icy peace

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By CEDRIC DURAND*

There is no doubt that the war in Ukraine will be deleterious for many Russian companies, which will test the ruling class's loyalty to the regime.

Petrov's Flu (2021), Kirill Serebrennikov's latest film, begins by showing a crowded bus in Russia. The atmosphere is feverish, almost violent. With a strong fever, the protagonist suffers a coughing fit and moves to the back of the vehicle. Right behind him, another passenger yells, “We used to get free coupons to a sanitarium every year. It was good for the people. Gorby sold us, Yeltsin threw it all away, then Berezovsky got rid of him, nominated these guys, now what? He concludes that "all those in power must be shot". At this point, the protagonist gets off the bus and enters a daydream where he joins a firing squad executing a group of oligarchs.

The term “these guys” refers to Putin and his clique, while “what now?” is a question that weighs heavily on the country they created. What kind of society is contemporary Russia and where is it heading? What are the dynamics of its political economy? Why did they trigger a devastating conflict with their equally paralyzed neighbor? For three decades, icy peace reigned in the region, with Russia and the rest of Europe swimming together in the cold waters of neoliberal globalization. In 2022, following the invasion of Ukraine and economic and financial sanctions from the West, Russia has entered a new era, in which the illusions that animated the country's market transition have become impossible to sustain.

Of course, the fantasy of post-Soviet development never lived up to reality. In 2014, Branko Milanović drew up a balance sheet of transitions to capitalism, in which he concluded that “only three or at most five or six countries can be on the path to becoming part of the rich and (relatively) stable capitalist world. Many are falling behind and some are so far behind that for several decades they cannot aspire to get back to where they were when the wall fell.” Despite promises of democracy and prosperity, most people in the former Soviet Union got neither.

Due to its geographic dimension and political-cultural centrality, Russia was the Gordian knot of this historical process, which constitutes the vital background of the crisis in Ukraine. Apart from the military tropism of “Great Power” approaches, domestic economic factors are at least as essential in mapping the coordinates of the current situation and explaining the Russian leadership's precipitous rush to war.

 

First period: 1991-1998

Russia's aggression is part of a desperate and tragically miscalculated attempt to meet what Trotsky called "the whip of external necessity": that is, the obligation to compete with other states in order to preserve some degree of political autonomy. It was this same whip that drove the Chinese leadership to adopt controlled economic liberalization in the early 80s, fueling forty years of successful integration into the global economy, allowing the regime to rebuild and consolidate its legitimacy. In Russia, however, the whip broke the state itself after the end of the Cold War.

As Janine Wedel documents in her indispensable Collision and Collusion: The Strange Case of Western Aid to Eastern Europe (2000), the end of the Soviet Union resulted in a profound weakening of the country's domestic elite. During the early years of the transition, state autonomy was minimized to the point that policy-making was effectively delegated to US advisers, led by Jeffrey Sachs. He oversaw a small group of Russian reformers, including Yegor Gaidar – the prime minister who launched the country's decisive price liberalization – and Anatoli Chubais, the privatization czar and former Putin ally. Reforms in the form of shock therapy caused industrial involution and rising poverty rates, inflicting national humiliation and impressing a deep suspicion of the West on Russia's cultural psyche. Given this traumatic experience, the most popular motto in Russia remains “the nineties: never again”.

Vladimir Putin built his regime on this motto. A simple look at the evolution of GDP per capita tells us why. The first years of the transition were marked by a severe depression that culminated in the financial collapse of August 1998. Unlike the total collapse described by Anders Åslund, in the magazine Foreign Affairs, this moment indeed contained the seeds of a rebirth. The ruble has lost four-fifths of its dollar face value; but as early as 1999, when Putin rose to power in the wake of another war in Chechnya, the economy began to recover.

Before the crash, the macroeconomic prescriptions of the Washington Consensus had created an intractable depression, as anti-inflationary policies and a blunt defense of the exchange rate deprived the economy of a much-needed amount of money in circulation. Soaring interest rates and the end of reliable state wage payments resulted in widespread barter (responsible for more than 50% of intercompany exchange in 1998), endemic wage arrears, and the exodus of industrial firms from the domestic market.

In remote places, the use of money has almost completely disappeared from everyday life. In the summer of 1997, I spent a few days in the small village of Chernorud, on the western shore of Lake Baikal. Villagers harvested pine nuts and used them to pay for bus fares to the neighboring island of Olkhon, as well as to obtain accommodation and buy dried fish; a glass full of nuts represented, then, the unit of account of this “currency”. The social situation with regard to health and crime was dire. A generalized sense of despair was reflected in a high death rate.

 

Second period: 1999–2008

Compared to this economic catastrophe, the beginning of the Putin era was a feast. From 1999 to 2008, the main macroeconomic indicators were expressive. Barter quickly receded and GDP grew at an average annual rate of 7%. Having fallen by almost half between 1991 and 1998, it fully regained its 1991 level in 2007 – something Ukraine has never achieved. Investment recovered along with real wages, posting annual increases of 10% or more. At first glance, a Russian economic miracle seemed plausible at the time.

This enviable economic performance was made possible by the increase in commodity prices, but this was not the only factor. Furthermore, Russian industry benefited from the stimulative effects of the ruble's devaluation in 2008. This loss in value made locally manufactured products more competitive, facilitating import substitution. As industrial companies were completely disconnected from the financial sector, they did not suffer from the 1998 crash.

Furthermore, thanks to the legacy of Soviet corporate integration, large companies generally preferred to defer wage payments in the 90s rather than lay off their workforce. As a result, they were able to quickly ramp up production to keep up with the economy's reflation. The capacity utilization rate increased from around 50% before 1998 to almost 70% two years later. This, in turn, contributed to productivity growth, creating a virtuous circle.

Another factor was the government's willingness to take advantage of export windfalls to revitalize state intervention in the economy. The years 2004 and 2005 marked a clear change in this direction. Privatization was still on the agenda, but it continued at a much slower pace. Ideologically, the current flows in the opposite direction, with greater emphasis on public ownership.

A presidential decree of August 4, 2004 established a list of 1.064 companies that could not be privatized and named a number of joint-stock companies in which the state's participation could not be reduced. State activity was expanded through a pragmatic combination of administrative reforms and market mechanisms. Putin's most important target was the energy sector, where he intended to reassert state control of prices and eliminate potential rivals such as liberal oil tycoon Mikhail Khodorkovsky.

Meanwhile, a combination of new policy instruments and incentives for Russian investment abroad created companies that could compete in areas such as metallurgy, aeronautics, automobiles, nanotechnology, nuclear energy and, of course, military equipment. The stated aim was to use the proceeds generated by the export of natural resources to modernize and diversify a largely obsolete industrial base, so as to preserve the autonomy of the Russian economy.

 

Third period: 2008-2022

A developmental vision can be glimpsed in this attempt to restructure Russia's productive assets. However, strategic mistakes in managing the country's insertion in global markets, together with tense relations between its political leadership and the capitalist class, prevented an adequate articulation of this social agreement.

The symptoms of this failure became evident with the financial crisis of 2008 and the agonizing growth of the following decade. They were evident in the continued reliance on commodity exports – primarily hydrocarbons, but also base metal products and, more recently, cereals. Externally, this growing specialization has left the economy susceptible to fluctuations in global markets. Internally, this has meant that policy-making has come to revolve around distributing a (often squeezed) surplus from these industries.

Russia's developmental failure can also be seen in its high levels of financialization. In 2006, its capital account was fully liberalized. This measure, together with the entry into the WTO in 2012, indicated a dual allegiance: first, to the process of globalization led by the US, whose cornerstone was the free movement of capital; second, for the domestic economic elite, whose luxurious lifestyles and frequent clashes with the regime required them to keep their fortunes and businesses abroad.

Putin encouraged this outflow of domestic capital even as he simultaneously pursued macroeconomic policies aimed at bringing foreign investment to Russia. The consequent internationalization of the economy, combined with its dependence on commodity exports, explains why it was seriously affected by the global financial crisis, suffering a contraction of 7,8% in 2009. To face this instability, the authorities opted for a burdensome accumulation of low-return reserves – which meant that, despite its positive net international investment position, Russia lost between 3% and 4% of its GDP through financial payments to the rest of the world during the 2010s.

Thus, in the decade before the invasion of Ukraine, the Russian economy was characterized by chronic stagnation, extremely unequal distribution of wealth and relative economic decline compared to China and the capitalist core. It is true that there have been certain more positive developments. As a consequence of the sanctions and counter-sanctions adopted after the annexation of Crimea, some sectors, such as agriculture and food processing, benefited from an import substitution dynamic. At the same time, a vibrant technology sector has enabled the development of a digital ecosystem with an impressive international reach.

But this was not enough to offset the structural weakness of the economy. In 2018, mass demonstrations against neoliberal pension reforms forced the government into a partial return. They also revealed the growing fragility of the Putin regime, which is unable to deliver on its promises of economic modernization and adequate welfare policies. As this trend continues to undermine its legitimacy, the president's confidence in nationalist revanchism – and its military expressions – will become even more intense.

Facing economic difficulties and political isolation after its adventure in Ukraine, the outlook for Russia is bleak. Unless it can secure a quick victory, the government will falter when ordinary Russians feel the economic costs of war. It will likely respond by increasing repression. For now, the opposition is fragmented and sectors of the left, including the Communist Party, have rallied around the flag – meaning that, in the short term, Putin will have no problem quelling dissent. But beyond that, the regime is in danger on several fronts.

Businesses are terrified of the losses they will suffer, and financial journalists in Russia are openly sounding the alarm. Of course, it is not easy to predict the outcome of sanctions – yet to be fully implemented – on the fate of individual “oligarchs”. It should be noted that the Central Bank of Russia skillfully stabilized the ruble after it lost a third of its value immediately after the invasion.

But for Russian capitalists, the danger is real. Two examples illustrate the challenges they will face. First is the case of Alexei Mordashov – Russia's richest man according to Forbes – who was recently added to the EU sanctions blacklist for his alleged ties to the Kremlin. After this decision, Severstal, the steel giant he owned, stopped all deliveries to Europe, which represented about a third of the company's total sales: about 2,5 million tons of steel per year. The company must now look for other markets in Asia, but with less favorable conditions that harm its profitability. These ripple effects on the businesses of the so-called “oligarchs” will have implications for the economy as a whole.

Second, import restrictions pose serious difficulties for sectors such as automobile production and air transport. A “technological vacuum” could open up, given the withdrawal of business software companies like SAP and Oracle from the Russian market. Its products are used by Russia's major corporations – Gazprom, Lukoil, State Atomic Energy Corporation, Russian Railways – and will be expensive to replace with local substitutes.

Trying to limit the impact of this deficit, the authorities legalized the use of piracy, extended tax breaks to tech companies and announced that tech workers will be freed from military obligations; but these measures are no more than a temporary stop-gap. The critical importance of software and data infrastructure to the Russian economy highlights the danger of monopolized information systems dominated by a handful of Western companies, whose withdrawal could be catastrophic.

In short, there is no doubt that the war in Ukraine will be deleterious for many Russian companies, which will test the ruling class' loyalty to the regime. But the consent of the general population is also at risk. As socioeconomic conditions deteriorate further for the general population, the motto that served Vladimir Putin so well against his liberal opposition – “Nineties: never again” – may soon backfire that will hit home all right. at the head of the Kremlin. The mix of generalized misery and nationalist frustration is political nitroglycerin. Its explosion would spare neither the oligarchic regime of Vladimir Putin nor the model on which it is based.

*Cedric Durand is a professor at the University of Sorbonne Paris-North. Author, among other books, of Techno-Féodalisme: Critique de l'économie numérique (Discovery).

Translation: Eleutério FS Prado.

Originally published on the website of New Left Review .

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