Putin's Russia: Aiming To Catch Up With Kazakhstan

by: Craig Pirrong

Vladimir Putin wrote a long piece (5K words) in Vedemosti outlining his plans for Russia’s economy. It is bizarre, in a way, because he lays out a variety of different programs and identifies some serious problems with the system, which raises the question: What has he been doing the last 12 years?

His vision for transforming Russia from a resource-extraction dominated economy to a modern, innovation-based one, such as it is, relies heavily on state involvement. The reason?: “Private capital will not voluntarily enter new sectors as it does not want to bear elevated risks.”

Well, why not? This isn’t a problem in other economies.

Putin acknowledges that the problem is institutional. Specifically, institutionalized corruption and the lack of a reliable legal system make private businesses unwilling to invest “private capital” that can be taken in a trice:

“The main problem is insufficient transparency and accountability on the part of state officials,” Putin wrote. “To call it by name, we are talking about systemic corruption.”

“Clearing the way for business that is ready to win in fair competition is a fundamental, systemic task … We need to change the state itself – executive and judicial power.”

Putin said Russia, ranked 120th in a World Bank investment climate survey, should seek to catch up with neighboring Kazakhstan, which is in 47th spot.

He called for business cases to be moved from criminal to commercial courts to break a cycle of collusion between police, investigators and judges that all too often ends in convictions.

Wow. Aiming to catch up with Kazakhstan. That says it all.

The diagnosis is actually spot on. But again: What has he been doing the last 12 years? It’s not like these problems are new, or haven’t been pointed out again and again.

And how credible is it to say that he will do anything different in the future? The corruption and legal nihilism are essential parts of Putinism. Moreover, how credible is it to claim that the new state corporations in the technologically dynamic sectors (such as pharmaceuticals) will be any less plagued by inefficiency, rent seeking, and corruption than the existing ones?

In sum: An acknowledgement that the existing system is fundamentally flawed, with no credible way to transition to a less-flawed one. As I’ve said before: The hamster wheel from hell. The fact that the only way Putin can see to change the Russian economy is to continue to rely on extensive state involvement reveals him to be completely out of ideas. Or, put differently, that he has only one idea. He has a hammer–state directed investment–and every problem is a nail.

Putin’s intellectual bankruptcy foretells of a future of stagnation, not stability. It further reveals that he is not Oz, but just a little man behind the curtain. Which is why other members of the elite are openly sounding out in places like Davos about the need to change the system. No doubt these are just surface ripples. Like the wake of a submarine, detected with a synthetic aperture radar. If there are such things on the surface, something much bigger is moving deep below. Putin’s weakness, and the palpable staleness of his thinking, is sparking bargaining among the elites. He used 5000 words to tell them– and the world– that he is not the future. The future is now up for negotiation.