Bear market
Russia's stock market collapse this week could well be enough to drive the country back to its old, anti-economic ways
Eric Morse
Citizen Special
Saturday, September 20, 2008
Retribution has come upon Russia for its August war with Georgia faster than expected in the form of a massive market collapse. The great unknown is whether this will restrain Russia's geopolitical ambitions or inflame them. Inflammation is the safer bet.
Analysts estimate that foreign and domestic investors have pulled about $35 billion U.S. out of Russian markets since the brief war. Trading on Russian exchanges was suspended for much of this week. Certainly, Russia is affected by the global market chaos, and a fall in oil prices -- Russia's mainstay export -- has added to the turmoil, but the war has certainly made matters much worse.
The crisis in investor confidence has been compounded by the Kremlin's growing propensity for what amounts to bare-faced confiscation of other peoples' assets. That has led some Russia-watchers to wonder whether Russia can be said to have been operating under a market system at all, as we in the West comprehend it.
There is a current of wisdom which holds that Russia overplayed its hand by its use of military force against Georgia. The basis for this argument is that no matter how much fear Russian threats inspire in its neighbours, Russia is an economic paper tiger, even with the very visible threat of turning off the gas supply to Eastern and Central Europe, and that it cannot sustain a viable military threat to the geopolitical order.
It has been suggested that the Russian business oligarchy would not tolerate the domestic economic chaos that would ensue from geopolitical overreach. Sooner or later domestic political change would result, thereby curtailing the ability of Russia to drive the world order in the direction of its choosing.
The problem with the argument is that it values economics over psychology. The clique of ex-KGB strongmen -- the siloviki -- that has formed around Prime Minister Vladimir Putin has proven highly impermeable to what westerners regard as the basic reality of economics and business. This really should not be surprising in the light of history.
It is catechism in the West that business and market forces drive politics (although this belief system is as susceptible to having holes shot in it as any other theology). That catechism was never accepted by the leadership of Soviet Russia, nor -- more importantly for us in this era -- was it really ever taken to heart by the Russian people as a whole, nor is it accepted by the current political leadership.
This is not to suggest that Communism is resurgent, far from it. We forget too easily that Marxism-Leninism did not make modern Russia; pre-modern Russia made Marxism-Leninism. The house that Lenin, Trotsky and Stalin built was founded on the bedrock of Russian popular collectivism, intellectual imperialism and pan-Slavism and the divine right of Tsars -- roots that go as deep as the history of the Russian state.
The vital -- and dangerous -- factor is that the paramount traditions of Russian history are anti-economic. They deny the force of economics in favour of the force of the spirit, made manifest in business, politics and geopolitics by the application of physical force.
The "Russian free-market system" has only been in existence some 15 years. Western-style structures with some surface credibility only came into being after the market meltdown of 1998, but they have proven unable to resist forcible intervention to suit the interests of the rulers and the absence of the effective rule of law has become more and more noticeable.
Russia wears the mask of the market economy very thinly, and the benefits have not yet reached the mass of the Russian people in any meaningful way. Russia might develop a sudden excess of political restraint as a result of hard times. But the opposite reaction is frighteningly tempting -- to seek "saboteurs" (the current tame oligarchs would do very nicely as their financial usefulness to the ruling clique wears out) and even to attempt to return to the Soviet-era "security blanket" of economic autarchy. Soviet Russia failed economically but it took 70 years of cataclysm within and without to bring it to an end. Without Mikhail Gorbachev's interventions it might still be stumbling onward.
There is another dangerous factor. For all its failings, the Communist party had broad legitimacy and imposed internal collective discipline on the ruling circle. Nothing of the sort exists now except the personal authority of Mr. Putin. That is a very thin guarantee of order in the sort of power politics now played at the top levels in Russia.
In its circumstances, Russia would not be the first nation that overplayed its military hand in pursuit of a political chimera.
Eric Morse is a former member of External Affairs and a member of the Royal Canadian Military Institute's Defence Studies Committee.
© The Ottawa Citizen 2008
