Rhyming History: Russia Repeats USSR’s Errors

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Rhyming History: Russia Repeats USSR’s Errors

Far from being a resurgent power, Putin’s Russia is falling into many of the same traps that brought down the Soviet Union.

Although Chinese leaders have studied the Soviet Union’s collapse obsessively, their Russian counterparts don’t appear to have the same interest in modern history. Indeed, even as Vladimir Putin seeks to reestablish Russia as a great power, , Moscow is increasingly falling into the same traps that brought down the Soviet Union.

First among them is a complete neglect of the economic foundations of power. While military power may be the ultimate currency in world politics, the strength of a nation’s military is little more than an extension of its economic might (at least over the long-term.) Thus, sea-faring, trading nations like Britain in the 19th and 20th century and the U.S. since the 20th century have enjoyed long reigns as global powers. By contrast, as Paul Kennedy famously argued, military powers that don’t keep their fiscal house in order don’t remain military powers for very long.

The Soviet Union is a case in point. Although the brutal policies of Joseph Stalin made the USSR into an industrialized country, and the economy grew at fast or respectable rates through the 1960s, the inefficiencies of the system meant that, among other things, the Kremlin went from being the world’s largest grain exporter to its largest importer. This required the Soviet Union to acquire hard currency to feed its population, which—owing to the poor quality of the Soviet economy—could only be obtained by exporting natural resources. This was sustainable during the record-high oil prices of the 1970s and early 1980s, but once oil prices began bottoming out in the late 1980s due to greater Saudi production, the Kremlin was forced to borrow heavily from abroad to feed its populace. This proved unsustainable in the long-term.

Not much has changed since the Soviet days in Russia.

Indeed, far from diversifying away from natural resource exports, Russia under Putin has grown more dependent on them (relative to the 1990s). As a December 2012 report from the European Bank of Reconstruction and Development noted gloomily, “Not only are Russian exports highly concentrated in natural resources, this concentration has increased over time: the shares of oil, gas and other minerals in Russia’s exports are higher today than they were 15 years ago.”

The report went on to point out:

“In 2012 Russia remains highly dependent on its natural resources. Oil and gas now account for nearly 70 percent of total goods exports…. Oil and gas revenues also contribute around half of the federal budget. The non-oil fiscal deficit has averaged more than 11 per cent of GDP since 2009, while the oil price consistent with a balanced budget is now in the region of US$115 per barrel and rising.”

Thus, Russian power since the Cold War has corresponded directly with the price of oil. When energy prices were low in the 1990s, Moscow’s economy was in a state of shambles and the West trampled all over Moscow. Since energy prices began rising last decade Russia has seen its power and presence on the world stage increase as well.

The crux of the issue for Putin and Russian leaders, however, is that energy prices won’t remain high forever. Indeed, there is good reason to believe they will drop in the years of ahead.

To begin with, many of the leading energy consumers are investing in greater energy efficiency, which will eventually reduce the growth in demand. Supply will also expand considerably as more North American unconventional sources come to market and Iraq’s full potential is tapped. Other events could potentially cause a further drop in energy prices; for example, a resolution of the Iranian nuclear crisis.

Russia is dutifully unprepared for this eventuality. As the EBRD report cited above noted, the business environment and level of competition in Russia have not improved despite token top-down efforts to do so. As a result, far from attracting foreign direct investment as other BRIC countries have, capital flight out of the country totaled more than US$80 billion in 2011. The report further observes that although Russian leaders have touted the importance of high-technology sectors in the information age, they have failed to invest in the education and training necessary to bring about innovations.

Another well-known deficiency of the Soviet model was its excessively high defense spending, which some estimate at times consumed as much as 40 percent of the Soviet budget and 15-20 percent of its GDP. This excessive defense spending was driven, at least in part, by the Kremlin’s overly-militarized identity as a great power.

Since reassuming office, Putin has seemed determined to replicate this failure. Before Putin even returned, Moscow increased its military spending by 16 percent in 2012, even as other countries cut back. The US$90 billion it spent on defense in 2012 was more than it invested in education. Meanwhile, Putin has pledged to spend an additional US$755 billion over the next decade on modernizing the Russian armed forces. Even before this announcement, however, Russian military spending was expected to increase from about 2.3 trillion rubles (US$78.8 billion) in 2011 to just under 4 trillion rubles (appx.US$125 billion) in 2015.

Demographics are one key area where the Soviet Union and Russia differ. Whereas the Soviet Union was burdened by a growing population (particularly increasingly urban one), Russia has been beset by population decline since 1992. In its Global Trends 2030 report released in December of last year, the U.S. National Intelligence Council forecasted that Russia’s population would decline by 10 million people by 2030, more than any other country during that time span. The UN similarly expects that by 2050, Russia’s population will have dropped 30 million people below 2000 levels. Although vowing to reverse current trends—which there are some signs is occurring to a point—Putin himself warned last year that Russia’s population could drop to just 107 million by 2050, from about 143 million at the time of the speech.

In all these ways, then, Russia hardly appears to be resurging.