Read Guriev’s excellent article in the FT. In Russian, it was published by Vedomosti: Corruption Has Ruined the Russian Economy When economic growth comes to an end, authoritarian regimes may choose territorial expansion as a tool for maintaining popularity and preserving power
Russia’s annexation of Crimea came as a major surprise to everyone. After all, for a long time Russia had been seen as a “normal” country with a developing economy. Yes, it had become an undemocratic regime — but it still seemed to be trying, in its own way, to catch up with the Western world. What happened in Crimea, however, cannot be called “normal” in any sense. The last country in modern history to annex a neighbor’s territory was Iraq, when it seized Kuwait in 1990. Russia is, of course, not Saddam Hussein’s Iraq. But it, too, differs sharply from other countries in one respect: it is a high-income country that is also extremely corrupt. According to the World Bank’s Worldwide Governance Indicators, Russia ranks among the world’s 20% most corrupt countries — alongside some of the poorest countries on earth. For many years, corruption was treated as an internal problem that Russia would have to solve on its own. Western leaders also tolerated Russian corruption for more self-interested reasons. As money stolen by corrupt officials vanished from Russia and ended up in Swiss bank accounts or was spent on penthouses in Chelsea, Western governments reassured themselves that powerful people in Moscow had a vital stake in preserving peaceful relations with the West. It was widely assumed that corruption made the Russian elite, to a significant extent, accountable to the West. That was a mistake — and a very serious one, because Russian corruption turned out to be a key cause of the Crimean crisis. Corruption has ruined the Russian economy. And when economic growth comes to an end, authoritarian regimes often resort to territorial expansion as a tool for maintaining popularity and preserving power. In Russia, the social contract of the 2000s was built on economic growth, which before the crisis ran at 7% a year. Citizens were satisfied with a government that delivered substantial material benefits, even as it simultaneously curtailed democratic freedoms. The assumption was that this arrangement could continue indefinitely. When Vladimir Putin became president again in 2012, he promised to increase budget spending — promises based on expectations of economic growth of 5% to 6% a year. But under current conditions, that social contract is no longer viable. Last year, economic growth slowed to 1.3%. Forecasts by independent experts, including World Bank specialists, even predicted negative growth in the first two quarters of 2014. Why did growth come to an end? Because the previous sources of growth — cheap labor, rising prices for consumer goods, and the expansion of consumer lending — had been exhausted, further growth would have required incentives for investment. That, in turn, would have required protection of property rights and guarantees of contract enforcement — but those are precisely the institutions destroyed by corruption in the executive branch and the judicial system. Even before Crimea, investors were already voting with their feet. Investment was falling. Russian stocks were trading at a 50% discount to those of other emerging markets. Having driven the economy into recession, the Russian elite had to look for new ways to stay in power. For an authoritarian regime, this is always a difficult task, requiring money, repression, and propaganda. Recession means that the Russian authorities can no longer buy society’s loyalty with money. Only repression and propaganda can make up for the shortfall in loyalty. In such circumstances, nothing is more useful than a short, victorious military adventure. Tangible victories — no matter how small, and no matter what price is paid for them — always boost a leader’s popularity. It is hardly surprising that Vladimir Putin’s approval rating has now risen to 80%. Russian corruption can no longer be seen as a factor that helps keep the Russian elite under control. The consequence of Russian corruption has been an aggressive foreign policy to which Western leaders still cannot find an adequate response. Russian corruption has truly become a threat to international security. Anti-corruption investigations have never been a priority for the Russian authorities. Independent activists are fighting an unequal battle against corruption. Other governments can and should help identify and freeze the assets of corrupt officials. This would weaken support for Putin within Russia’s ruling class — and also weaken public support for the elites. Both, undoubtedly, would help bring about a new, democratic — and therefore peaceful — Russia. (*FT*, 3 April 2014) The author is a professor of economics at the Paris Institute of Political Studies (Sciences Po) and former rector of the New Economic School in Russia