Russia is said to be keen on inviting foreign capital into its electric power generators; an ambition that at first sight conflicts with its determination to keep control over its oil and gas sectors. However, this apparent confusion in economic doctrine is explained by the Russian government’s overriding concern with security and power-political matters. What’s not clear is whether an economy run in the interest of “national security” can work in the long run.
Current Russian economic policy, which seems likely to continue whether or not President Vladimir Putin is re-elected in 2008, is not a re-enactment of Soviet economic policy, even that of the “glasnost” era of 1985-91 under Soviet president Mikhail Gorbachev. The private sector is not merely tolerated on a small scale, it is an integral and vibrant part of the Russian economy, and consumer spending preferences are given an important role in spurring Russia’s economic growth. To that extent, therefore the fall of the Soviet Union and the reforms of the 1990s really achieved something; in certain sectors, notably the service sectors that had been neglected under the Communists, the Russian economy is vibrant and offers excellent growth prospects for the future. Certainly Enel, the Italian electric utility, thinks so; earlier this year it acquired 49.5% of the Russian energy trader RosEnegoSbyt and Thursday it announced its intention to invest 2-4 billion euros ($2.5-5 billion) in the Russian power generation sector.
Nevertheless, that is not the whole story. Russian security policy, its wish to exert its full weight in world affairs and dominate its neighbors and ideally western Europe are also not similar to the policies of the Gorbachev era, when Russia attempted to mend its relations with the West, they are a throwback to the pre-glasnost era before 1985, when the Soviet Union showed no compunction in bullying its neighbors and delighted in the fear its moves inspired. To some extent, this is a reversion to traditional Russian foreign policy; the Tsarist Russia of the 18th and 19th centuries was an unpleasant neighbor and inspired considerable paranoia in Berlin and London. Only Russia’s smaller size and relative population, compared with the Soviet Union or the late Tsarist empire prevent Russia from casting a similar shadow over word affairs today.
In this context, Russian economic policy makes sense. Economic growth is good, even if it does not come from the traditionally favored heavy industry sectors; it builds Russia’s strength in world affairs as well as keeping its people docile. If free market capitalism produces economic growth it is to be welcomed; the current Russian regime has no particular hang-ups about income distribution and regards its 2001 institution of a “flat” income tax of 13% as a major policy triumph.
Certain sectors, however are too important to be left to the free market, particularly if that free market consists of independent minded oligarchs such as the Yukos oil tycoon Mikhail Khodorkovsky whose loyalty to the regime is suspect. Imprisoning Khodorkovsky and destroying Yukos, as well as being satisfying to his enemies, have shown other tycoons that the state is not to be denied when it wants something; the power of that state has accordingly been greatly increased. In any case, oil is a natural resource essential to a modern economy, and allows Russia a key position at the economic top table. Natural gas, too, can be used to increase Russia’s influence in Western Europe and ensure that weak neighbors such as Ukraine maintain an appropriately Russia-friendly government.
This combination, of friendliness towards the free market combined with a determination to subordinate it to the demands of a security state, is one that hasn’t really been tried before over a long period, although current Chinese policy is fairly similar. It bears some resemblance to Italian Fascist and German Nazi economic policy of the 1920s and 1930s, but those regimes were much more committed both rhetorically and in practice to the nostrums of socialism. The Tsars may have been moving in that direction under Pyotr Stolypin in 1905-12 (before that time, the Tsarist economy was primitive and hampered by mediaeval regulations) and Wilhelmine Germany also operated under similar assumptions, but both those regimes were a long time ago, and their eventual economic success or lack of it was lost in the horrors of the First World War.
To assess the viability of a free market economy within a powerful security state it’s thus worth conducting a thought experiment, and considering what the current United States might look like under such a regime. Suppose for example that President Richard Nixon, instead of the benign and mostly wise democrat that he truly was, had been the deranged paranoiac of leftist fantasy, and had combined with the brilliant but equally paranoid CIA super-spook James Jesus Angleton to create such a regime in the United States. What would be the economic result?…..
Today the United States is still a democracy, but electoral competition rests between National Security Republicans and National Security Democrats, both placing security issues above all other considerations. NSR President Donald Rumsfeld appeared on television last night, pledging a new round of defense spending to counteract the growing menace that is Hugo Chavez’s Venezuela, including the deployment of genetically engineered killer sharks off the Florida coast to deter possible attacks by nuclear-armed Venezuelan frogmen.
The United States is self-sufficient in oil, and has been since 1997. All cars driven by the public must be capable of 40 miles to the gallon. The last independent U.S. automobile manufacturer, General Motors, went bankrupt last year and the market is dominated by imported brands, particularly from the world’s leading automobile producer, China. Only senior government officials are exempt from the 40 MPG restriction; for security against possible terrorist attacks, their preferred transportation is the Hummer. The repose of the caribou on the Alaska North Slope is devastated by the noise and pollution from thousands of “nodding donkey” oil rigs and the gigantic pipeline network laid across the permafrost that is necessary to get North Slope oil to its consumers in the “lower 48.”
The DARPA Corporation, wholly owned by the Department of Defense, has since 2000 sold memberships in its ARPAnet information and communications network to private individuals; there are now over 100,000 subscribers. To prevent the possibility of viruses and spam, subscribers must obtain a security clearance before being allowed to link to the ARPAnet; the waiting list for security clearances is now estimated at over 4 years. The principal problem with the ARPAnet reported by subscribers, apart from the lengthy delay before their friends can be connected, is the primitive and cumbersome DARPA search engines, which often fail to provide users with information that they know is available. An attempt by a group of Stanford University students to provide a superior search engine some years ago resulted in their arrest and imprisonment, on the grounds of compromising the ARPAnet system’s security.
Immigration restrictions have been steadily tightened over the years, and since the 9/11 attacks of 2001 have been made absolute, with no further permanent immigration permitted from any country. There is a certain amount of grumbling about the cost of the twin border Security Barriers, totaling 5,096 miles in length, and of the 2.5 million strong National Border Guard that defends them. On the other hand, the economy remains prosperous although the high cost of construction has elevated house prices to undreamed-of levels. In fashionable suburbs, the new trend among McMansion owners is towards “Ecological Gardens” in which nature is allowed to run unchecked producing dense undergrowth and even jungle, as the cost of landscaping has become prohibitive.
Mobile telephony is extremely popular, but rather expensive. The main problem is the cost of the handsets, which must include a National Security Chip, which allows the NSA’s supercomputers to cut off communication instantly if a cellphone conversation is becoming subversive, damaging to national security or potentially leading to terrorist activity.
Silicon Valley is a haven for the defense electronics sector, the principal high-tech sector in the economy, with numerous small companies making their fortunes supplying complex equipment to the Defense Department. Meanwhile Bill Gates, Senior Vice President of IBM’s Microcomputer Software Division, is believed to be interested in extending the charitable activities he undertakes with his wife Melinda. There is some talk of Bill being elected to the regional board of the United Way.
George W. Bush is the successful owner of the Texas Rangers baseball team, whose star Alex Roderick is rumored to make as much as $250,000. It had been thought that Bush might go into politics, but his youthful problems with alcohol prevented him from getting the necessary security clearance.
There may be a few readers for whom the National Security America sounds preferable to our own – most of them doubtless former senior CIA and NSA officials! Nevertheless, for the rest of us it is clear that such a society would be very much poorer than the one we have, as well as being hideously vulnerable to such risks as oil depletion and the collapse of information and telecom systems.
Your investment in Russia should thus be short term, and should avoid sectors in which the government takes a particular interest.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)