Could the Soviet economy be re-established in Russia?

Dmitri Travin
4 November 2008

Vladimir Putin remains the most important person in Russia even though he has moved from the post of president to prime minister.  On 29 October he announced that no nationalisation should be expected. Why make such statements 17 years after Russia moved to a market economy?

The fact is that many people in Russia have indeed begun to wonder how committed the present leadership of the country is to the principles of the market economy. The growing economic crisis has once more posed the question of whether Russia intends to return to the administrative economic system that existed before the collapse of the USSR and the reforms put in place by Boris Yeltsin and Yegor Gaidar in 1992.

The main problem is that many Russian banks are today faced with a shortage of money with which to make payments, but the Government and the Central Bank have preferred to provide serious support for only three major financial institutions under state control - Sberbank, VTB and Gazprombank. It was these banks that were granted large-scale credit, enabling them to settle their solvency problems. At the same time there was a sharp increase in state guarantees covering deposits in banks participating in the scheme for insuring deposits.

This creates the impression that the Russian authorities intend at any cost to prevent the bankruptcy of only the largest banks (primarily the three banks listed above) and have no particular interest in supporting other banks. Or rather, the support is only for specific depositors.  Increased guarantees mean that in the event of a bank collapse, the majority of depositors will not suffer greatly, as they will receive the compensation to which they are entitled by law.  This will reduce the social tension, which inevitably accompanies a collapse in the banking system. Reducing social tension seems to be the main problem that currently concerns the Kremlin. As for the fate of medium and small banks, the Russian authorities are prepared to abandon them to the vicissitudes of the market.

This policy (as far as can be judged from existing data) has already led to many depositors rushing to transfer their savings to Sberbank or VTB, as more reliable banks. On 30 October it became apparent that this had led to serious problems for VEFK Bank (East European Financial Corporation), which in recent years has worked actively with individuals.

Russia's credit market is thus becoming increasingly monopolistic (or rather oligopolistic) with the state playing a dominant role in decision-making.

All of the above would probably not be of such concern if the state had not started playing a stronger part in another important economic sphere in recent years - energy. Mikhail Khodorkovsky's company YUKOS was practically destroyed, and all its assets went to the state company Rosneft.  Sibneft, which belonged to Roman Abramovich, was sold to the state concern Gazprom. Past ideas about privatizing Gazprom and Rosneft have essentially been forgotten.

There are other examples of increased state intervention in the economy. Major financial resources have been allocated from the budget to the investment programme "Russian Railways" and large-scale investments are planned for the winter Olympics in Sochi in 2014. Transport is, of course, in a poor state and really does need serious investment, but the situation cannot be rectified by government policy. The investments in Russian Railways will be managed by civil servants, and experience shows that they are hardly likely to be capable of using the money effectively. Many well-informed experts consider that the Olympics will be a gravy train for the officials who, for "kickbacks" (in other words, bribes), will issue contracts to construction firms at prices, which are way beyond anything reasonable.   

Finally,the recently created state corporations are now starting to play a major role in the Russian economy. Rostekhnologii, for example, headed by Vladimir Putin's old friend Sergei Chemezov, holds large government equity stakes in various hi-tech enterprises.

It can therefore be said that the increased state participation in the Russian economy is both systematic (under the guise of developing high technology and investment projects) and spontaneous (as a reaction to the developing crisis). On the whole, the economic system is becoming increasingly dependent on civil servants and the political leadership, rather than the market and competition. Nevertheless, it seems to us that it would be premature to forecast a return to the administrative economy of the Soviet period.

To understand whether such a return is possible, we should examine its objective and subjective conditions. In other words, we must ask whether the Russian economy today is capable of starting to function once more as an administratively managed economy, and whether there are serious political forces in Russia that wish for a return of total state control.

An administrative economy is capable of functioning more or less effectively in simple economies, where the government keeps track of the manufacture of a very narrow and almost unchanging range of goods. In the 1930s, Joseph Stalin attempted to create a powerful armament system in the USSR, so he prioritised the production of coal and steel, the construction of power stations, canals and railways, and the development of new models of tanks and aircraft. Although manufacturing a tank or an aircraft is not an easy task, the economy of the 1930s was still much simpler than the modern economy, where consumers demand tens of thousands of different goods.

In the 1950s, the Soviet administrative economy became somewhat more complex. Stalin's successors set themselves the task of providing the people with basic consumer goods, but the range was limited. Nikita Khrushchev launched mass housing construction. The buildings were primitive and cheap, and the apartments small and of one type. Take, for example, the manufacture of clothing.  The situation is shown very well in a feature film of the time: a team of outstanding agricultural workers is issued with material for suits as a reward for their successful work. The entire team has identical suits made from the same fabric, and they are all quite delighted - in the past they didn't even have this.  

The Soviet administrative economic system perished in the 1980s-1990s to a large degree because people stopped being satisfied with such primitive forms of consumption. Under the influence of the information that got through to the USSR about how people lived in the West, Soviet citizens began to aspire to a greater diversity and quality of goods - primarily imports. In the years after the start of economic reforms (particularly from 1999 to 2008, when GDP real incomes grew rapidly), Russians became used to high-quality and diverse consumer goods, which no administrative economy would be able to provide.

Russians today are spoilt by an abundance of goods, and do not in any way share the ideology of the Stalinist period, when people were prepared to go hungry in order to strengthen the country's defence capabilities. People who are used to the benefits provided by a consumer society would find it very difficult to return to the wretched state they were in before the start of market reforms.

So a return to the administrative economic system in the form that it existed in the USSR previously would seem to be unlikely. If in the 1930s-1950s the system was capable to a certain degree of satisfying the underdeveloped demands of Soviet man, these days the disappointment of society over a drop in the quality of goods or a return of shortages would be too great. This will increase with the passing of time: new products from countries with market economies will engender new demands, which an administrative economy will be unable to satisfy. It is unlikely that Vladimir Putin and other leaders, who are so concerned about their popularity, will consider re-imposing complete state control and the resulting deterioration of the economy.

Furthermore, the Russian leadership has no personal wish for a dramatic increase in the role of the state. These people are not fanatics, they are pragmatists, although they make many mistakes. Putin, Medvedev and the other leaders belong to the generation of Russians who no longer cherished any illusions about the possibility of building communism on the basis of state ownership. They had been observing the inefficiency of the Soviet economy since they were young and it is unlikely they would make the mistake of thinking that nationalisation would enable Russia to recover from the crisis. It appears that Putin's comment on the impossibility of nationalisation may be taken at face value.

Russian leaders have created and strengthened large state companies in recent years for pragmatic, rather than ideological, reasons.  Several economic experts have pointed out that it is this strategy which has made possible the privatisation of revenues and nationalisation of losses.

If a large and high-revenue company is run by civil servants, they are able to use small firms, which belong either to them or people who are closely connected with them, as intermediaries for trade. These firms receive a disproportionately large fee for their work.  High-ranking officials, who should be acting in the interests of state and not allowing such abuses, close their eyes to this, as they have a personal interest in these practices. This is what it is meant by privatisation of revenues.

If a major state company encounters difficulties (for example, is unable to pay its debts), then the officials themselves take the decision to provide credit from the state budget (i.e. out of taxpayers' money). This is what is happening currently. Government representatives tell the people that major companies must be saved at any cost. The people agree to this i.e. they are covering losses, arising as a result of the officials privatising state revenues with the help of small intermediary firms during an earlier, more prosperous,  time.

This system of privatising revenues and nationalising losses works well in the interests of officials only in a few sectors of the economy - mainly oil and gas - and especially when prices for resources are high. It is not profitable to apply this system to the entire economy. It is especially unprofitable in sectors which require flexible management to react swiftly to changes in consumer demand. Here, the system of private enterprise works much better. The civil servants don't miss out here either.   They take a huge number of bribes, forcing businesses to share income with them.  Russia is currently among the leaders on the world scale of corruption.

We can, therefore, assume that the Russian authorities are interested in an economic system where several large enterprises are state-owned, and managed by privatising the revenue and nationalising the losses. The rest of the economy remains in private hands so as to satisfy the Russian people's demands, as they are not prepared to return to the primitive Soviet system. At the same time, the system of taking bribes from business enables officials to look after their own interests.

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