There is evidently some kind of natural law at work: if the business press and the leaders of the financial world name some country or other as a success story, then this is precisely the country where you can expect things to go badly wrong.

Not long ago the newspapers were full of rapturous accounts of the Argentinian economic miracle. We were urged to study and reproduce the "Argentinian model".

Now Argentina is on the verge of bankruptcy, unemployment has become a national catastrophe, and the population no longer believes anyone. In the recent parliamentary elections, voters crossed out all the politicians and wrote in Osama bin Laden. In two precincts he received a majority of the votes, and in others, a creditable second or third place.

The Czech Republic was also hailed as an example of successful reforms, until problems arose there. For some reason, the experts then immediately lost faith in that country. The most popular story of recent years, however, has concerned the "new economy" in the US.

This story came to an end with the fall of the Nasdaq, after which America ceased to be the "motor of world development", and turned into a source of problems for the rest of the world.

The "Russian Miracle"

Developments in Russia confirm the general rule. The crash of 1998 was preceded by enthusiastic assessments from Western experts, predicting the onset of an unprecedented economic boom. After 1998, the same experts wrote Russia off entirely as a basket case where reforms had failed and corruption and inefficiency reigned.

Needless to say, Russian economic indices promptly started to rise. It took Western analysts around two years to notice this. Finally, in the third year of steady growth Western business leaders recognised Russia as a land of opportunity, once again declaring that reform was proceeding successfully after all.

Unfortunately, this turned out not to be an exception to the rule either. No sooner had Russia received a high rating from the world business community, than oil prices started falling, and the government confessed that it doubted whether the budget it had just adopted could be implemented. A new economic crisis became a serious prospect.

The problem with most economic analysts is that as a rule, they do not analyse anything. If things are going well, there is no point in exploring the specific reasons for the success. Everything is due to the consistent implementation of neoliberal policies.

If problems emerge, then the policies have not been carried out consistently, or are not radical enough. No-one is bothered by the fact that the very same governments, whether of the Czech Republic, Argentina or Russia, have first been described as practitioners of consistent and effective liberalism, and then as examples of inefficient bureaucratism.

In the years from 1999 to 2001, there have not been any radical structural changes in the Russian economy. The major developments have included a fall in the exchange rate of the ruble, followed quickly by an increase in the price of oil. The lack of any reforming initiatives on the part of the government no doubt helped allow the stability and predictability, short-lived but real, without which the present upturn would have been impossible.

From the moment when the flow of petrodollars dried up, the structural problems of the Russian economy reappeared in all their force, and worse still, it has become clear how little relation the standard set of liberal prescriptions at the disposal of the government has to these ills.

Once again we have been confronted with a massive disproportion between the resource sectors which bring in real income, and the half-starved manufacturing industries on which most of the population depends for its existence.
Equipment is wearing out, private-sector investment is disastrously inadequate, and the state itself has quit the economy, handing over the main sources of real income to the oligarchs. Meanwhile, the population is too poor for its demand to act as a stimulus to production.

This is not the first time the government has had to correct its budget. But the economic upturn of the past few years has only been possible because the resource monopolies have had a surplus of funds, and because this surplus has been spontaneously redistributed to the benefit of other sectors.

People have started receiving their wages, and even if these are tiny, they are at least being paid regularly. This is why everything in the economy, from food processing to book publishing, has started to grow. In the space of three years so many good books have been published in Russia that it seems the publishing houses have not only caught up with their Western counterparts, but have made up for their omissions of previous years. The cinema too has started to revive.

The surpluses of money have now come to an end. There is barely enough for the oil producers, and the other sectors, which had just begun to discover what normal functioning feels like, are all returning to their old semi-comatose state. After a lag of six to eight months, the prices for gas are following oil prices downward. Unless this trend is reversed, we will face a full-scale crisis in the coming spring. At best, we will hang on until next August....

The Russian Bubble
The American economic boom of the late 1990s was accompanied by an artificial inflation of stock prices, with the creation of a gigantic soap-bubble on Wall Street. Fortunately, this bubble did not burst immediately, but subsided over time. Hidden inflation, pumped up by the stock-market speculators but restrained by the federal reserve system, found an outlet in high oil prices, among other things. In short, what was lethal for Americans was good for Russians.

The Russian upturn was one of the side-effects of the American correction. The more the American bubble subsided, the more the Russian one grew. This occurred, however, in line with our national traditions.

The Russian bubble has not been economic, but political. It might be described as "strong presidential power", or as "stabilisation of the state", or as "an increase in administrative effectiveness". Or perhaps, simply as Vladimir Putin's reputation. In essence, these are all one and the same thing.

In Russia, a huge soap bubble has been mistaken for a balloon. From a distance, the two look very similar, but there is one difference:

if you try to ascend into the heavens on a soap bubble, the result will inevitably be catastrophic. Our national peculiarities must be taken into account. Our bubble has proven astonishingly durable and long-lived, but there is a limit to everything.

The Kremlin's political monopoly has rested on high oil incomes, and will vanish into the past along with them. The bubble is bursting, and the market correction will inevitably take the form of a crisis of power. The massive vote for opposition candidates in the most populous regions occurred even before the first symptoms of economic recession had appeared.

With the onset of winter all the familiar social problems, which no-one is about to solve, are again making their appearance. Meanwhile, hopes that everything will resolve itself of its own accord are dissolving along with the flow of petrodollars.

Putin was lucky. His political honeymoon lasted not a hundred days, as with other presidents, but a year and a half. All this time he could get away with not essentially solving anything, instead engaging in palace intrigues and personnel reshuffles, intimidating waverers, punishing personal enemies and encouraging old friends.

Meanwhile, in Russia and the world at large everything went ahead much as ever. It did not go badly, either, so long as the economic upturn retained its momentum. The Putin Administration might be said to have coasted along, benefiting from the earlier efforts of the Primakov government and from the policies of OPEC.

The first of these restored Russian industry to life, while the second raised oil prices, redistributing the "surplus" of dollars not only to the OPEC countries, but also to Russia. The Putin regime contributed precisely nothing to this situation, but was delighted to enjoy the results of others' work.

If these two factors had not coincided (and also the default of 1998, which lowered the ruble and made our products competitive), all talk of a "Russian miracle" would have been absurd. Accounts were settled with Primakov, who was turned into a political outsider with a seat in the Duma, and when oil prices started to fall and the OPEC countries called on the Russian authorities to show elementary solidarity, they received a haughty refusal.

Instead of addressing its own domestic and foreign problems, Moscow fraternised with Washington. The "big brother" from across the seas demands proofs of loyalty, and the Kremlin has an awed faith in US might.

The friendship between Vladimir Putin and George Bush is developing against a background marked by war in Central Asia, an accelerating world economic crisis, and increasingly difficult relations between Russia and other oil producers. In all respects, Russia appears as a bastion of the "Western world", taking a stand against "Islamic terrorism", supporting the principles of "liberal economics", and refusing to collaborate with oil-producing countries in the Third World.

Western politicians in their turn have been prepared not only to forget the Russian president's past career in the state security organs, but also the breaches of human rights in Chechnya. This is especially true now in the era of the "war on terrorism", with human rights in the West also being pushed into the background, even as a political slogan.

If Putin has been given high marks in the West, back home all sorts of misfortunes are lying in wait for him. The new president received his strongest support from people who hoped that this veteran of the security forces would give Russia back its independence, strengthening its military might and allowing it to take its distance from the West.

At the same time, they counted on him to put the oligarchs in their place. These people who believed the Putin myth now feel a deep sense of betrayal. To accuse Putin in this way is, however, quite unjust, since he has not betrayed anyone.

He made no promises whatever. He never presented a program, and never outlined any political positions. There were only obscure hints that positions might be drawn up in the future. The people who linked their hopes of "national" or state revival to Putin were deceiving themselves, because they wanted to be deceived. They wanted to believe in the determination of the leadership to bring about national salvation; in the glory and grandeur of the security forces; and in the selflessness of the bureaucracy.

For this reason, they looked for hidden meaning in empty words and vacuous slogans, attributing the obscure and elliptical character of the president's statements to the secretiveness of a man used to conspiracy in his former employment. The idea that the emptiness concealed nothing but emptiness proved too difficult for people used to idolising authority simply because it was authority.

In one respect, of course, the hopes of the "patriots" have been borne out. Under Putin, the military-repressive apparatus has indeed been strengthened to a degree - or more precisely, the position of its leaders in the Russian political elite has grown stronger. Even here, however, the hopes nurtured by patriotic opinion have been deceived, since these military-repressive structures are working closely with the US, and are protecting the positions of the oligarchs.

The calculation in Moscow, it appears, is that once the support of Washington has been enlisted, everyone else can be ignored. However, miracles do not happen, and not even the sympathy of George Bush can stave off an economic crisis.

When oil prices started to fall, the OPEC countries cut their production, trying to stem the decline. Quite unconcerned, Russia continued marketing its supplies. Venezuelan President Hugo Chaves flew to Moscow, and tried to explain to his Russian colleagues that it was wrong to profit at the expense of others, and that if Russia wanted to sell oil for more than $18 a barrel in future, it should join with the OPEC countries in cutting its output.

Chaves was shown the sights of the Kremlin, was treated to a ceremonial dinner, and was sent home empty-handed. Moscow's initial pledge to cut production by 30,000 barrels a day was seen as derisory; the amount was so insignificant that it would have been better for the Russian ministers to have kept their silence altogether.

The outraged OPEC countries declared a price war on Russia, and within three days had emerged victorious. The cost of producing oil in Saudi Arabia and Venezuela is half that in Russia, and as a result, Russia never had a chance. As soon as oil prices dropped below $18 a barrel, the ruble started to shake, and the government panicked. The Russian ministers rushed to consult with OPEC, promising real production cuts.

In a country where the oil companies have been divided up among oligarchs, making these cuts is unfortunately easier said than done. For the oligarchs to reach agreement among themselves on the share that each should have of the reduced production is harder than reconciling Bush with bin Laden. The government cannot compel them to do it, since the oligarchs are themselves the government.

The only remaining hope is that the oil magnates will have an eye to their self-preservation. More than likely, however, it is already too late. In the longer term, not even a cut in output will redeem the situation.

Until now, Putin's most serious crises have been linked to the submarine Kursk and to the burnt-out Ostankino television tower. For all their symbolism, these were not issues on which the country's fate depended. In the autumn of 2001, Putin was forced to make crucial state decisions for the first time.

The choices he made were a heavy blow for anyone who had confidence in the new president. Meanwhile, a single month can hardly have sufficed to inspire love for Putin in people who were already suspicious of him. The social base of the regime has narrowed rapidly.

The Kremlin can console itself with the professions of love issuing from the West. The experience of two earlier presidents shows, however, that this love is rarely able to guarantee sympathy from the people of Russia themselves.
The current tenants of the Kremlin instinctively understand this problem, and feel nervous as a result, but there is nothing they can do. No-one can say precisely how the crisis will develop, or what form it will take. All that is clear is that when the political bubble bursts, the noise will be even louder than when the bond market collapsed.

December 22, 2001.

[Source: Znet Daily Commentaries]