international analysis and commentary

How Russia is not repeating the mistakes of the USSR


As the price of oil slumped to nearly $40 per barrel in late August, the Russian ruble plummeted, hitting 70 to the dollar, its lowest point of the year. In Moscow and abroad, many have asked whether Russia is reliving the painful 1980s. As an oil and gas exporter, the Soviet Union had benefitted from the high prices of the 1970s, as oil export revenue compensated for the failings of the sputtering command economy. When the price of oil reversed course during the mid-1980s, falling by roughly two-thirds in real terms between 1981 and 1986, boom turned to bust. Soviet export revenue fell sharply, and the Kremlin struggled to pay for grain imports, without which it could barely feed its people. Within several years, the Soviet state collapsed under the weight of unpaid bills.

Are things different today? Then as now, an autocratic elite, funded by oil revenue, seems bent on pursuing an aggressive foreign policy at the expense of its own living standards. But predictions of the pending collapse of Russia’s government are mistaken. The reality is that, though Russia’s economy is no less dependent on energy rents, the country’s economic policy makers are taking steps to avoid the key mistakes that destroyed the USSR.

The generation of officials who govern Russia today was shaped by two main crises, the collapse of 1991 and the financial crash of 1998. Both crises left a powerful imprint on Russian leaders. President Vladimir Putin has said that anyone who wishes to return to the USSR lacks a brain. Why? Because, Putin believes, the Soviet Union was habitually incapable of balancing its books, a dangerous policy that led to its undoing.

The 1998 crash has imparted similarly searing lessons to the Russian policymaking elite. The crisis was caused by a number of factors: the government again ran a large budget deficit, which was funded by short-term bonds. The government bond market was in turn partially funded by flighty foreign money, which fled at the first sign of trouble. At the same time, the Russian ruble was pegged to the dollar at an unsustainable rate, forcing the central bank to expend precious foreign exchange to defend it against speculative attacks. In the end, the pressure was too great, foreign funds dried up, and Russia was forced to abandon its dollar peg and default on its debt.

How has this fear of financial crises been manifested in policy, based on past experience? Since 1998, the Russian government’s macroeconomic policy has been strictly orthodox, earning high marks from the international institutions such as the IMF as well as from foreign investors. But these policies are not primarily intended to impress foreigners, they are designed to avoid another financial crisis.

Consider government debt. Throughout the 2000s, when most of Europe was running up the massive debt burdens that caused the past five years of financial crisis, Russia was paying down its own debt. Rather than spending its windfall oil revenues, Russia all but eliminated its own public debt. As a share of GDP, Russia’s debt by 2008 was a tenth the level of much of Western Europe. On top of this, Russia’s rulers managed to fend off the many interest groups seeking funding for pet projects. Over the course of the 2000s, they put away over half a trillion dollars in savings in rainy day funds, which Russia is now using to pay the bills while oil prices are low.

The danger of debt was not the only lesson that Russian policymakers drew from the crisis-ridden 1990s. The Kremlin has also learned how to use monetary and currency policy to its advantage. In 1998, uncertainty about whether the ruble would remain pegged to the dollar added fuel to the crisis. Since then, Russia has slowly shifted toward a policy of a floating ruble. Today, the central bank has a formal policy of letting the currency float freely, though in reality it still intervenes occasionally to prop up the ruble’s value.

The free-float policy is important because it limits the effect of oil price swings Рwhich are largely unpredictable and uncontrollable Рon Russia’s government budget, over half of which is funded via taxes on energy. Oil prices are denominated in dollars, while most Russian government spending is in rubles. When oil prices began falling in late 2014, the dollar value of Russia’s government revenue fell, too. But because the central bank let the ruble slide sharply against the dollar, the Kremlin had roughly the same number of rubles with which to pay pensions. That explains why, even though oil prices are half their price of mid-2014, the IMF expects Russia’s 2015 budget deficit to be less than 4% of GDP.

The combination of low debt levels and sensible monetary and financial policies means that low oil prices are unlikely to lead to the implosion of Russia’s government. The greatest risk Russia faces is not an acute crisis, but prolonged stagnation. So long as oil prices stay low and the government declines to boost productivity by making state-owned firms more productive, the country faces at least several years of anemic growth. Stagnation is bad news for Russians, and if it lasts long enough, it may well create political problems for Putin. But with low debt levels and sensible monetary policy, a Soviet-style crash is unlikely.