Russia’s Comeuppance

Any international economic crisis afflicts different countries in different ways, but an unfortunate few experience every painful dimension of it.  In the current crisis, Russia is confronting virtually all the negatives at once--sharply declining export earnings from energy and metals, over-leveraged corporate balance sheets and a chorus of bailout appeals, a credit crunch and banking failures, a bursting real-estate bubble and mortgage defaults, accelerating capital flight, and unavoidable pressures for devaluation.

The Russian stock market is down 70 percent from late spring. The government has burned through more than 20 percent of its foreign-exchange reserves since August. The outflow of capital in October alone was $50 billion. Next year's budget is based on a projected average price for oil of $95 per barrel; now budget planners have to work with forecasts of $50 or lower. Since Finance Minister Alexei Kudrin has said that Russian government spending goes into deficit at $70 per barrel, pressures for spending cuts are starting to mount. Severe reductions have already been announced in housing and education programs.

Russians, it seems, at last have an answer to the question they have been asking since the economic collapse of 1998: Can anything approaching that crisis happen again? The vast hard-currency reserves they accumulated during years of high oil and gas prices (and thanks to conservative fiscal policies) make it hard to imagine that Moscow might default on its debts anytime soon. Yet the very fact that this crisis has engulfed the country at a moment of high confidence in the future has made it in some respects even more shocking. Debate about how it is being handled, how far it will go, and what changes it will bring with it is becoming intense and much more open.

Russians remember, after all, that 1998 was not only an economic calamity but a political crisis--perhaps the low moment of the entire presidency of Boris Yeltsin. It toppled the government, ended the political careers of key liberal policymakers, and actually brought Communists back into the cabinet. It offered a hearing to protectionist demands for Russia to insulate itself against the fluctuations of the international economy. It revived talk of the need to hew to Russia's collectivist traditions, rather than to alien Western ideas about markets and the primacy of the individual.

In Russia's response to the crisis of 2008 there have been a few echoes of 1998, including a generous share of anti-Western rhetoric. President Dmitry Medvedev and others have repeatedly criticized the United States and called for a reduction in its global influence. There have also been hints of a further tightening of authoritarian rule. Many Russian commentators have interpreted Medvedev's proposal to lengthen the president's term of office as a sign that Prime Minister Vladimir Putin plans an early return to the Kremlin--perhaps to rule with heightened powers.

Yet, for all this, the most distinctive feature of the Russian leadership's overall response to the crisis has been its emphasis on the importance of further reform and on cooperation with other countries. There has been no repudiation of liberal policymakers, and few suggestions that Russia should pursue a "Third Way," much less wall itself off from the world economy. If there is one theme that unites Medvedev's many policy statements, it is that the restoration of state control of the economy must be avoided at all cost. "The government," says Arkady Dvorkovich, the president's chief economic adviser, "cannot replace the private sector, the market, and business, nor is it going to do so."  For Medvedev, the state bureaucracy is already far too powerful and is guided by Soviet-era mistrust of "free people and free enterprise." The only way to stabilize the economy and sustain growth, he has repeatedly and publicly argued, is through transparency, competition, accountability, and protection of property rights.  When Medvedev and others call for changes in international financial regulation, their message is that Russia should try to increase its influence in global processes, not withdraw from them, and abide by international norms, not talk idly of creating alternatives.

Many Russian commentators have said that if the goal is to keep a hard-hit Russian economy in the international mainstream, adjustments in Russian foreign policy are likely to follow as well. They do not predict a complete change of direction, but a less confrontational, less ideological, more prudent, more resource-constrained approach to relations with the West. The need for such adjustments is particularly obvious where resources are concerned. With housing, education, and infrastructure budgets under acute pressure, it is hard to imagine that military spending could be completely unaffected.

Military officials who were told by Putin in September that they would get a 50 percent funding increase over the next three years may well resist suggestions by President Medvedev that their budget is now on hold. Yet arguments about the urgent need for military modernization can hardly have the same force that they did earlier in the fall. Already the armed forces have had to accept a plan to cut the size of the office corps by almost 60 percent in the next three years. The Russian government's desire to delay large increases in military spending surely also contributes to its apparent interest in a new round of arms-control agreements with the incoming U.S. administration.