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A touchstone time for Russia

By Jeff Schubert - posted Wednesday, 8 November 2006


What markets that did exist were little more than crude bazaars; with most of the economy still under the yoke of central planning.

It was then that Russia imported another idea about running the economy for the greater good. In 1992, Professor Richard Layard of the London School of Economics, who knew little of Russia, recounted to me his short flight from London to Moscow in which he and a Polish economist (whose name I do not recall) began with the idea that reform needed to be carried out gradually with care. However, by the time they arrived in Moscow they had decided that it would be best to implement reform as quickly as possible, including the use of shock therapy.

They thought there was a less than 50 per cent chance of this working but it was worth a try. On the Russian side there were English-speaking economists, such as Yegor Gaidor, who had read western economics text books but had little experience in a western economy - and often little practical experience in the Russian economy.

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It seems to have never occurred to any of the economists that markets in advanced economies only work well with a sensible dose of regulation in the areas of accounting standards, commercial laws, policies to promote (or at least allow) competition, and effective police forces and courts to enforce them.

In late 1993 the London Financial Times was suggesting that Boris Yeltsin must use both the iron fist and an iron glove against the parliament (when Ruslan Khasbulatov was speaker) and that a constitution which gives power to the president was the “only basis for stable democratic rule in Russia”.

The worst result of such cavalier attitudes and ignorance - much of it imported - continue to impact on the Russian economy and politics.

There was the botched and extreme privatisation program, with its notoriously corrupt loans-for-shares deals, which has created dozens of US dollar billionaires and thousands of millionaires and delivered poverty (or something close to it) to most of the population.

In 1989, before he became president, Yeltsin argued for diversity. “Unity has already inflicted a great deal of damage on our country”, he explained. Unity stood for thinking exactly the way the supreme leader thought. "It is time we got rid of this stereotype," he thought. It was in the clash of opinions that the best solution developed.

Yet the economic turmoil brought on by Yeltsin and his silly advisers (admittedly it was never going to be easy to reform the economy) soon made unity a desirable word. “Unity” was the name of the political party created by the Kremlin to help it gain control of the Duma (lower house of parliament) in the 1999 elections.

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Since then, Vladimir Putin has followed the thinking of the Financial Times that power to the president is the only basis for stable democratic rule in Russia. The regions, which Yeltsin initially encouraged to take power have been reined in with, among other things, governors now appointed by the Kremlin rather than elected. The Kremlin has also reasserted its control over the economy in almost all areas of activity.

The return of centralism - economically and politically - has been welcomed by the population. Putin is enormously popular, and there is little doubt that he could arrange a constitutional amendment to allow him to serve a third-term after his present term expires in 2008.

This will be a touchstone time for Russia; and we can only hope that the foreign idea that he not serve another term (which I assume is the foreign idea) is accepted in preference to the apparent desires of the Russian people. The trend to centralism still exists, and if Putin were to serve a third-term it would almost inevitably result in a fourth and continued concentration of power in the presidency - and the inevitable abuse of that power.

We can only hope that Putin is true to what he has said he will do - that is, step down in 2008. Russians may not all realise it, but this would be the best way to bring an end to the extremism of the last 100 years.

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About the Author

Jeff Schubert is an economist, business consultant and writer. He is author of Dictatorial CEOs and their Lieutenants: Inside the Executive Suites of Napoleon, Stalin, Ataturk, Mussolini, Hitler and Mao. He is a regular commentator on Russian affairs and now lives in Moscow. Jeff is also the creator of The Little Pink Ant. His websites are: www.jeffschubert.com and www.thelittlepinkant.com. The also blogs about Russia at www.russianeconomicreform.ru/

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