Russia Digest: Russian-style state capitalism, the credit boom, and other news

Russian capitalism is becoming increasingly state-owned; the credit boom continues; Russia is lagging behind in the green energy transition; which regions have the highest poverty rates; healthcare spending is on the decline; culture is key to democratization, by what margin will United Russia win the parliamentary elections; why independent media has been banned – Boris Grozovskiy, columnist and author of the Telegram channel EventsAndTexts, presents the most important publications on economic policy from mid-to-late August 2021.

Part I. Economy

Russian-style state capitalism

Russian big business will be an increasingly important part of the state project planning system, write sociologists Sergei Belanovskiy and Anastasia Nikolskaya in Republic. This will entail controlling prices and directive allocation of some production necessary for state projects. The authors exaggerate this dynamic, but those in government are indeed moving in this general direction (using prison labor for large-scale government projects, a fairly arbitrary system for determining how much profit to take from entire industries, Shoigu’s idea of building cities with over a million inhabitants in Siberia, etc.). First Deputy Prime Minister Andrei Belousov is correctly seen as the ideologue behind this line of thinking, and he enjoys full support from Russia’s security forces. Faced with an investment climate that leaves a lot to be desired and international sanctions, the state is being pushed to increase its role as an investor and attract large corporations totake part in major projects.

In the coming years, the state will likely ramp up fiscal pressure on both people and business, while becoming more active in involving the private sector in government plans.  The authors suggest that the state will attempt to mitigate public discontent over higher taxes by providing more social services. However, just like in the 1970s, it will fail at preventing the emergence of “super agencies” – lobbying firms that manage these mega projects, which will attempt to take as many government resources for themselves as possible. As a result, the economy is dominated by the military industrial complex and producing means of production. The authorities are amassing huge amounts of resources and responsibility, and the only question left is to what extent the its social and power elements will be capable of ensuring economic growth. The authors believe that economic liberalism has been fighting a losing battle for many years in Russia, and that the state is turning toward a neo-Stalinist economy.

The credit boom continues

Russia’s credit boom shows no sign of letting up – Russians’ income is still about 7% lower than pre-crisis (2013) levels, pent-up demand after a decade of belt-tightening is high, and interest rates are relatively low right now. This is particularly noticeable in the mortgage sector. Financial leaders are aware that the credit market is overheating, but they are in no hurry to cool things down – in August, the government extended a preferential mortgage program. Also in August, the Central Bank introduced several measures ostensibly aimed at cooling credit markets, but so far, they are very weak.

According to Expert RA credit rating agency, the average mortgage loan grew from RUB 2.2 to 2.9 million, while the average term of those loans increased from 18 to 20 years. The rise in mortgages led to a sudden spike in housing prices, while low interest rates are giving the illusion that housing is affordable, analysts say. Inflating the credit bubble benefits the banks and construction industry, but borrowers may not be fully aware that they are taking on serious debt.

According to a poll by Yunikom24, 20% of Russians are considering buying real estate in the next few years, while 80% of that group cannot actually do that without credit resources, meaning that most of them will be taking out a mortgage. The Ministry of Construction assumes that banks will continue to issue more mortgages. 

As the share of the population with mortgages continues to expand, an increasing number of loans are going to the poor, as is the number of mortgages with a low down payment. All of this is simply setting the stage for the next financial crisis.

Loans from microfinance institutions (MFIs) are also growing (these are small loans at very high interest rates for borrowers who are unable to get a bank loan). Right now, 16% of the population is carrying this type of debt (at an average of 350% per annum).

The total volume of household debt continues to rise rapidly, and for the first time in Russian history, it is approaching the amount of household bank deposits. Historically, Russians have deposited more in the bank than they have borrowed from it, but this is gradually starting to change. 

Electric vehicles: Russia still lags behind

The government approved a plan to develop electric transportation over the next 10 years, though it will not succeed in bringing Russia up to speed in this area. In a best-case scenario, by the time some European countries will have almost completely halted the sale of cars with internal combustion engines, Russia expects electric vehicles to comprise just 10% of all auto sales. Investment in the fight against global warming is clearly underestimated, and both society and officials are groaning loudly at the idea of transitioning to a greener transport system.

Just how Russia will be influenced by the global fight against climate change was the topic of a report by some of Russia’s top economists, entitled “Stagnation-2: Consequences, risks, and alternatives for the Russian economy”.

The government has begun discussing sources of Russian investment in emissions reduction. So far, they plan on mainly working with private companies. Currently, Russia’s energy production and consumption from renewable sources is extremely low, as is its investment in this field, relative to developed countries and China.

Stagnating poverty

On average, poverty in Russia stands at 12.1%, though in some regions, that figure is two-to-three times higher. According to the Ministry of Labor, those regions include Tuva, Ingushetia, Kabardino-Balkaria, and the Altai Republic (23-24% poverty). In 2018, Putin set a goal of reducing poverty to 6.5% by 2024. Russia’s Federal State Statistics Service (Rosstat) responded by changing the way it calculates poverty, which led to a decline in poverty indicators, even against the backdrop of the Covid-19 pandemic (when the number of Russians living below the poverty line dropped sharply by 2 million, to 17.7 million total). Now, the subsistence minimum is no longer calculated based on the cost of a number of goods and services, but rather on the average income, and that calculation is unlikely to change for several years.

The subjective subsistence minimum (how much the people themselves consider sufficient to live on) is approximately twice that of the official figures, at about RUB 25,000. If we calculate based on that figure, 53% of Russians live in poverty.

Over the last several months, accelerating inflation has worsened the situation. Though household incomes quickly recovered in the first half of 2021 after declining in 2020 due to the pandemic, that growth was largely offset by inflation. As a result, Russians have in fact lost purchasing power in terms of buying one kilogram of groceries.

There is no money in healthcare

During the first half of 2021, regional budgets reduced funding for healthcare by 15%, while the federal government spent 2.6% less compared to 2020. At the same time, the regional budgets are looking relatively strong. The regions are cutting costs, as during the 2020 crisis, they were forced to up their healthcare spending at the expense of other programs. Generally speaking, Russia is suffering more from the Covid-19 pandemic than other countries; the excess death rate is very high, and economic and social support is clearly lacking, according to a recent report from Liberal Mission.

A non-market economy?

Given the Russian economy’s growing trend toward nationalization, the United States Department of Commerce is preparing to consider whether Russia has a market economy or not. Reconsidering that status makes it easier for the US to introduce antidumping duties on Russian exports, with metals and grain exports being the hardest hit. At the same time, China’s status as a market economy has done little to prevent antidumping trade barriers. 

Zombies in the midst

According to the Center for Market Research, 10-15% of Russian companies are chronically unprofitable, inefficient, bankrupt or in pre-bankruptcy, or produce uncompetitive products. In most cases, they are kept afloat by government support – often, these companies have closed, but officials feel it is easier to prop them up them than liquidate them (as is the case in single-factory towns).  From one-fourth to one-third of Russia’s industrial enterprises have been unprofitable in recent years. These companies are often financed by the regions with the aim of keeping jobs. Inefficient companies that are difficult to liquidate are a major social and economic burden. So long as the Russian authorities avoid making any steps toward resolving that problem, it will only get worse.

Part II. Politics, society, history, law

Culture is important

Daron Acemoglu and James Robinson continue to refine their theory, which began with the book The Narrow Corridor, which was recently translated and published in Russian. Lipset’s standard theory of modernization (as countries get richer, they modernize politically) has come into question in recent decades, due to the development of China, among other factors. The authors now recognize that in addition to economic development and institutions, culture also plays a role in social development, and is capable of supporting and legitimizing both existing institutions and the distribution of political power. Cultural attitudes determine the importance of hierarchy,family and gender roles, as well as society’s highest ideals. For this reason, economic growth might not necessarily go hand in hand with the automatic democratization of institutions, though cultural configurations themselves can shift and are not set in stone.

Unnecessary elections

Elections monitoring by political consultant and regional expert Alexander Kynev has shown that the 2021 elections campaign has been extremely subdued. Kynev underscores that while there is no real competition in these elections, that also comes as no surprise. The authorities are not trying to draw the public’s attention to the elections, though they are working on their administrative mobilization techniques. Putin’s United Russia party is set to sweep most constituencies, thanks to the fact that any promising competitors were systematically excluded from even running in the first place. Even a result of 43%-45% on the party lists will ensure United Russia’s constitutional majority, as it is expected to win 175-204 seats out of 225 in the majority constituencies, according to Kynev’s report (this does not include self-nominating candidates, who will come into play after the elections). Thus, even if United Russia voters do not turn out in large numbers, the party will win by a landslide, which Russian citizens may perceive as illegitimate. As any show of protest grows increasingly costly, this will translate into lower trust in the authorities.

The situation with municipal authorities is not much different. According to research by Novaya Gazeta, currently, 147,000 out of 192,000 municipal deputies (or ¾) are members of United Russia. Moreover, in over half of the municipal districts, only 80 votes are enough to win.

Destroying the media

Political editor Maxim Glikin was designated as a foreign agent (Open Media,  where he worked, was forced to close). Over the summer of 2021, was given various explanations for the state’s crackdown on independent media. Setting aside the more speculative and improbable versions, in short, they can be boiled down to 1) attacks on the media are a reaction to the protests in the winter of 2021 (the authorities decided that journalists are responsible for organizing mass unrest, or at the very least, stoking the public’s growing dissatisfaction with those in power), 2) clearing the media field prior to elections, and 3) the state’s repression machinery is working independently because of the way it has been programmed. The political regime does not need a free media, but society does – though not so badly that people would be willing to risk their personal freedom over it, notes columnist and editor Tatiana Malkina.

Gorbachev’s mistakes

Yale University Press is preparing to release a history book by London School of Economics Professor Vladislav Zubok about perestroika and the fall of the USSR, entitled Collapse. The Fall of the Soviet Union. published two pieces by Zubok about the book’s topic  (part 1, part 2), in which he harshly criticizes Gorbachev, who he claimsattempted to rebuild the economy, politics, and public administration at the same time, rather than thinking through the sequence of these steps from a reform management perspective. Zubok is convinced that the suddenness and speed of the economic and social crisis that killed the USSR was not only driven by the Soviet system itself, but also caused by the hasty and haphazard way with which it was dismantled. Decisive measures would have made it possible to stop the downward spiral, but none were taken.

Rather than lifting the economy, the Gorbachev-Ryzhkov reforms of 1986-1987 sowed chaos by creating production and consumer goods shortages. All of that led to an unprecedented opportunity for theft, stealing, and profit for the “common good” (meaning that no one benefited at all).

Once Gorbachev pushed the Politburo out of power in 1989, he lost control of state finances. Zubok describes Gorbachev’s refusal to hold nationwide elections in 1990 and his rejection of Nikolai Petrakov’s market transition program (based on stabilizing state finances) as his last significant errors. Zubok analyzes the paradox of Russian separatism in 1990-1991 and Gorbechev’s endless political zigzagging between various political forces, which led to constitutional chaos and political anarchy.

Putin is sure toavoid Gorbachev’s mistakes. He understands that liberalism will only speed up the demise of his authoritarian regime.

An un-independent constitutional court describes the situation of constitutional justice in Russia after the constitutional court was granted full authority to consider the decisions of international courts, while losing the right to publish any dissenting opinions from constitutional court judges. In undemocratic countries, constitutional courts are used to consolidate power while also resolving minor, nonpolitical matters. However, Russia’s passive and unpopular constitutional court is unable to uphold even nonpolitical laws.

Expert review as an investigation tool

Russian expert reviews act in assistance to investigations, rather than the courts. Usually, the experts are not independent from the prosecution, and the court might simply ignore any investigations requested by the defense.  Additionally, the defense is prohibited from evaluating the scientific basis for any examinations prepared by the prosecution. A first step in the right direction would be giving expert reviewers back the right to review investigations carried out by other experts working on the case.