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Society, Politics & Law

Why Russia’s flak jackets beat the NATO safety-suit

Updated Thursday, 18th September 2014

Putin’s sins will go unpunished abroad because of greater resilience to their financial aftershocks at home, writes Alan Shipman.   

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Vladimir Putin swings from a trapeze while holding the arms of a man with the Ukrainian flag on his back. Far below them is a safety net made out of the Soviet Union flag. Creative commons image Icon Gary Edwards under Creative-Commons license

Who said social scientists can’t make accurate predictions? Russian actions in Ukraine over the past month, building on local discontent to carve out a land corridor to the already-annexed Crimea, were accurately flagged by area experts as early as April

The disastrous economic impact on Russia was similarly foreseen, even before the weight of EU/US sanctions began to mount. Some prominent international relations scholars now anticipate a possible Russian break-up, as the blowback from its sponsorship of secessionists to its west excites those it has tried to suppress in its east and south while diverting the military resources that have kept them at bay.

Russia was already heading into recession, before its military adventures, because of a downturn in prices of its main (fossil fuel) exports which a number of energy experts had also forecast well in advance. Putin has been reluctant to diversify the economy away from oil because this would upset the political balance, allowing new business groups to challenge those currently supporting the Kremlin. But even years of instability in Libya and Iraq have not delivered the needed oil and gas price boost, which anyway depends on inward investment now threatened by sanctions.

Russian capitalism vs Western welfare-statism

President Putin discounts such warnings, because of a prediction of his own that deserves more attention. He calculates that the cost of economic sanctions, and other retaliation, will be higher for the countries imposing them than for their intended Russian targets. That’s because, even if the Ukrainian incursions cause serious economic hardship for most Russians, they are a self-reliant people accustomed to living through times of war and shortage. Indeed, Russians’ contemporary self-image most resembles that of the American pioneers, the passing of whose rugged individualism was mourned a century ago by Thoreau and is even more conspicuously absent today. 

EU and US citizens, in contrast, cry out (and throw out their leaders) at the slightest hint of a gross domestic product (GDP) downturn or surge of price rises. So even if his actions crash the economy, Putin will reap electoral rewards for looking strong, while poll defeat awaits any western counterpart who tries to stand against him.

Putin is exploiting a bizarre turnaround in east-west configurations which few predicted when the Soviet Union broke up in 1991. Since then, Russia has transformed from a state-run economy and regimented society into a free-market hothouse, in which individuals and households have to fend for themselves with shaky employment prospects (outside a few well-cushioned state-owned-enterprise jobs) and little state support when employment or small-business income turn down. History has – according to commentators from Tolstoy to today’s bloggers - taught Russians to expect little except trouble from their governments, and to cultivate virtues independent of the corrupted public sphere. The EU and US have, in the same period, moved from free-enterprise system into one where nothing works without explicit subsidy or insurance from the state.

You thought the welfare state was shrinking?

If this sounds daft, consider the extent to which western ‘capitalism’ now depends on state support. In the UK, government spending in 2014/15 is budgeted at £732bn, around 42% of GDP. The largest components of this are Social Protection (£222bn), Health (£140bn) and Education (£98bn). Social Protection consists mainly of redistributive expenditures on old-age pensions, victims of sickness or disability, and families with children. Assistance with housing costs rose sharply after 2000, and is about to rise again as house prices revive.

While these appear to be (and were designed as) ‘social’ subsidies aimed at giving all people essential resources and service provision regardless of their income, they now operate principally as business subsidies. Tax credits are a wage subsidy, enabling employers to pay less than a living wage knowing the state will top-up their pay packets. Housing benefit is a subsidy to landlords, enabling them to charge far higher rents than their tenants could privately afford

The healthcare budget (long a financial bedrock for the pharmaceutical industry) is now a gold mine for private providers, many owned by private equity groups, which after recent reforms can pitch to manage or supply those parts of the NHS that can be run at a profit, leaving the state to handle costlier patients and treatments. State education, which for more than a century has relieved businesses of paying for workers’ knowledge and skills, offers a similar publicly manufactured market in those countries that have legalised for-profit provision.

Digging deeper into its budget, the state has long been the principal source of the basic science and technology that ‘silicon valleys’ feed on, provides or subsidises most long-distance transport links, and is an equally essential financial partner for all commercial sources of energy

It runs a range of insurances and revenue guarantees, from the private finance initiative to export credit guarantees without which large parts of the private sector could not function. And, since 2008, it has owned or underwritten the systemic core of the banking sector, without which money couldn’t even circulate, leaving nothing to invest.

Today’s western entrepreneurs like to invoke the Austrian economist Joseph Schumpeter, who viewed ‘creative destruction’ as the engine of progress that kept capitalism ahead of any socialisms. But the destructive side is now more than western economies’ pension funds and budgets can absorb – blunting the capitalist edge, as Schumpeter anticipated in 1942.

Simple bear necessities

Untrammeled by such obligations, Russia has (even in recession) a near-balanced budget, and a public debt around 12% of its GDP, deliberately kept down after external creditors forced its default in 1998. In comparison, the UK (even out of recession) will still show a budget deficit above 4% of GDP in 2016 (on Office for Budget Responsibility forecasts), adding to a public debt that’s already 77% of GDP. While Social Protection absorbs 20-30% of GDP in EU countries west of the old iron curtain, it falls to 10-15% in the old ‘Eastern Bloc’, and drops off even further beyond the Urals. 

Putin’s gamble could go spectacularly wrong if Russians, lacking much protection against another downturn, prove unwilling to go through another round of soup-kitchen suppers and auctioning furniture to pay for food. There are already signs that, even if households are stoical, Russian business is now hankering after western-style corporate welfare, with its energy giants already asking for large subsidies to cope with the impact of sanctions

But fear that the Russian president is right was evident at this month’s NATO summit, which chose to prioritise the threat of Islamic radicals in the Middle East/North Africa over that of Russian expansionism closer to home. Russia is famous for circus acrobats who take heroic risks with negligible safety-nets. If its economy still takes after them, Putin’s sins will go unpunished abroad because of greater resilience to their financial aftershocks at home. 

This blog post is part of Society Matters. The blog seeks to inform, stimulate and challenge our understanding of this changing world and of our humbling role within it. Find out more about the blog and the team.
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Please note: The opinions expressed in Society Matters posts are those of the individual authors, and do not represent the views of The Open University.





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