Critics of Vladimir Putin’s regime argue that Russia’s political system is too centralized and risks collapse in today’s economic storm. The regime’s ideology, after all, places the state and loyalty to the rulers ahead of private property and merit. When the crisis hits with full force, the government would nationalize major banks and companies, with the resulting inefficiency then burying the Russian economy, just as it doomed the Soviet Union.
Russia’s government has, in fact, made serious mistakes in dealing with the crisis. Taxpayers’ money was spent to purchase corporate stocks in a failed attempt to support collapsing stock prices. The government is unlikely to recover its investment anytime soon.
The government was also too slow in depreciating the ruble. While one can argue that one-off devaluation was risky – as it could have triggered a panic – gradual depreciation should have started earlier than it did. In the last two months of 2008, the central bank allowed the ruble to weaken at a rate of 1% per week, then at 2-3% per week. It probably still needs to fall another 10%. In the meantime, the central bank haemorrhaged reserves defending this slow correction, while commercial banks have been holding on to dollars in anticipation of the ruble’s further decline.
The third mistake was to raise import duties, especially for imported cars. This was not only economically foolish (as with many other import-competing sectors, the automotive industry will certainly be protected by the weakening ruble), but also politically dangerous. Car owners are an affluent, socially active, and easily organized group. Street protests against the import duties became the first serious popular uprising that Russia has seen in many years.
Yet these mistakes are relatively minor and reversible. Indeed, Russia’s government, unexpectedly, has taken resolute and mostly correct economic decisions. First, it prevented the collapse of the banking system. Many Russian banks were heavily exposed in foreign markets and therefore faced severe financial problems once the crisis hit. A massive liquidity injection by the government ensured that no major bank collapsed, and minor bank failures were administered in a surprisingly orderly fashion.
Moreover, the crisis has – so far – not resulted in major nationalizations of private companies. The government could have used the crisis to nationalize all banks and companies in financial distress. It has not, despite its still awesome foreign reserves, which give it the wherewithal to buy out a significant portion of the economy at fire-sale prices. Instead, up to now at least, the government has mostly been providing (high-interest) loans rather than engaging in massive equity buyouts.
Nor have the oligarchs been bailed out. Of $50 billion in external debt owed by Russian banks and firms in 2008, the government refinanced only $10 billion. Apparently, the terms offered by the government (LIBOR+5% and collateral) have turned out to be right on target.
How did reasonable economic policies prevail in this crisis? The key factor is that, for the first time since Putin came to power, the Kremlin perceives a genuine threat. The years of easy popularity are over. All the ugly facts that Russians ignored during the years of fast economic growth are bubbling to the surface.
The regime knows that its survival depends on preventing economic collapse. The crisis energized the system and shifted decision-making power to those who know about and can do something for the economy.
But did these policy changes come too late? The ossified, corrupt, inefficient economy built in the fat years of the oil boom may be impossible to save. So the central question that Russia confronts is whether even competent economic policy can prevent economic and political collapse.
Sergei Guriev is Rector of New Economic School in Moscow. Aleh Tsyvinski is a Professor of Economics at Yale University.
Copyright: Project Syndicate, 2009.
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