international analysis and commentary

Russia’s economic transformation and the future world order

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It has become a common, if crude, joke that Vladimir Putin has killed Covid. While the jury is still out on this, the Russian President’s fear of the virus – evidenced by the twenty-meter-long table around which he has been receiving state visitors as well as his own generals – appears to have dictated the timing of the war in Ukraine. Though the pandemic might have impacted how and when the war began, questions as to when it will end need to be answered based on an utterly different reasoning.

Examining military victories or setbacks on the ground in Ukraine is not sufficient to decipher Putin’s logic. Doing so calls for a closer look at how Russia’s economy is being repositioned to withstand the impact of the war. At the moment, the Duma is now considering a bill that will allow the government to oblige private businesses to abandon civilian production in favor of state defense contracts. Another bill considered by the Russian Parliament apparently foresees the state controlling employees in private companies as it used to in the Soviet days.

A farmer collects fragments of Russian rockets that he found on his field ten kilometres from the front line in the Dnipropetrovsk region, Ukraine.

 

More than Russia’s military advances, these developments point to Putin’s long-term vision of this grinding war. While they mark a breaking point in the conflict, they also do so in Russia’s own history and – I would argue – in creation of a new world order. If adopted, they will rewind the oversized clock on Kremlin’s Spasskaya Tower back to the Soviet days both in Russia and any territory of Ukraine or other former satellite states that it sets its eyes on henceforth.

In the Soviet Union, most factories, including the one in Odessa where my parents had worked, were also motivated by priorities of state production, disconnected from civilian needs that included basic goods conspicuously absent from store shelves which – precisely for that reason – could hardly be called supermarkets. These factories hummed primarily according to five-year plans, designed to assure national self-sufficiency and to maintain a limited sphere of geopolitical influence for Russia.

 

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This “statist” developmental thinking had inspired economic development models in a number of countries from Tunisia to Congo, now incidentally hard-hit by Russia’s war as prices of primary goods skyrocketed. In Soviet times, it stood – and continues to stand now – in opposition to American “free enterprise” ethos, which the US had equally tried to export. While both paradigms have issues that need to be reckoned with, it is difficult to argue that communist economics did not crumble in the USSR and all countries where it was adopted or imposed.

Return to this brand of economic statism will once again fail in the Russian Federation. But before it does, Russia’s economy will become significantly more government dependent and the relationship between the state and the oligarchs even more incestuous. Th growth  of state ownership and meddling in private enterprise in Russia will not be short lived as it had been during the 2008 financial crisis or during the past years of Covid. Instead, the comingling of state and private ownership in Russia will anchor the country in a different economic development model, closer to the heyday of voucher privatizations.

The coerced transition of Russia’s private enterprises to the defense sector and the withdrawal of foreign enterprises are not the only indicators of the shrinking role of the private sector in the country’s economy. Other measures such as a recent decree suspending the requirement for listed firms to update prospectuses, the removal of a requirement for sanctioned companies to have boards of directors, and the obligation of Russian issuers to terminate their depositary receipt programs, all point in the same direction.

Taken together, they all suggest a greater lenience with corporate governance, including an even greater opacity of underlying ownership to aid Russian shareholders and board members avoid international sanctions. Problems of beneficial ownership and corruption in Russia are certainly not new. These recent measures will further exacerbate them, posing a challenge for future sanctions but also for global anti-money laundering efforts. While the suggested policy changes appear primarily technical, numerous devils are hiding in their details.

As a result, corporate governance and integrity improvements realized by Russia over the past two decades trying (and failing) to accede to the OECD and improve its FATF relationship, are being thrown under the bandwagon. At the same time, the relationship between the state and the oligarchs (and among the oligarchs themselves) is becoming even more entangled. For example, when the UK imposed sanctions on Vladimir Potanin, the main shareholder of the world’s largest nickel company Norilsk Nickel, he agreed to a merger with Rusal (a leading Russian aluminium company) that he previously resisted.

It is highly doubtful that this deal occurred without the Kremlin’s blessing, suggesting indirect state interventionism also exists to intermediate between private businessmen in the name of national prerogatives. The oligarchs will likely be “compensated” for their loyalty by the transfer of foreign assets, imminent after the passage of a decree allowing the appointment of “external administration” in foreign firms that have left Russia. As a result, the clique around Putin will grow even tighter.

 

Read also: Goodbye Liberalism: the triumph of Russia’s “slavophiles”

 

These measures, more than Kremlin’s public pronouncements, give a clear indication of the direction of Russia’s economy but also of the timeline of its war in Ukraine. Moreover, the new decrees  draw the contours of the future geopolitical order, centered around a deep rift between the US and Russia, and more generally between countries reliant on large scale and pervasive state interventionism and others, whose economies are predicated on private, as opposed to public capitalism.

The alliance between Russia and China is already grounded in this public capitalism modus operandi. Indeed, this international coalition – fundamental for the survival of Russia’s economy – is based the acquisition of Russian oil and gas by Chinese state-owned firms, while they strengthen their control of African, Asian and Latin American natural resources. The fight for the future global order will be defined along these lines for a long time after Russia’s invasion in Ukraine is over.

Perhaps even more worrisome is the reinstatement of the geopolitical boundaries defined during the Cold War and the ideological divide defined by the Berlin Wall, both of which fell while I was still growing up in Ukraine. The consequences of this will be a further global polarization, not along religious or ethnic lines but along the lines of corporate ownership and hence, of competing economic development models.