Kremlin Factions and the Enemies of Socialism

Well, isn’t that a shocker. With Russia’s economy under serious threat from Western economic sanctions and falling oil prices, a major Kremlin faction has quite unexpectedly gotten some wind behind its sails.

In essence, there are two economic viewpoints that are supported in the Kremlin: one is represented by the former KGB types who have seen their political fortunes revived under Putin. Many of Russia’s so-called oligarchs have aligned themselves with this faction, which is not surprising: owners of large established businesses often tend to support statism, because it ensures the suppression of competition from upstarts. This is also the main reason why many big businesses in the West are supporting the regulatory State and the ever increasing pressure on economic and individual freedom it stands for.

We may thus call this the “statist” faction. The other faction is represent by people aligned prime minister Dimitry Medvedev – this is the pro-liberty, pro-economic liberalization faction, which has seen its fortunes alternately waxing and waning since the collapse of the Soviet Union, but which has never been fully rooted out. This is not least due to the fact that many economists in the former Eastern Bloc are acutely aware of the failure of socialism, and have eagerly studied the arguments forwarded against it. Today there are probably more economists in the former Eastern Bloc who are aware of and have understood the Misesian critique of economic calculation under socialism, than one can find in the West.

Evil Russian grand poobah goes for more economic freedom.

(Image via ilbe.com)

In fact, Western intellectuals have never lost their penchant for central economic planning, presumably because they have never been personally exposed to what happens when it is implemented in full. By contrast, the Eastern Bloc was a laboratory for the Marxist doctrine, and its failure was acutely felt by everyone living there. It occurred precisely for the reasons elaborated in the theoretical work of Mises. In this context, we strongly recommend reading the famous monograph that started the “socialist calculation debate”: Economic Calculation in the Socialist Commonwealth (pdf). Mises was quite generous in his assumptions: he assumed that there would be a market for consumer goods, and a token “money” that could be exchanged for them. However, there would be no market for capital goods, with the State in full control of the means of production. Mises showed that such an economy would be deprived of economic calculation; the lack of prices for capital goods would make it impossible for the planners to allocate resources efficiently,regardless of how much ancillary information they possessed, and regardless of the purity of their intentions.

The debates on the subject (in which F.A. Hayek and other “Austrians” were involved as well) have shown that Mises’ critics had often not even understood his argument. They thought that sufficiently strong calculation devices and adequate mathematical equations would be all that would be required to effectively “plan” an entire economy. It is quite ironic in this context that the Marxist experiment collapsed in the biggest bankruptcy in history just as such powerful computational devices became indeed widely available.

The upshot is that today, we find more sworn enemies of socialism in the former Eastern Bloc than in the West. A strong current in favor of free markets was set into motion in academic circles in the former command economies after the collapse of the Soviet Union, and its influence never completely waned.

The monograph that explained why socialism cannot work

(via mises.org)

Russia Going in the Opposite Direction from Western Regulatory Democracies

Russia’s national security apparatus by its very nature is a major part of the “statist” faction. With the support of Russian nationalists, it has certainly gotten its way in both the Georgian crisis and again in the Ukraine crisis. From a geopolitical perspective, Ukraine is regarded as a big “prize” by Western strategists (we refer you to Zbigniev Brzezinski’s “The Grand Chessboard” in this context, which is a kind of neo-con/war party bible). At the same time, the geopolitical importance of Ukraine for Russia can hardly be overstated. From production facilities supplying the Russian military-industrial complex to important gas pipelines (see also “The Map that Explains Everything”), to the warm water port of Sevastopol, to the fact that it is regarded as a “buffer” state and has a large ethnic Russian population, Ukraine is very high up on the Russian government’s list of foreign policy priorities.

All of this is well known and explains the Russian government’s reactions to the coup in Kiev. As is usually the case though, Western powers won’t consider compromise: their demands are maximalist and leave no room for anything but complete surrender. This is also echoed by what Kiev demands of the Eastern separatists: first, surrender completely, and then a few crumbs may fall from the table for you. Obviously, the separatists cannot possibly agree to this.

In fact, we could discern the same principle at work during the coup itself: the elected president Yanukovich – though his reputation as a corrupt and thieving gangster was well-deserved – had already agreed to all the demands forwarded by the EU and opposition negotiators. The very next day, demonstrators were shot on Maidan square by unknown assailants – an event the new rulers in Kiev to this day refuse to properly investigate. However, everything that is known about the incident tells us it was a so-called “false flag” attack. There was to be no compromise with Yanukovich – maximalism was pursued instead. The opposition grabbed the power denied to it by elections by means of violence.

This maximalist attitude is a characteristic the neo-feudal ruling elites of modern-day Western regulatory democracies have in common with fascism. Hence, Russia cannot expect that the sanctions will be lifted, almost regardless of what it does – unless it completely surrenders to every demand. This in turn is impossible, not only due to the geopolitical considerations mentioned above, but also due to domestic political pressures. Putin’s government is not a dictatorial government acting in a political vacuum. While it is quite adept at suppressing what might be called “pro-Western” political dissent at home, it is under considerable pressure from nationalist factions. Contrary to the propaganda so beloved by Western politicians and media that paints Putin as someone who wants to “resurrect the Soviet Union”, it is in reality people like Communist Party chief Gennady Zyuganov and extreme nationalist Vladimir Zhirinowsky who are pursuing this dream. Putin has far more to fear from them than from comparatively powerless opposition leaders like Gari Kasparov or Alexei Navalny.

The ruble reflects the pressure Russia’s economy is facing – recently the currency has however strengthened a bit from its worst levels.

So this is the context in which the most recent developments are taking place. The Russian government is forced to look for ways to minimize the economic threats from Western sanctions and the decline in oil prices. What to do? As Bloomberg reports:

“A recession is imminent, inflation is getting out of hand and the ruble and oil are in freefall, Economy MinisterAlexei Ulyukayev told Putin, according to people who attended the meeting at the presidential mansion near Moscow in mid-October. Clearly, Ulyukayev concluded, sanctions need to be lifted.

At that, Putin recoiled. Do you, Alexei Valentinovich, he asked, using a patronymic, know how to do that? No, Vladimir Vladimirovich, Ulyukayev was said to reply, we were hoping you did. Putin said he didn’t know either and demanded options for surviving a decade of even more onerous sanctions, leaving the group deflated, the people said.

Days later, they presented Putin with two variants. To their surprise, he chose an initiative dubbed “economic liberalization,” aimed at easing the financial burden of corruption on all enterprises in the country, the people said. It was something they had championed for several years without gaining traction.

The policy, which Putin plans to announce during his annual address to parliament next month, calls for a crackdown on inspections and other forms of bureaucratic bullying that cost businesses tens of billions of dollars a year in bribes and kickbacks, the people said. It entails an order from the president to end predatory behavior, with prosecution being the incentive for compliance, they said. “Wastefulness, an inability to manage state funds and even outright bribery, theft, won’t go unnoticed,” Putin said at a meeting with supporters in Moscow yesterday.

[…]

Putin’s backing of the program marks a revival of sorts for the Medvedev faction, which advocates closer integration with the U.S. and Europe, a process now derailed by sanctions, as the path most beneficial to the country. This group, which includes Ulyukayev, had been sidelined since February, when the overthrow of Ukrainian President Viktor Yanukovych, Russia’s ally, spurred the siloviki to organize the annexation of Crimea.

Putin chose the corruption crackdown policy over the other option presented by his economic team: the “mega-projects” program. That path would further enrich two of his closest allies, billionaires Gennady Timchenko and Arkady Rotenberg, by transfering huge sums of money to contractors.

[…]

Former Finance Minister Alexei Kudrin, who sits on the president’s Economic Council, said a successful campaign against extortion would be akin to cutting taxes without further weakening public finances. Corruption is one of the greatest obstacles to growth and if Putin pushes the policy with the same vigor he pursues security issues, the impact on the economy may be profound, Kudrin said in an interview.

“The key driver for the development of the country is citizens’ confidence in the economy,” Kudrin said. “The first thing to do is to limit the number of control and supervisory functions of the state. Authorities simply have to stop going to enterprises to swindle money. We have to limit fire, sanitary and technical inspections.”

In 2008, when Putin swapped jobs with Medvedev for four years, businesses were paying more than $200 billion a year in bribes, Moscow-based research group Indem said in a report that year, using data from prosecutors. Most Russians say corruption has only gotten worse since, according to a survey published by Transparency International.

Business Solidarity, a Moscow-based organization that campaigns against corruption, estimates that bribes, kickbacks and related illegal activities end up increasing the retail price of most goods by 30 percent.

A crackdown on inspections, if done right, could have an “immediate impact” on the economy, said MDM Bank Chairman Oleg Vyugin, who served as first deputy head of the central bank from 2002 to 2004. As it is now, law-enforcement agencies have a simple business model: the more they inspect, the more they earn, Vyugin said in an interview.

“The economic powers of the Investigative Committee, the Prosecutor General’s Office and the police must be curbed,” Vyugin said. “This is the only way to convince people that it’s possible to develop a business here.”

There’s an irony about the U.S. and European sanctions that isn’t lost on the members of Putin’s economic team. While the penalties have pushed foreign investors away, they’ve also become the catalyst for meeting one of their key demands — rooting out corruption.

One of the major debates about the new program now is what to call it because Putin thinks “Economic Liberalization” sounds too western, according to one of the people who attended last month’s policy meeting. The frontrunner is “Economic Freedom” and everyone is praying he doesn’t change his mind, the person said.

The siloviki mentioned above are what we have referred to as the “statist” faction. The authors of the Bloomberg article make it sound as if it were a very big surprise that Putin decided to choose a program ofeconomic freedom (we also happen to believe this is a fortuitous terminology) over the wasteful Keynesian “mega-projects” idea. However, this is far less surprising to those who have paid attention to some of the things Putin has said in the course of his career. Here are a few pertinent Putin quotes that may explain why economic liberalization appeals more to him that Keynesian ditch digging:

“During the time of the Soviet Union the role of the state in economy was made absolute, which eventually lead to the total non-competitiveness of the economy. That lesson cost us very dearly. I am sure nobody would want history to repeat itself. We should also be aware that for during the last months, we have been witnessing the washout of the entrepreneurship spirit. That includes the principle of the personal responsibility – of a businessman, an investor or a share-holder – for his or her own decisions. There are no grounds to suggest that by putting the responsibility over to the state, one can achieve better results. Another thing – handling crisis must not turn into financial populism, into rejecting a responsible macro-economic policy. Unreasonable expansion of the budget deficit, accumulation of the national debt – are as destructive as an adventurous stock market game.”

“While a modern state must honor its obligation ‘to take care of its population and ensure its social protection’ or face the risk of collapse, European countries have been ‘living beyond their means’ and are now “witnessing the rise of a dependency mentality … [that] endangers not only the economy but the moral foundation of society.”

“Unfortunately, more and more often we hear that increasing military spending will help solve today’s social and economic problems. The logic here is quite simple. Additional allocations for military needs create new jobs. […]

At a glance, it seems to be merely a method to fight the crisis and unemployment. Perhaps, in the short run, such a measure may yield some results. But in reality, instead of solving the problem, militarization pushes it to a deeper level. It draws away from the economy immense financial and material resources, which could have been used much more efficiently elsewhere.”

“One must not allow oneself to skid down to isolationism and unbridled economic egoism. … The second possible mistake would be excessive interference into the economic life of the country. And the absolute faith into the all-mightiness of the state.”

And yes, it is indeed quite ironic that Western sanctions have spurred the adoption of this plan. After all, the West is doing the exact opposite: it moves toward ever more central planning of the economy, which naturally implies ever more reduction in the degree of economic freedom. Corruption is bound to increase in the wake of these policies.

Putin on the other hand has been handed an opportunity to implement an economic policy he may well have always favored, but could to date not pursue due to domestic political considerations. Now he can always point to the necessity of introducing it so as to ensure Russia’s economic survival. As an aside, although this is understandably rarely mentioned in the Western press, Russia has a 13% flat tax, which puts the costs caused by corruption into perspective.

The MICEX (MCX) – Russia’s stock market has actually recovered quite a bit in ruble terms, which is so far largely a reflection of the currency’s declining value.

Conclusion:

It remains to be seen whether this idea is pursued as vigorously as it should be and whether the plan actually succeeds (the above quoted Bloomberg article mentions that there are quite a few doubters). In any event, it is quite funny that Russia is apparently adopting more economic freedom just as the West is doing the exact opposite (the ascendance of Western statism was starkly on display on occasion of the recent G-20 meeting). Putin’s apparent rejection of Keynesian nostrums in favor of economic liberalization is likely to make him even more unpalatable to much of the Western intelligentsia, but it is undoubtedly great news for Russia’s citizens.

Charts by: investing.com