archaisation of public consciousness have all happened and continue to this day. Even the big and medium-sized business strata, one of the main and immediate beneficiaries in the case of modernization-based reforms, not only failed to establish itself as a political class in these circumstances, but has also proved to be extremely pliable material for powerful administrative and propaganda influence and psychological treatment “from above”.

Consequently, over the past two years, peripheral authoritarianism, based on a misconception of the scale of our resources, the capabilities of the Russian economy, a distorted view of the structure of the modern world and the motivation of the “collective West”, has led our country on a path that does not end with disaster, but instead with collapse.

Today, any Discussion of Economic Reforms Is Meaningless

If we ignore the personal ambitions and interests that force competing expert groups to fight for priority financing, accuse each other of incompetence and insist on the need to develop new programmes, the discussion on the directions and ways of possible economic modernisation can be considered closed.

A programme for replacing the model of Russian capitalism as it is developing at present has long been defined in basic features and is familiar to many people.

This would involve freeing up and encouraging entrepreneurial initiative in general and, especially, in those fields and areas where practice, rather than theory, discloses signs of international comparative advantages. This involves the creation of a favourable and stable institutional environment for business, which is ready to comply with the law and assume its share of social responsibility. However, this would require strict compliance with the law after a thorough audit of its realism and genuine anti-corruption bent. Such an environment implies feedback between the state and responsible business, enabling business to participate legally and openly in the political life of the country.

This involves the creation of the most competitive environment in all spheres, except for justified instances of natural monopolies. Competent laws, and antimonopoly authorities implementing effective and transparent antitrust regulations should be combined with political mechanisms of antitrust control, eliminating any possible covert pressure and shadow lobbyism by groups interested in maintaining their monopoly status.

It is clear that the effective operation of such mechanisms requires the maximum transparency of activities and information openness in the public and private sectors.

It is necessary to stimulate in every way accumulation and investment, create negative incentives against the erosion of income and economic assets. The tax system should be geared to achieving this task. And that is why a system of so-called development institutions should be put in place, with the remit to promote long-term investment. A large proportion of the state’s rental revenues should be used for this purpose.

The problem today is not the lack of programmes and solutions, but rather the absence of a state capable and ready to work hard to achieve these vital tasks. Moreover, the Russian state in its present form and on its current course is incapable of even rectifying the damage caused to the peripheral economy by complicating its relations with the global core – economically developed countries.

When Will Reforms Be Possible?

Not tomorrow. To show that this will not happen any day soon, I will name here only three problems that must be resolved first if there are ever to be any reforms. Otherwise all the measures will represent merely pointless imitation.

First, the creation of an atmosphere of historical certainty: a) unconditional European self-identification; b) continuity with historical Russia through a full and distinct state assessment of the communist period and Bolshevism and practical steps to overcome Stalinism, including in public administration and public life.

Second, legitimisation, the granting of inalienable rights of private property. The pernicious consequences of fraudulent privatisation carried out through vouchers and mortgage auctions must be fixed through economic methods. This means that the authorities would never be able to claim again, for example, as they do now, that “… in the opinion of the Russian Federation, the plaintiffs cannot claim any payments at all as they are connected with the former owners of YUKOS, who bought the shares of the company at auctions in violation of the law in 1995-1996.”

Third, an end to the aggression against Ukraine and determination of the final status of Crimea through an international conference and referendum subject to international monitoring. Incidentally, we still need to manage somehow to get out of Syria and the Middle East, which will not be easy now.

Russian society is now in such a state that it is not ready to fully discuss any of these topics. It is clear all this will only be possible in a post-Putin era, that is, after a change in the country’s political leadership – the President, the government, and parliament. Until then we can forget about economic reforms and strategies.

Officials have been discussing the country’s economic prospects in various forums and have been professionally articulating deliberately unrealistic official forecasts. Businessmen, fearing the difficulties faced by Vladimir Yevtushenkov, attend these bossy forums as if they were going to work, trying to make the best of a bad bargain. It is easy to understand them: they simply have nowhere to go. However, the academic and expert community and Russian intellectuals bear a special responsibility. Despite serious limitations, they still have an opportunity to correctly assess the situation, without substituting professional forecasts by meaningless discussions and the issue of half-baked scholarly proposals on how to resolve the increasing number of serious problems and empty promises to present an extensive reform programme soon.

The author has a PhD in Economics.

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