Russia and the unreliable West

March 12, 2014

The revival of East-West tension over Ukraine looks thoroughly geopolitical. But the context is bad economics. In the last century, Russia was damaged by flawed ideologies which originated in the West. And today it is damaged by Western economic policy.

It is easy for Western Europeans and Americans to look down on the Russian economy. Since the breakup of the USSR, the nation’s real GDP per person has increased at a 3.9 percent annual rate. That is a modest accomplishment for a middle-income country with a great deal of resource income. While Ukraine’s 1.7 percent growth rate is even worse, Armenia, Poland and Romania have all grown faster than Russia.

Now look at it from the other side: what the West has given Russia. There are good things, from markets for energy exports to many types of sophisticated technology. However, these positives are dwarfed by two disastrous ideologies in the past and two selfish and hostile policies in the present.

When the Communists took over Russia in 1917, they imported a theory that had been thoroughly discarded in its European homeland. Under the influence of Eduard Bernstein, Karl Marx’s own political party, the German Social Democrats, refused to support an attempted Communist revolution in 1918. The Marxist USSR made some economic progress, but growth eventually dwindled as the system was frozen by inefficiency and corruption.

When the Soviet Union finally collapsed, Russia imported another Western idea which had basically been discredited at home: blind confidence in free markets. By 1989, the wise minds in development economics knew very well that markets are only healthy when they are set in a favourable institutional environment. And the Chinese had already shown a better way to organise post-Communist economies.

The experts who were sent to help Russia seem to have ignored all that. With the help of Russian collaborators, they imposed a “shock therapy” of massive privatisation and price liberalisation on an unprepared country. These ideologues were genuinely shocked by their failure. While they licked their intellectual wounds, the Russians ended up with new varieties of crippling inefficiencies and corruption, including a class of hyper-rich usurpers of the nation’s wealth.

Whether or not Vladimir Putin is fully aware of the damage done by the two radical Western notions, it is hard not to sympathise with an immediate Russian mistrust for any well-meaning Americans or Europeans explaining that they only want to help Russia adjust to modern reality.

There are few Western sympathisers left for either of the ideologies which so damaged Russia. That is not the case for the West’s present harmful economic policies. Start with the easy monetary policy that has helped keep oil and gas prices high. Or course, the relationship between the cost of money and the cost of energy is not direct. Still, abundant money explains at least some of the gap between the $20 a barrel average for Brent crude in the five years before the U.S. Federal Reserve came to the rescue of the stock market in 2001 and the $70 average since. The current price is $109.

Russia, which gains 72 percent of its export revenue from energy, has used the monetary windfall to enrich a few people, subsidise otherwise unaffordable pensions and generally avoid helpful but hard economic decisions. In a country traditionally plagued by an overly powerful government, the Western-funded state energy bonanza has been little short of disastrous. The Russians are responsible for mismanagement, but the Federal Reserve and other central banks deserve some of the blame for creating the opportunity.

Putin has led Russia through most of this period. His governments and his friends have gained from the willingness of developed nations to distort the global economy – even at the cost of paying more for vital commodities – for the sake of slightly higher GDP growth at home. However, those policies can only reinforce Putin’s view of the West as weak and narrowly self-interested.

The West’s enthusiastic welcome offered to Russian oligarchs and their capital supports that view. If European governments were seriously committed to Russia’s welfare, they would not be so anxious to help people taking wealth, legitimately earned or otherwise, out of a country in desperate need of investment.

It was much the same in pre-revolutionary Russia. Westerners gave Russia lectures about their dangerous irresponsibility, while happily sharing its spoils. Back then, Crimea and most of what is now Ukraine were then part of Russia. Putin seems to want to restore some of the old borders. That would go along with the renewal of the old hypocrisy.

Putin may believe that when the crunch comes, countries which are happy to ease Russia’s unfair play at home will struggle to back up any noble words about Ukrainian self-determination with significant actions. It is too early to tell if he is right, but it is easy to see why he would not take the West at its word.


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The unanswered question is whether the Ukraine is a miniature Russia.

Posted by Bob9999 | Report as abusive

A nice level headed and balanced viewpoint for a change. Being neither, I find it curious why Americans and Russians seem to WANT to fight each other. I don’t see it as a hangover from the cold war – but rather the cause of it. It is as if their particular brands of nationalist pride are thoroughly incompatible. Perhaps both sides would do well to remember we are all human and perpetual war achieves nothing of value in the end.

Posted by BidnisMan | Report as abusive

It is easy to argue that the last ten years of ME conflict were intended to drive the price of oil up so this country could tap domestic reserves and new supplies. I can;t shake the feeling that OBL was just what the “doctor” ordered. Prior to the run up, it was lower cost, stable ME oil prices that made expanded domestic production too expensive to compete. And the US still has the motive to continue to keep the price higher so our high priced cost of living won’t sag.

Our greatest fear is low cost oil anywhere or a lot of new domestic supplies will find themselves in the red. Our robber barons aren’t any finer than Russia’s robber barons. In the face of nearly automatic and enormous world wide appetite for resources, how could they be?

Robbery and aggression is the true face of Nations, and it is obvious massive appetites and need trump human life. It’s always a question of us vs them.

The wars are also a let to pent up aggression that bad times frustrate.

Posted by paintcan | Report as abusive

The typical Reuters readers will love this. Yet another… ‘everything is our fault’… piece. Can never have too many of those on this site.

Posted by dd606 | Report as abusive

Sugar-coating the hard reality that the West is bent on encirclng Russia politically and militarily, in order to remove it as a world power.

Still better than the Shoeman’s granddaughter, whose recent Reuters piece pushed the “Putin is delusional” line now popular among the liberal New Cold Warrior set.

Posted by f00 | Report as abusive

I couldn’t finish reading this “white burden” type of narrative.

The reality is the US is refusing to accept that any other power emerges on world stage except itself(as a “sole superpower”) and its stooges.

Washington establishment has gone crazy since Putin came back to power and is angry that Putin is no letting them commit more crimes around the world (Iraq, Afghanistan, Lybia,Syria..)

This article about it’s our fault, it’s Putin fault, it’s the West’s fault, it’s Russia’s fault is pure nonsense. Maybe the intention is to decive the weak minded reader as usual.

There was an honest article here on Reuters about this US-Russia conflict in which the author was deploring the fact that the US “dropped the ball” by allowing Russia to emerge stronger from its Soviet era rubbles, saying that the US did a poor job containing Russia.

This US’ animosity towards Russia will be beneficial to the true international community. Russia will no longer cover western aggressions(for instance in the UN) and will play,with a wink from China,its role of thwarting NATO/US criminal projects around the globe.

The world is sorely lacking balance. A multipolar world will be beneficial to the true international community. Many countries that have been/are being bullied by Washington are supporting Russia behind the scene.

Posted by Fromkin | Report as abusive

Thank You for an excellent article, Mr. Hadas. I find it interesting that, “Karl Marx’s own political party, the German Social Democrats, refused to support an attempted Communist revolution in 1918.” As you pooint out, Communism turned out to be just another way for a few to steal the national treasure of countries of the Soviet Union. Perhaps Mr. Putin recognizes that Social Democracy, where government owns and oversees prodction, with private sector managment, is the most equitable form of government. Let’s hope so. However, all systems become corrupt if there aren’t community watchdogs to keep them honest. And when a few people – like the Koch brothers – emass so much of OUR wealth that they can buy OUR government we citizens have not done our jobs. America has become more corrupt than any “western” country and many 3rd world countries. We had better concentrate on cleaning up our own backyard and leave Mr. Putin alone.

Posted by njglea | Report as abusive

You speak as if “we” agree. I mean, that the western response was determined by referendum. “We” are actually the central bankers of the US and europe who have always destabilized to make money. The US won the revolutionary war, casting off the yolk of the british empire. We then learned to not trust central bankers when lincoln printed the greenback. We lost the revolution however in 1913 however when our congress created the federal reserve. Since then we have slowly been slipping back to a surf like state, with the facists starting with Reagan and sped by Bush the younger, gaining further control and lessening our freedom. So, “we”, the west are the central bankers of the US, who are the minions of the bank of england and who control not our politics, but our government, through fiscal policy. We have returned to the british empire. Thus the war mongering around this or any other little world disturbance. War is profitable for the BoE and The Federal Reserve who are private citizens, not representatives of us or our government.

Posted by brotherkenny4 | Report as abusive

Nobody cares about economic policy when Ukraine has been invaded and it’s soldiers are held prisoner at the point of a bayonet.
Ukrainian partisans are going to blow the Russian pipelines to millions of tiny bits in retaliation for their invasion, and Russia without an income is going to choke to death on it’s own vile gangster propaganda.
Mark my words, the end of Russia and it’s non-stop threats against Europe is about to come to a crashing end.

Posted by UScitizentoo | Report as abusive

“In the last century, Russia was damaged by flawed ideologies which originated in the West. And today it is damaged by Western economic policy”, wow – this makes fairies at the bottom of the garden seem like a plausible interest group.

Posted by Colmery | Report as abusive

Russia will not jeopardize its only warm water port for its Navy. Hence it will “take back” Crimea. End of that story.
As for economics and governments, I think Russia proves that the western version of democracy is really not the right answer for the world. I think many in America see that too. Most westerners complain bitterly about the corruption and unfairness, yet vigorously defend it when challenged by communism. That I believe is a trained social response. @njglea above demonstrate this quite well. We all know that unbridled capitalism is bad, and that communism is bad. Somehow though, we refuse to acknowledge that the Chinese are very successfully marrying socialism (strong government of the people by the people) with capitalism. With virtually no help from anyone they have performed miracles over the last 50 years. In another twenty they will easily be the number one economy and world leader. I think it’s time both the western powers and Russia shut up and learn from the wisdom of the Chinese.

Posted by tmc | Report as abusive