It looks like the BRICS have turned into the BICS. A week ago, Russia’s economic minister forecast that the country’s GDP would grow by a mere 2.5% annually through 2030 – well below an expected global growth of 3.5%. This is a huge disappointment for the many Russians who hoped the country could finally escape from relative poverty and take its place among the world’s economic – not just military – superpowers. It also conjures up unwelcome memories of Soviet stagnation in the 1970s and 80s.
Stalinist industrialization in the 1930s created dramatic growth for three decades, with the interruption of World War II. Economic progress in the 1950s and 60s was so impressive that many Western thinkers came to the conclusion that a Soviet-style planned economy was superior to the free market. But with Leonid Brezhnev’s rise to power in the late 1960s, two decades of stagnation set in, culminating in the USSR’s collapse in the late 1980s.
The Soviet experience became a basic lesson of development economics: a centralized, planned economy can be very good at creating growth initially, but beyond a certain point it lacks the capacity to innovate and begins to stagnate.
This lesson seems to be lost on Putin. His economic system is a far cry from Stalinism, where centrally administered five-year plans determined the allocation of virtually all resources. But it has the same tendency to shower large industrial monopolists with funds at the expense of everyone else. Russia’s boom of the early 2000s came on the back of oil and gas exports by the country’s two state-run behemoths Rosneft and Gazprom. Independent companies – faced with corruption, bureaucracy and an underdeveloped banking sector – have had a much harder time.
Unsurprisingly, Russia has been slow to recover from the 2008 recession. Its economy is too dependent on oil and gas prices, which seem likely to go down as fracking expands around the world, and may now be entering a new Brezhnev era.
Several government officials, among them Prime Minister Medvedev, have acknowledged the need to reform the economy. But so far, attempts at change have been too timid.
The problem is that serious reform is incompatible with Putin’s ideal of vertical power. He sees corporations not just as economic actors, but as political tools. In foreign affairs, he has used Gazprom’s gas exports to put political pressure on Ukraine and arms exports to strengthen ties with allies such as Syria. Domestically, he has used Rosneft and Gazprom to delight voters with artificially cheap energy and put loyal supporters into well-paid jobs.
Breaking out of the Brezhnev trap is impossible without curbing the influence of the large state monopolists. Putin is reluctant to do so because it would diminish his power over the private sector. But as long as Russia’s economy stagnates, his government has no future. Sooner or later, Putin may have to accept a small loss of influence over the private sector so as not to lose power altogether.