In the bad old days, Russia's facsimile of an economy would crash every time the price of oil did. The government would go broke, the currency would collapse, and ordinary people would see their standard of living evaporate. Now if all this sounds familiar, that's because the bad old days never went away under Vladimir Putin. He just got lucky until now.
So now, like they have for generations, the Russian people are paying the price for their government's economic illiteracy. And it's a miserable price to pay for the nation's 140 million people.
The Soviets knew this story well. The oil shocks of the 1970s filled the USSR's coffers with enough cash to not only mask the massive inefficiencies of its centrally-planned economy, but also launch its own imperial quagmire in Afghanistan. It was enough to make Americans think they were losing the Cold War.
But then, like that, the USSR was gone. All it took was Saudi Arabia deciding to let oil prices fall, and the Soviet empire did too. The whole Marxist-Leninist thing didn't help either. Supermarkets went empty. People went hungry. And then nobody would lend them any more money. That's how the Cold War ended: Not with a bang, but a bailout. The West loaned the bankrupt Soviets $100 billion, and, in return, the USSR let its satellite states go.
The end of communism, though, didn't bring prosperity. The opposite, actually.
Russia didn't (and still doesn't) so much have an economy as an oil exporting business that subsidized everything else. And with oil prices averaging just $17.50-a-barrel in the 1990s, that business was in bad shape. Russian companies that were used to getting handouts from the oil-rich government had to get loans from the central bank instead. This created so much new money that inflation, which had already built up due to just-ended price controls, exploded to over 800 percent. The government was able to bring this down to merely painful levels of 10 to 20 percent, but only at the cost of a protracted slump. Unemployment climbed into the double digits, all while the cost of basic goods rose out of reach for even people who managed to keep their jobs. The result, as you can see below, was a lost decade for Russia.
Gross domestic product per capita, adjusted for local prices, actually fell in the eight years after the USSR did.
Russia was still basically bankrupt, but without the benefit of bankruptcy. It simply owed the West more money than it could reasonably pay back. That, as Jeff Sachs points out, was different from how the U.S. treated other post-communist states. Sachs, you might remember, was the economist who advised the former Iron Curtain countries on the, as he called it, "shock therapy" they needed to save their failing economies as they transitioned to capitalism. The U.S., he explains, helped ease Poland's inevitable pain by giving them $1 billion to stabilize their currency and forgiving much of their debt.
But the U.S. wasn't so magnanimous with Russia. It wasn't magnanimous at all. Russia was required to pay back everything it owed. And in the meantime, even more debt was piled onto its rotting husk of an economy in the form of emergency IMF loans. Because a nuclear-armed country would never be allowed to default, right?
Well, no. It's hard to say whether Russia was the victim of bad leadership and worse luck or bad luck and worse leadership. The government's incompetence, you see, was only matched by its corruption. Economic reforms were always a day away. And behind closed doors, state-owned monopolies turned into privately-owned monopolies thanks to sweetheart deals that made government officials rich and the new oligarchs regally so. Russia, in other words, traded one gangster state for another. And its economy, so far as it had one, was still entirely based on extracting natural resources. That's why, when oil prices tumbled from their already-low levels in 1998, Russia found itself back where it'd been a decade before: bankrupt. Under pressure from markets, it devalued the ruble and defaulted on its debt.
Then a miracle happened: oil prices started rising. Okay, it was more China's miracle than Russia's, but, after two decades of decline and fall and even more declining, that was more than good enough for Putin. He'd become president in 1999, when oil prices averaged just under $18-a-barrel, and then watched as China's insatiable demand for raw materials helped push the price up into the triple digits over the next decade. That gave Russia so much money that even after the oligarchs—Putin's real political base—took their cut, there was still enough left over for ordinary people's living standards to improve.
But despite this, Russia's economy didn't really improve. Putin didn't diversify it at all, not if you don't include braggadocio. It's still all about digging things up out of the ground and selling them. That, of course, was all Putin needed to do what Russia's rulers have always done—invade a neighboring country or two—when they're feeling flush with petrodollars. But it left Russia vulnerable to the same kind of crisis that's always hit it when oil prices have unexpectedly fallen.
This time, at least, the government has built up a war chest of dollars to keep the ruble from falling too much. But Russia's companies became the epicenters of economic doom instead. They borrowed a lot of dollars, in part, as Paul Krugman points out, because the ruble's rise the years before had made these debts look smaller than they actually were. It didn't help that Western sanctions over Putin's incursion into Ukraine kept Russian companies from rolling over what they owed by shutting them out of international credit markets. So now that the ruble is plummeting, those dollar debts are harder to pay back, and it's sucking the economy into a death spiral.
This is Russia's version of Groundhog Day. Oil crashes, so does the ruble, and then unemployment balloons. Sometimes the government goes broke. Other times companies do. In any case, it's the ordinary people who suffer. They get hit by the double whammy of unemployment and inflation. So even if they're lucky enough to keep their jobs, their budgets still get squeezed by the rising cost of everyday essentials. It's even worse for imports, which make up a big chunk of the manufactured goods they buy, and have suddenly become twice as expensive now that the ruble has fallen by almost half. That's why shoppers are stampeding to buy whatever foreign products they can get their hands on—luxury cars, Apple products, or even Ikea furniture—before the ruble loses any more value.
Russia's winter of discontent, though, is about to get even more bleak. Its central bank just jacked up interest rates to 17 percent to try to prop up the ruble, which is so high that nobody will want to borrow. But even if they did, nobody will be able to get a loan on anything less than punitive terms when banks are so scared that they won't even lend to each other. This credit crunch will turn Russia's already-nasty recession—GDP is projected to shrink 4.7 percent if oil stays at $60-a-barrel—into a full-on depression. In a worst-case scenario, the economy could contract as much as 10 percent next year, even as inflation flirts with double digit territory.
It shouldn't be this way. The one thing Russia doesn't have a shortage of, after all, are brilliant scientists, programmers, and mathematicians. By all rights, it should have a booming high-tech economy. A Silicon Valley-on-the-steppes. But that would require giving people the freedom to challenge authority, which is far too much for Putin when he thinks that any opposition amounts to a "fifth column." It's safer just to dole out the old Soviet monopolies to his cronies, and let the plebes shop in the meantime. Putinism, in other words, is communism minus the pretense that all animals are equal.
Every happy economy might be alike, but in Russia, at least, the unhappy ones are too.