Putin's Economic Policy Depends on Witchcraft

Russian President Vladimir Putin speaks with Finance Minister Anton Siluanov during a meeting at the Novo-Ogaryovo state residence outside Moscow on July 18, 2014. The author argues that the Kremlin is divorced from a true understanding of why Russia's economy is failing and quotes one Russia expert as saying, “Investors—both foreign and Russian—don’t trust the man in the big chair not to drive the economy deliberately off a cliff just to stay in power.” Alexei Babushkin/RIA/via reuters

This article first appeared on the Kennan Institute site.

Russian officials still refer to "conditions for doing business" or "quality of governance" when discussing the country's economic performance. But the lack of gravitas in these conversations is palpable.

Russia's official economic policymakers command an excellent understanding of the country's economic problems, but they lack the power to administer treatment based on their own diagnosis.

The real policymakers, those in the Kremlin, consistently have the upper hand and are able to turn their thinking into policies. The problem with this is not the fact that the president and his inner circle are more powerful than the ministers of finance or economics. Technocrats everywhere are less imperious than political heavyweights. The problem is that the economists and the Kremlin players live in two different worlds.

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The heavyweights' and technocrats' understandings of the reasons behind events are so profoundly different that the policies proposed by each are incompatible. These differences of opinion go beyond the usual policy disagreements and strike at the heart of the goals of policymaking.

Technocrats see reasons for domestic failures originating in domestic issues and seek to find internal cures for the economy's ailments. They live in the world of global economic processes and would like to see a competitive and developed Russia.

Heavyweights stress the importance of external factors and seem to believe that once the designs of foreign evildoers are revealed and rebuffed, the economy will fix itself. They operate under a war mentality and would like to stay in power at all costs.

Whereas economic technocrats speak of the investment climate and taxes, the Kremlin policymakers speak of international deals that would push oil prices back to their former highs. Whereas technocrats are trying to promote business-friendly policies and international integration, heavyweights see every economic problem as a manifestation of the United States' "hybrid war" against Russia and seek retaliation.

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Russian Finance Minister Anton Siluanov effectively confirmed this when he spoke in front of all the top brass of Russia's economic policymaking apparatus at a recent conference. Asked to name the most important growth factors, he said it was oil, although it should not have been.

"The top growth factor in Russia is oil: $20 a barrel adds 0.8 to 1 percentage points of economic growth. But do we need this kind of volatile, jerky growth?" Siluanov asked himself.

"The consequences of growth like this are the strengthening of the ruble and the loss of competitiveness. We need an investment-based growth.… A few sectors of the economy showed some profit increases last year due to exchange rate differences.

"But it all went into dividends, not into capital investment, because, with these high levels of deficit, economic agents were not sure of policy direction. They were not sure if the government would keep the current tax regime in place or hike taxes."

Macroeconomic policies alone won't be able to return the economy to growth because of the lack of a competitive investment climate and strong state involvement in business activities, Pyotr Aven, the head of Alfa-Bank, Russia's largest independent lender, said in a recent interview.

While these kinds of policies require years of political hard work, the Kremlin's favorite policies can be decided and put into effect quickly and easily.

"Russia and some other countries have been living in a situation of the so-called hybrid war unleashed by the United States.… International law is frequently used as an instrument of hybrid warfare against Russia," Alexander Bastrykin, head of the Russian Investigative Committee, wrote in a piece published on April 18.

Bastrykin went on to blame all Russia's economic trouble, including the falling ruble and dwindling incomes, on American mischief. Even the growing fiscal burden that affects Russian domestic companies, Bastrykin writes, is the result of American pressure. Yes, sanctions are in place, but reducing everything to an effect of external pressure is tantamount to magical thinking.

If everything that goes wrong is a result of America's "hybrid" attack, a retaliatory attack is in order. Is it going to be another invasion or some domestic crackdown? The answer is supposed to remain unknown until everyone learns it from the morning news. That's how a government acts when it is at war.

But the very unpredictability of this highly reactive "wartime" policymaking is deadly to most kinds of business. So the economic policymakers are not the problem.

"The problem is that investors—both foreign and Russian—don't really trust the man in the big chair not to drive the economy deliberately off a cliff just to stay in power," summarized Samuel Greene, director of the Russia Institute at King's College London.

Russia can follow two paths to try to climb out of the economic pit it currently finds itself in. It can champion private entrepreneurship and private investment and work to make its business climate more competitive. Or it can trust in its political witchcraft and hope that oil prices will somehow grow back to beneficial levels.

This latter path has failed spectacularly. Russian officials were putting a lot of hope into a possible deal to freeze oil output. But a summit in Doha, Qatar, among the world's largest oil-producing countries ended without an agreement on Sunday after Saudi Arabia insisted that Iran, a fierce regional rival, had to be part of any agreement.

Russia could follow the advice of the likes of Bastrykin and introduce further restrictive legislation, ban certain types of content and censor domestic internet. All these things will somehow make Russia better off, Bastrykin believes.

Given his background as onetime Young Communist League secretary of the city of Leningrad, this kind of ideological approach is understandable. It is just puzzling that these attitudes and beliefs still consistently beat out professional economic policymaking in Russia.

Maxim Trudolyubov is a senior fellow at the Kennan Institute and the editor at large of Vedomosti, an independent Russian daily. The opinions expressed here are solely his.

Putin's Economic Policy Depends on Witchcraft | Opinion