Do svidaniya democracy, and hello good times

By Anatole Kaletsky (THE TIMES, 04/10/07):

Vladimir Putin’s announcement that he will “consider” becoming Russia’s prime minister after stepping down as President next March raises two troubling questions: does this mean that Russia is moving back towards some form of post-Stalinist dictatorship? Or is the transition from communism to some form of free-market capitalism really an irreversible fact? The answer to both these question is yes.

Russia, after its brief flirtation with ultra-liberalism under Boris Yeltsin, is again becoming an authoritarian society. But in saying this, we also have to acknowledge that the failure of democratic politics will not bring back communism and may do the Russian economy no harm. The Putin regime’s economic management has been surprisingly competent and has turned the global energy boom to generally good use.

In fact, the Putin dictatorship has a serious chance of creating a successful capitalist economy in Russia in much the same way that the Deng Xiaoping dictatorship turned China into an economic superpower.

The statement that “free markets create free people” may have been treated as axiomatic in the idealistic heyday of Reagan and Thatcher, but it was never really more than a rhetorical trope. History has seen plenty of tyrannies that have run their economies on broadly free-market lines. There is a natural tendency for economic freedom to create competing centres of political power, but the link between economic and political liberalism is far from a one-to-one correlation.

And even to the extent it is valid, it operates on a timescale of decades or centuries, not years and months. It is wishful thinking, therefore, to suppose that Russia will pay a price economically if it succumbs to a Putin personality cult. It is even more fanciful to imagine that Western investors will flee Russia if it continues to stray from the democratic path. Western oil companies and banks have a long history of profitable cooperation with dictators in the Middle East, Asia and Latin America and they will have no problem working with an autocratic Russia.

This is particularly true at present, because Russia’s economic outlook is surprisingly good. Its economy has grown so strongly throughout this decade that it has built up a large reserve cushion, as well as developing a self-sustaining momentum that is independent of the global energy boom.

Its GDP is forecast to grow by 6.5 per cent this year and a similar performance is confidently expected for 2008, which will be the tenth successive year of growth of 6 per cent. Given that Russia’s population is declining by 0.5 per cent annually, per capita living standards and productivity are now rising almost as fast as in China, while starting from a base that is three times higher than China’s in dollar terms. The combination of rapid economic growth and a rapidly rising rouble has boosted Russia’s GDP to $1.2 trillion, making it the world’s ninth-largest economy and the biggest developing economy after China.

More surprising even than Russia’s rapid growth rate has been the prudence of its economic management under Mr Putin. Essentially all public debt has been repaid and Russia’s $400 billion foreign currency reserves are the third-largest in the world, after China and Japan.

The trade surplus, at 5 per cent of GDP, is bigger relative to the economy than Japan’s and the Government has a huge budget surplus, with half the revenues from energy exports sequestered in a $150 billion foreign currency stabilisation fund, where it is kept away from government ministries and politicians.

And Russian policymakers, from Mr Putin downwards, have shown impressive awareness of the “natural resource curse” that has blighted such richly endowed economies as Nigeria, Venezuela and Iran. While Mr Putin has bragged provocatively about his country’s “energy superpower” status, he has tried to diversify the economy away from its excessive reliance on natural resources. And as any visitor to Moscow and St Petersburg can testify, these efforts to diversify have produced some results, with wealth from mineral extraction gradually trickling down from energy to other businesses; from the big cities to the provinces; from the oligarchs to the middle class – and even to ordinary proletarian households, which are finally seeing their living standards restored to the levels they enjoyed under communist rule.

If all these favourable figures seem too good to be true – a bit like the Soviet output and construction statistics in the good old days of Nikita Khrushchev – they probably are. Russia has many economic vulnerabilities not captured by the favourable statistics: corruption in the legal and tax system; weak protection of property rights; political mismanagement of energy resources; the small size and inefficiency of the service sector and a vast backlog of underinvestment in transport and social infrastructure.

Worst of all is the country’s demographic outlook. Russia suffers from a unique combination of collapsing birth rates and rising death rates. It is the only country outside Africa where life expectancy has fallen in the past ten years, mainly because of alcoholism, accidents, suicide, crime, drugs and Aids.

Whether Mr Putin has any real ideas on how to tackle these social problems is an open question, but at least economic growth will create enough resources to restore the health and education services that were destroyed in the Yeltsin period.

Of course, it might have been preferable for the future of liberal capitalism in Russia if Mr Putin had consigned himself to a monastery and handed power to a triumvirate of Gary Kasparov, George Soros and Alan Greenspan. But realistically, there was a serious risk that Mr Putin’s departure would trigger a new battle for power and a scramble for control of Russia’s mineral wealth. It now seems probable, instead, that stability and property rights will be guaranteed – not by democracy or the rule of law, but by the desire of ruling politicians and business oligarchs to protect the wealth and power that they have already have, instead of trying to grab even more.

In a historical context, the gradual stabilisation of Russian politics and economics is starting to look like an accelerated version of the transition of the 12th century in Western Europe – when the anarchic tribalism and organised robbery of the Dark Ages gradually gave way to the feudal system and the rule of law.

Russia was Europe’s fastest-growing economy from 1900 to 1914. Politically, this was not a happy period; but had it not been for the incompetence and miscalculations of the Romanovs, Russia might well have avoided the Bolshevik revolution and managed to reform itself from an agrarian feudal economy into a modern capitalist state. Russia now has a second chance to complete this transition – and Vladimir Putin, for all his faults, seems determined not to blow it.