BY RICHARD EBELING
Posted 9/5/2008
SourceI was in Moscow just before the collapse of the Soviet Union and spent most of three days at the Russian Parliament building, watching as Boris Yeltsin, standing atop a tank, rallied thousands of fellow Russians to defend their emerging democracy against a then-in-progress coup attempt by Soviet hard-liners.
The day after the failed coup, tens of thousands of Muscovites celebrated in a large square behind the Parliament building. As the Soviet flag was lowered and the traditional Russian colors of red, white and blue were raised, the crowd chanted in unison: "Swaboda, swaboda, swaboda" — "Freedom, freedom, freedom."
How long ago those days now seem, as the recent conflict in the Republic of Georgia reveals. Today's Russia has fallen back into its historical tradition of a centralized and authoritarian government, a regulated and manipulated economy, and suspicion and hostility toward the West.
Gone are the days when Russian President Vladimir Putin appeared to be moving his country in a free-market direction by dramatically lowering business taxes, introducing a 13% flat income tax, reducing bureaucratic regulations and using export revenues to pay off Russia's foreign debt.
It's obvious now that Putin's initial support for these policies did not represent an endorsement of market principles or the ideals of an open society, but a pragmatic weigh-station on the road to a larger political end: using private enterprise to rebuild the Russian economy so that the government could use this wealth to reassert Russia's "rightful" place in the sun.
But only so much private enterprise. Putin began to reintroduce the heavy hand of the state over economic affairs as early as 2004. He was lucky, however. The adverse effects that might have resulted from this return to socialist policies were counteracted by a dramatic rise in commodity prices, especially for oil and natural gas, of which Russia has an abundance.
Commodities provided a huge infusion of export earnings, triggering increases in the GDP, fixed capital investment and trade, and decreases in unemployment and inflation, while covering over fundamental and serious weaknesses in the Russian economy.
A closer look at the Russian economy reveals a nation that is practically a caricature of the stereotypical Third World country. For example:
• Almost 65% of Russia's export earnings comes from oil and gas, while another 16% comes from precious metals and other raw materials.
• More than 10% of Russia's population is still engaged in farming, compared with less than 3% in the United States. The number is so high because some 70% of the agricultural land remains collective farms, now disguised as private corporations (heavily tied to and financially dependent on government). The 30% of the land that is legitimately tilled by private farmers is responsible for over 56% of crop and livestock production.
A long-term decline in global oil and gas prices could, of course, quickly undermine Russia's current economic strength. Russian Finance Minister Alexei Kudrin acknowledges that revenues from international oil and gas sales have probably peaked and that by 2015 the Russian government will probably have to start dipping into its reserve fund to finance increases in government spending.
This reserve fund, however, may have to be drawn upon sooner than Kudrin thinks. According to the Russian Central Bank, in the week following the start of the Georgia conflict, foreign investors withdrew more than $16 billion from the Russian market, an amount larger than total combined 2007 foreign direct investment in Russia by Germany, France and the United States.
Not that Putin minds. What he wants is the restoration of a strong Russia that is a great power player on the international stage. To that end, military force is viewed as a crucial means to gain international respect — and if not respect, then at least fear — and deference from those Russia wishes to influence and possibly control.
Still, Russia's ability to throw its political and military weight around heavily depends upon the state of the Russian economy and how much fat can be sliced off to feed the purposes of those in power.
In the short term, revenues from an energy-hungry world will enable Moscow to play for its place in the sun. In the longer run, Putin's authoritarian and nationalistic insistence on a strong, centralized and intrusive government will prevent a truly normal and prosperous Russia.
Ebeling is a senior research fellow at the American Institute for Economic Research in Great Barrington, Mass., and the Shelby C. Davis Visiting Professor in Economics at Trinity College, Hartford, Conn.
Copyright 2000-2008 Investor's Business Daily, Inc.