Putin’s New War Economy

Russian President Vladimir Putin and Defense Minister Andrei Belousov with military officials, Moscow, June 2024. Alexander Kazakov / Sputnik / Reuters
Russian President Vladimir Putin and Defense Minister Andrei Belousov with military officials, Moscow, June 2024. Alexander Kazakov / Sputnik / Reuters

In Russia, the tradition of making fun of Soviet economic planning is almost as old as attempts to improve the economic system. “What would happen if socialism was built in the Sahara?”, an old joke asks. The answer: “At first, except for plans, there will be nothing. Then there will be sand shortages”. According to another—one that former U.S. Federal Reserve Chair Alan Greenspan liked very much—in the Brezhnev era, a group of people are walking in a military parade in Moscow’s Red Square, except that they are wearing baggy formal suits instead of military uniforms. An aide runs up to the Soviet leader: “Leonid Ilyich, we don’t know who these people are!” Brezhnev replies: “Calm down, comrade, these are our most destructive weapons—Soviet economists”.

After more than two years and six months of Russia’s “special military operation” in Ukraine, Russian President Vladimir Putin appears to be undeterred by the reputation of his country’s economic planners. The most striking outcome of his government reshuffle this spring was undoubtedly his replacement of longtime defense minister Sergei Shoigu with Andrei Belousov—a state economist with no military experience. A man not in a baggy suit but in an expensive and well-fitting one, Belousov previously served previously as minister of economic development, assistant to the president for economics, and vice prime minister. But there is a reason for his appointment: Russia’s military spending has now reached such gargantuan proportions—according to some estimates, nearly one-third of the 2024 budget is devoted to defense, reaching a higher portion of GDP than any other year in post-Soviet Russian history—that only an economist can make it efficient.

This, at least, is one of Putin’s explanations, and it appears to be the rare case in which he is not lying. Another explanation is that effective management of Russia’s military technology will make it possible for the country to achieve “technological sovereignty”—complete self-sufficiency—in civilian industries, as well. And also that vast military spending, even if it must come at the expense of human capital, sometimes including social and health services, is in principle capable of driving economic development. In this sense, Belousov is the right choice: as a product of the mathematical school of Soviet economics, he has total faith in the ability of the supreme authorities to calculate everything, and that state money and state interventions can solve any crisis.

Observers have already described Belousov as a “military Keynesian”—a somewhat offensive reference to John Maynard Keynes, the early-twentieth-century British theorist and advocate of government stimulus. More accurately, Belousov’s ideas are reminiscent of exactly the approach that helped undermine the Soviet Union: the unsustainable growth of defense spending and the relentless militarization of the economy. Of course, as a professional economist, Belousov does not advocate abandoning the market. But he supports the view that not only intensive government expenditures but specifically military spending can serve as a driver of development. It is fair to describe this approach as Putin’s new economic model—one shaped not only by the imperatives of his war in Ukraine but also by decades of Soviet nostrums and delusional thinking.

To an extent, this marks a shift from Putin’s first years in the office. After all, he came to power on the heels of the liberal reforms of the 1990s, and in his early years in power seemed to support large-scale restructuring and liberalization of the Russian economy. He is also fully aware of the importance of maintaining strong macroeconomic indicators and balancing the state budget. That is why he still keeps rational technocrats in his administration such as Elvira Nabiullina as central bank governor and Anton Siluanov as finance minister.

But Belousov is cut from a very different cloth than the former liberal reformers. By appointing him, Putin is now returning to what is essentially a Soviet economy, but with important market elements. The new model combines state interventionism, a dominant emphasis on the military-industrial complex, and import substitution, with a market economy in different areas, including for parallel imports of various Western products to satisfy consumer demands. It is an interesting experiment, but also one with a long and perilous history. All the more so given that an increasing number of large businesses are being nationalized, undermining confidence in the protection of private property and suggesting that the market as such is at risk. Moreover, the Kremlin has signaled in other ways—it has just raised taxes on the middle class, for example—that it does not have enough money to balance the budget.

Like some of his Soviet predecessors, Putin seems to be wagering that huge military expenditures, managed by economic number crunchers, can save, rather than bankrupt, the country. But as the late Communist regime learned too late, an economy built on war cannot survive forever, no matter how good the planners’ math. By embracing such an approach, Putin and Belousov risk eroding what remains of Russia’s hard-won liberal economic foundations. Established by economic reformers more than thirty years ago, these principles have until now kept the Russian system relatively stable, despite the country’s growing isolation. When and if they disappear, it may be very difficult to avoid a larger collapse.

BREZHNEV’S BAGGY SUITS

Going back to the Soviet era, the leadership in Moscow has almost always had a crucial part in the success and failure of attempts to transform the country’s economy. Although economic reforms were discussed under Nikita Khrushchev (1953–64), it was in the Brezhnev era that Prime Minister Alexei Kosygin, with Brezhnev’s consent, first attempted to reboot the socialist economy. The effort began with a provocative 1962 article in Pravda by an economist named Evsei Liberman, who argued for the need to increase the autonomy of enterprises, primarily in how they use their profits. The airing of this argument was no accident. In the Soviet era, an article in Pravda was not just an article; it was, almost always, an instruction. In this case, it meant that the authorities had deemed that the Soviet economy was already overripe for reform and that it was a favorable moment for change.

Thus began a debate in the Soviet press and among the authorities about how to overhaul the so-called economic mechanism. By early 1965, Liberman was appearing on the cover of Time magazine under the banner headline “The Communist Flirtation With Profits”. And finally, that fall, Kosygin issued his famous government report, in which, following a sustained debate among economists, he formally proposed giving enterprises limited independence, greater freedom to dispose of their revenues, and even the freedom to expand their range of products in response to demand. This marked a revolution in Soviet consciousness: goods not only had to be produced according to Soviet planning but also, preferably, sold. Still, it was just an experiment; among skeptics, the Kosygin reforms came to be known, with some irony, as “libermanization”.

Soviet-era tanks practicing for a military parade, Moscow, May 2024. Maxim Shemetov / Reuters
Soviet-era tanks practicing for a military parade, Moscow, May 2024. Maxim Shemetov / Reuters

In fact, the reforms coincided with a transformation of the economics profession itself. At the time, economists were embracing mathematical methods to turn Soviet economics from a mere pillar of orthodox Marxism-Leninism into a modern science. Paramount was the theory of optimal functioning—the idea that a workable model of socialism could be based on a comprehensive set of calculations for a perfectly balanced economy, in which all industries and needs of citizens are taken into account. One of the centers of the new thinking was the Central Economic and Mathematical Institute (CEMI), where a new generation of mathematical economists searched for a magic formula of universal optimization, which they hoped to design with the help of computer technology.

The sheer scale of the work was daunting. How could Soviet economists link and balance the thousands of planning tasks and more than 10,000 material balances that had to be written for every Soviet good, from rolled ferrous metal to dairy products? After all, there was not even a single bureaucracy to handle all of this, with the former under the State Planning Committee, or Gosplan, and the latter under the State Supply Committee. In the late Soviet era, Gosplan itself had 70 subdivisions and about 3,200 employees. The annual plan itself took up dozens of volumes and was calculated in Gosplan’s Main Computing Center, where an enormous computer bought from the United Kingdom occupied two floors; underneath the machine rooms there was artesian water, because the machines needed cooling.

Yet little of this prodigious effort did much to save the Soviet economy. It is true that the Soviet economy picked up during the second half of the 1960s and official growth figures were very high. This was due to reforms, although it seems likely that the growth was provoked by inflationary pressures: a minimum of freedom pushed enterprises to increase their assortment and, accordingly, slightly increase prices. The deeper reality was that the Kosygin reforms were doomed to failure in the absence of a market and private property. Without an open economy, no amount of planners’ computations could keep supply and demand in line.

THE POLITBURO PETROCRACY

By the end of the 1960s, the Soviet economy faced another problem: labor shortages. Among other factors, rural villages, which had long supplied the workforce, had been exhausted. Surprisingly, Putin faces a similar problem today in his own war-fueled statist economics, but in his case it is more the result of long-term demographic decline and partly exodus of qualified personnel abroad, as well as the massive replenishment needs of the armed forces.

In December 1969, Brezhnev spoke bluntly about the labor crisis and other economic problems to the Plenum of the Central Committee. The speech was so red hot that it was classified. Perhaps he was trying to show that his rival Kosygin’s reforms had achieved nothing. But Brezhnev’s criticisms—from inefficient spending to the failure to implement new technologies—were accurate. And he seemed to apologize for Moscow’s engagement in costly geopolitical adventures, with reasoning that uncannily anticipates Putin’s logic today.

“If we had not helped repel the machinations of imperialism in Southeast Asia and the Middle East”, Brezhnev said, “it would have inspired the Americans and their allies to launch new aggressive actions somewhere closer to our borders.... If we had not thwarted the counterrevolutionary plans in Czechoslovakia, NATO troops would soon have been right on our western borders”.

As with other failed Russian and Soviet reforms, the decline of the Kosygin efforts coincided with a political freeze. This one began in August 1968, with the Soviet invasion of Czechoslovakia. The economic changes were put on hold, and not only because of flagging interest from the top. Around this time, petrodollars were pouring into the Soviet economy, as the oil fields discovered in the 1960s came on line; and oil prices rose after the oil crisis of 1973. At this point, there was apparently no longer any need for reforms at all. As with the case of Putin’s Russia, the superpower was hooked on oil and gas, which it used to fund food and industrial imports. The will to change was devalued. But as the Soviets soon discovered, such an approach can only be sustained for so long.

Today’s Kremlin would do well to note that the Soviet petrocracy was exhausted within a decade. By 1979, with the Soviet invasion of Afghanistan, and Moscow’s nuclear arms race with Washington, the Soviet economy was accumulating deficits in almost every possible sector. It was these factors that would later lead to hyperinflation, when, after the fall of the Soviet Union, a new generation of reformers ended price controls. At this point, Russia’s economic reformers could repeat the famous line from a popular Soviet movie from the 1960s: “Everything has already been stolen before us”.

WHO’S AFRAID OF UNEMPLOYMENT?

Today, the 1990s are generally remembered as the years of large-scale economic liberalization in Russia—and are often seen as the era against which Putin is now reacting. In fact, there had already been attempts at economic reforms in the 1980s under Mikhail Gorbachev, who not only began to give the Soviet people some political freedoms but also some economic ones, as well. But Gorbachev’s economic reforms were slow, and then they stopped altogether.

On the one hand, Gorbachev sought to gradually widen the space for economic initiative: for the first time, the government authorized joint ventures with foreigners, as well as allowing some forms of small private enterprise and the creation of semi-private companies in service sectors. Yet the machine-building industry continued to be pumped with state money in the usual way. And when the economist Nikolai Shmelev had the temerity to publicly suggest that the government should allow for unemployment under socialism, Gorbachev was furious.

Still, it had become clear that a more dramatic approach to economic reform was needed. Since the early years of the decade, groups of young economists had been holding underground, and then official, seminars in Leningrad and Moscow. In Leningrad, their leader was Anatoly Chubais, a young economist who organized informal and formal scientific workshops in the city, gathering a group of like-minded people; in Moscow, it was Gaidar, who, as the most gifted of the young cohort, was already involved in preparing analytical and program documents for the party and the government. These two groups formed a more or less cohesive team, and they quickly understood that radical and very far-reaching economic reforms would be required; they also considered different ways of privatizing property, without which they knew that no real transformation of the socialist economy was possible.

The remaining years of perestroika were filled with heated economic discussions and competition among different reform factions. In June 1987 the Central Committee even convened a Plenum on the economy that included many progressive Soviet economists from the old school. In particular, the academic economist Alexander Anchishkin was chosen to head the new Institute of Economics and Forecasting of Scientific and Technological Progress, which drew a cohort of other promising young economists, including Gaidar. Among its very young staff was also Andrei Belousov, Putin’s future defense minister.

Yet Gorbachev failed to embrace bolder steps. Although his role in the large-scale transformation of the Soviet Union was enormous, he did not dare redesign the Soviet economy, and it began to experience an ever more serious crisis: stagnation combined with a gigantic foreign debt, hidden inflation that was gradually breaking through, a colossal budget deficit, and, at the same time, an acute shortage of goods and products. The political collapse of the Soviet Union, which gained unstoppable momentum after the attempted coup against Gorbachev in August 1991, was the natural corollary of this breakdown.

LESS MATH, MORE MILK

As Gorbachev’s adversary, Boris Yeltsin understood that the Soviet Union was collapsing and that he could only establish a hold on power in an independent Russia—and not just politically. He also realized that Russia would need to carry out radical economic reforms that could not be coordinated with the former Soviet republics, many of which were unprepared for a market economy. It was then, in the fall of 1991, that he called in Gaidar’s young reformers to author the reform program.

He also offered the young economists—nicknamed the Chicago Boys because of their liberal convictions—key positions in the financial and economic bloc of his government: Gaidar became Yeltsin’s key economic adviser and then served as acting prime minister; Chubais became minister of privatization and then first deputy prime minister responsible for financial stabilization. Moreover, while the reforms were being implemented, the position of Russian president and prime minister were effectively combined, giving the reformers the political backing they needed. (The reforms met with fierce opposition from the parliament, and Yeltsin’s support was crucial in giving them political cover.)

Economist and presidential adviser Yegor Gaidar and First Vice Premier Anatoly Chubais in Moscow, November 1994. Gennady Galperin / Reuters
Economist and presidential adviser Yegor Gaidar and First Vice Premier Anatoly Chubais in Moscow, November 1994. Gennady Galperin / Reuters

Thus began the controversial economic restructuring of the 1990s. Gaidar liberalized prices as well as domestic and foreign trade, and the government began to privatize state property. Although these forced reforms were considered shock therapy in the West, Gaidar himself referred to them as “defibrillation measures”, because he believed that without them there would simply be famine and stores would have nothing to sell. Thanks to the liberalization program, the shelves were full and market forces began to work.

Very quickly, however, the reformers were blamed for galloping inflation, production stoppages of goods that lacked sufficient demand, the rapid decline of military and agricultural spending, the closure of numerous military-industrial factories, and the lack of money for social support. A fierce political struggle erupted, and Gaidar’s government—as it was called at the time, although formally Gaidar was vice prime minister and minister of economy and finance, and then acting chair of the Cabinet of Ministers—lasted only until the end of 1992.

But no matter how fiercely they were criticized, Russia’s radical economists had accomplished one enormous thing: establishing a market economy. And in this they had significant success. Consider the simple challenge of stocking store shelves. In the early 1970s, the Central Economic and Mathematical Institute estimated that a computer performing a million operations per second would require 30,000 years to manage the gigantic demands of the planned economy for every single kind of product. Yet after Gaidar liberalized price controls in January 1992, the same result could be achieved with almost no planning at all: consumer demand was enough to keep the stores full. The founder of Soviet cybernetics, Viktor Glushkov, had once proposed attaching sensors to each cow’s udder to calculate the optimal volume of milk production; now the optimal volume was being determined without any sensors, simply thanks to the invisible hand of the market.

LIBERAL GHOSTS

In contrast to the first generation of Soviet economic reformers, who were mostly born in the 1930s, the new generation that came of age in the Yeltsin years had been born in the 1950s. They had been educated during the worst years of Soviet stagnation, gaining an appetite for underground self-education and for studying the reforms of socialist economies in Hungary, Yugoslavia, and Poland. The Hungarian economist Janos Kornai, who wrote openly about the nature of the deficit economy, was a particularly important figure to many of this generation. Overcoming socialist illusions allowed this cohort to carry out initial economic reforms and then to gain a significant foothold in the government administration. This meant that they could continue to oversee structural reforms or, for those, like Gaidar himself, who withdrew to the academy, contribute to the realization of reforms by consulting and drafting proposals.

To have a lasting impact on the political system, however, it was crucial for the economic liberals to have their ideas institutionalized. Notably, Yevgeny Yasin, who was one of the few members of the older generation who accepted Gaidar’s reforms, was a mentor to many young economists at Moscow State University, including future Central Bank Governor Elvira Nabiullina. Also important was the creation of a new economic institute in Moscow in 1992, which later became the Higher School of Economics, a fully fledged university. This nest of liberalism soon attracted the best professors and researchers and became one of the most preeminent research institutions in Russia. Tellingly, that has also made it a target for regime crackdowns in recent years. After the replacement of the university leadership just before the war in 2021, the government oversaw a major purge of liberal professors on its faculty.

Yet even die-hard Putinists cannot completely eradicate liberalism from economic education and economic policy. Maxim Oreshkin, the president’s economic aide, may not be a liberal, but he is a technocrat and a fairly typical graduate of the Higher School of Economics. Present-day Russian conservatives and communists, who support Putinism in all its manifestations, grumble about the presence of “liberals” in the government’s financial and economic administration. But Putin is not suicidal: at the beginning of his rule, several liberal economists taught him the basics of macroeconomics and budget and monetary policy, led by Chubais and Alexei Kudrin, who was finance minister during Putin’s first decade in power. Putin, of course, moved away from liberalism, and almost all the reformers found themselves on the periphery. At best, it is possible to describe those that remain as rational technocrats. An autocrat who carries out illiberal counterreforms and demodernization does not need liberal modernizers.

As an economist, Belousov’s approach is diametrically opposite to that of the liberals. His father was a prominent figure of the Soviet mathematical school of economics, and he is, to oversimplify a bit, an adherent of it. When you spend public money in the right way, you get results. That’s what his economic philosophy is all about. Technological changes are also important. It is no coincidence that Belousov has been working a lot on new technologies in recent years; but technological innovation does not only happen in the public sector, and certainly not in an economy that has become increasingly isolated from the world. The deeper reality is that Putin’s new military-economic model seems likely to make it significantly more difficult to avoid making the country more brittle.

OMELETS INTO EGGS

Employees of the Soviet Gosplan were firmly aware that the socialist system depended on the principle of overestimating the required amount of capital investment and rejecting technical innovations. They understood that the more money there is, the more it is wasted in the state economy in the absence of private interest and initiative. This paradoxical Gosplan wisdom seems to have been completely forgotten by today’s generation of Russian economists, who are building a new model of mature Putinomics, based on an almost religious belief in the effectiveness of government spending and the special role of the military economy. Putin now has set an ambitious task: according to his words, economists must find a balance between guns and butter. There is no money left at all for butter in the state budget, but that can be handled by the market sector, which is still in place in Putin’s Russia thanks to the impetus given more than three decades ago by Gaidar’s reforms.

Government spending on guns in Putin’s Russia has nearly reached the scale of that of the late Soviet era: formally, as a share of GDP, it is slightly less, but when the bosses announce the figures they keep silent about the fact that almost a quarter of the federal budget is secret. There is no mystery to this secrecy—the money is spent on what is shamefully called “defense and security” and on financial support for those lobbyists who successfully extract huge financial subsidies from the state. Belousov, who has a rigidly dirigiste and statist view of how the economy should develop, has been entrusted with the duty of bringing this type of model to full realization.

Russian conscripts at a military recruitment center in Bataysk, Russia, May 2024. Sergey Pivovarov / Reuters
Russian conscripts at a military recruitment center in Bataysk, Russia, May 2024. Sergey Pivovarov / Reuters

For those who support this approach, the belief in state intervention does indeed border on a special religion—or at least an ideology. The conviction that correctly calculated government spending on the products of the military-industrial complex can succeed in sustaining, and even growing the increasingly isolated Russian economy is anomalous in modern economic thought. It cannot be upheld without an appropriate political framework and strong ideological justifications. But the only framework that presupposes such an absurd scale of military spending is inevitably an autocracy; ideological support has been furnished by Putin’s concept of Russia’s special mission, its special path, its special cultural code, and the special role of its orthodoxy. And for all this, one must literally fight: war has become a permanent factor in Russian “development”.

In the 1940s, the economic planner Nikolai Voznesensky, who managed the Soviet economy during World War II, became a favorite of Joseph Stalin. At the end of the conflict, he wrote an extremely popular monograph, The Military Economy of the USSR During the Patriotic War, before being purged by Stalin in 1949. Whether Belousov, Putin’s current favorite, is destined to write a similarly triumphant monograph on the military economy of the Russian Federation during the “special operation” is an open question. Success is not guaranteed. And sooner or later, Russian economists will have to return the Russian economy from the military interventionism model to some form of normality—or, as the reformers joked in the early 1990s, to “make an egg out of an omelet”.

In the late twentieth century, Moscow’s militarization of the economy and belief in the magical power of massive state investment helped precipitate the collapse of the Soviet Union. Thus far, Putin has avoided the same kind of fate for today’s Russia by maintaining the remnants of an open market and keeping his financial agencies in technocratic hands. But now that old-school economists are leading the military parades, it is unclear how long this economic rationalism can continue to survive.

Andrei Kolesnikov is a Senior Fellow at the Carnegie Russia Eurasia Center.

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