Moscow Victory Day Parade, 2015
Wikimedia Commons/Kremlin.ru

Russia is having increasingly difficult economic problems, as was discussed  in my last post. A large part of the reason for that can be seen in the photo above.

The Russian Problem: Theirs and Ours

However, the statement that Russia’s expenditures on its armed forces are causing economic strain is a superficial and facile assertion. What drives those expenditures are the desires, instincts, and fears of Russia’s fascist dictator, the President of the Russian Federation, Vladimir Vladimirovich Putin. And what makes it possible for Putin to mandate those military and naval expenditures

is the fascist government and economic organization that has evolved since the dissolution of the Soviet Union in 1991. The First Russian Federation President, Boris Yeltsin, made an historic mistake in his method of attempting privatization of the Soviet economy. As I discussed in the last post, his methods insured that ex-Communist Party apparatchiks, or their relatives or close associates, ended up as owners of the newly “privatized” companies. They became the crony-capitalist seeds for the fascist evolution of Russia, and are often referred to as the “Russian oligarchs”.

By late 1993 Yeltsin was faced with growing popular unrest with deteriorating living standards (the GDP had declined by half since 1989) and with the developing crony capitalism. It seemed that the crony-capitalists were earning their sobriquet as oligarchs as they were becoming increasingly influential in politics, playing a significant role in the re-election of Yeltsin in 1996. Given insider information about government financial decisions, they could adapt their activities to increase their wealth even further.

After Putin succeeded Boris Yeltsin in 2000, he began a power struggle with the oligarchs, ending in 2004 with a “grand bargain” allowing the oligarchs to maintain their wealth and positions as long as they supported and cooperated with Putin. The deciding moment determining the submission of the oligarchs to Putin was the arrest of the billionaire Mikhail Khodorkovsky in October 2003 for fraud. Putin’s government then nationalized his oil company Yukos for what they cited as tax-evasion. After that, the fight was taken out of the oligarchs, and not wanting to risk continued struggle with the ex-KGB officer, they submitted. Russia had totally collapsed into fascism.

Putin’s Military Buildup and Use of the Military

Since becoming the de facto dictator of the Russian Federation, Putin has launched Russia into an effort to reclaim the lost imperial possessions of the Soviet Union of the Baltic Sea States and Eastern Europe. This thought naturally leads us to question just how well the Russian economy is supporting him in his military projects.

Economically, he initially had an easy time, as shown in the graph of Russian per capita GDP below. The red arrow on the graph indicates when Putin took over from Yeltsin.

Whatever his mistakes, Putin’s predecessor Boris Yeltsin was able to arrest the decline of Russian GDP in the late 1990s and to bequeath Putin a growing economy. This growth was primarily due to the historical accident that at the time crude oil was internationally in very short supply, as demonstrated in the graph below.

The strong international demand for oil kept Russia prosperous from around 2000 until the U.S. shale oil revolution (aka fracking) began the international over-supply of oil. As we would suspect for a country that gets most of its foreign trade revenues from the oil and petroleum products trade, the fracking revolution has hit Russia hard. Out of a total $449 billion in exports in 2014, Russia sold $279.2 billion in petroleum and petroleum products or 62% of all exports. Their GDP at the time according to the World Bank was $2.03 trillion, making the export revenues from petroleum 7.3 % of GDP. In 2015 total Russian exports fell to $340.35 billion, substantially due to the fall in the price of oil. This was a decrease of 24.2% from the previous year. At the same time the Russian GDP fell to $1.32 trillion, a whopping big decline of 35%!  That should be considered a depression by anyone!

And in addition to the dysfunctional nature of the Russian economy, economic sanctions imposed by the West because of Russia’s Invasion of the Ukraine have been taking their toll.

Meanwhile, the Russian military budget continues to grow rapidly, both in absolute terms and as a percentage of the Russian GDP, as shown in the two plots below.

From all this, it is easy to deduce that Putin’s major concerns are his designs on Europe, not the living standards of the Russian people. In addition, he has ongoing military operations in the Ukraine and in Syria, and quite possibly he might add operations against the Baltic Sea states of Latvia, Lithuania, and Estonia in the very near future.

Any of these military adventures would be a large, costly drain on the Russian economy. About a year ago I wrote in the post Achilles Heel of Autocrats: Their Economy about how a dictator’s depredations on his own economy to feed his military machine could limit his capability to wage war. Then later in Russia Becoming Cautious?, I speculated on how Putin’s regime was hollowing out their economy in order to strengthen their armed forces. In that essay, I cited a post by Sergei Alexashenko in the Moscow times, entitled Russia’s Economy Slows Amid Investment Woes, in which he wrote,“It is well known that only the upsurge in military production is keeping Russian industry afloat, even while it wastes precious resources needed for moving the economy forward.” For Alexashenko, the most discouraging economic result of 2015 was a continuing decline of private sector investment. He attributes this primarily to the lack of property rights protection. He writes,

The situation in Russia is not just bad, but downright ugly. The main reason for the poor state of the Russian economy is the lack of an effective system for protecting property rights. The gradual dismantling of state institutions led first to a decline in investments, then to a sharp drop beginning in 2013, and finally to massive capital flight, with economic growth slowing to a halt by mid-2014.

As Putin himself pointed out in his recent speech, of the 200,000 businesspeople against whom the authorities brought criminal charges in 2014, 83 percent lost their businesses. More proof of how dire the threat to property rights has become in Russia is the country competitiveness rankings compiled by the World Economic Forum: of the 140 countries listed, Russia ranks 120th for property rights protection, 116th for minority shareholder protection and 108th for judicial independence.

Could there be any more eloquent proof about how Russia has been conquered by fascism? This fascist organization apparently threatens the independence and financial health of all companies in Russia by more than just disturbing supply and demand relationships in general; it also threatens them by direct expropriation.

Putin’s Political Problems

Putin has reacted quite vehemently against criticisms like that of Alexashenko above. RT, originally Russia Today, is a television network that is a propaganda organ of the Russian government. They have a website on which they posted the following comments on June 27, 2016:

Vladimir Putin has called speculation over various difficulties and the deliberate exaggeration of problems “worse than treason” and “the most dangerous things” as he spoke at the election convention of his main political allies, the United Russia party.

“The most dangerous thing today is speculation on the current difficulties. I am not talking about the criticism of the authorities – it is necessary, it must be present and it definitely will. I am talking about different things – about lies, distortion of facts and empty promises that are worse than any treason,” Putin told the United Russia convention on Monday.
“These promises are backed by nothing but the desire to destabilize the situation, split society and at any cost grab some state power. We must do everything to prevent such development of events,” the Russian president added.

The old Soviet Union fell in part due to a multiple decades-long arms race with the United States that began the crumbling of the economy. Soviet President Mikhail Gorbachev finished the job with the social and economic reforms of “glasnost” and “perestroika,”, meaning openness and restructuring respectively. He thought of these reforms as mere tweaks on socialism, which he thought could still work as a system. In fact, perestroika did not involve any fundamental structural reforms at all, and Gorbachev’s half-measures only succeeded in triggering communism’s final demise.

Today in 2016 Putin is facing domestic unrest and economic problems eerily similar to those experienced by Gorbachev. What will happen, and how will Russia regain stability, assuming it ever does? And how much will the rest of the world have to pay in blood and treasure before Russia finds that stability again?

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