‘For macroeconomic stability,you need political credibility… that’s exactly what the general election should bring’https://indianexpress.com/article/opinion/columns/for-macroeconomic-stability-you-need-political-credibility-thats-exactly-what-the-general-election-should-bring/

‘For macroeconomic stability,you need political credibility… that’s exactly what the general election should bring’

Sergrei Guriev,a top Russian economist,was rector of Moscow’s New Economic School until he resigned on April 30,2013 and moved to France.

Sergei Guriev,a top Russian economist,was rector of Moscow’s New Economic School until he resigned on April 30,2013 and moved to France. He advised various Russian government economic bodies and is associated closely with Russia’s economic transformation over 20 years. After his critical report on the “Second Yukos Case”,co-written with other members of the expert council that looked into the Mikhail Khodorkovsky trial,Guriev was subjected to an investigation. He is currently with SciencesPo,Paris. In Delhi last week on a lecture trip,he talked to Sudeep Paul:

Q: You’ve been making news headlines. How big is the loss of Sergei Guriev for Russia?

A: Ha. Ha. This is not a question for me. For me,this was indeed a big story because I had to move and give up what I’d been doing for many years. I feel very bad I didn’t deliver on my explicit and implicit promises to colleagues and partners. That of course is very sad. As for the story that Russia has suffered a loss,my replacement,Simeon Djankov,is very impressive — an outstanding academic economist,an amazing career at the World Bank,a former Bulgarian finance and deputy prime minister.So the School is very fortunate,and I am very proud that he has agreed to take over.

As for intellectual life in Russia,I think my story is very painful. This is a signal it may happen to anybody. I wasn’t a member of the ruling party or government. And yet a lot people would tell me they didn’t expect something like this could happen to me. As all this was happening,I was told I should talk to Russia’s leading politicians. I did so,but my problems did not stop. Which means it was a conscious decision by the Russian leadership — to send a signal that people who speak against the government shouldn’t expect to be safe. And this is a very bad signal. Every government needs free debate,feedback. Without this debate Russia can only fall back on the Soviet Union’s track.

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Q: The ‘New Yorker’ called your departure a sign of the “imminent catastrophe”,while you’ve said that you don’t want to be a symbol,that you’re not apolitical refugee.

A: The “imminent catastrophe” is about the signal. For me personally,it’s a little bit out of context. I don’t have any personal problems with Medvedev or Putin for not interfering in the work of the Investigative Committee. But as a citizen I believe that my story shows that Russia has big problems — and this is the fault of its political leadership. I saw outright illegal action by the Investigative Committee and by the judge who signed the order to take away my emails for 5 years,to the point that whatever the prosecutors would do,the judge would support. My problem with Medvedev or Putin is that the system they built is not the rule of law I’d like to see in Russia. But already after I left,the Russian opposition leader Alexei Navalny has asked me to support him and since I left I have helped develop his programme for Moscow’s mayoral election. That may qualify as political activity.

Q: We often felt that Putin and Medvedev worked in tandem. But it seems now that there was quite a bit of difference between the Putin and Medvedev presidencies. The Medvedev presidency seems remarkably different from the new Putin presidency — just take the case of Medvedev setting up the committee to investigate the Khodorkovsky trial,which Putin junked afterreturning.

A: You’re right. We saw a lot of things that we didn’t expect to see. After May 2012,when Putin came back to presidential office,we saw a completely unprecedented scale of repression against civil society and the opposition. Right now we have about 20 people in jail for participating in the protests in May 2012. We saw new levels of internet censorship,new laws against street rallies,laws against gays,eventually we saw Pussy Riot going to jail for two years. These are some of the things we could not imagine before May 2012. In that sense,even when both Medvedev and Putin speak in favour of rule of law and democracy,their deeds in the last couple of years have been completely different.

Q: You had high hopes of the Medvedev presidency,that it would set in motion the economic reforms that Russia needed for long-term,deep changes. That didn’t happen.You were disappointed?

A: By now we can say that whatever reforms did get implemented in Medvedev’s presidency have been rolled back. And as we speak,the government is rolling back yet another on every important reform protecting entrepreneurs from expropriation by the law and order agencies — prohibiting the police from going after entrepreneurs for tax evasion,unless a tax inspection actually says there was a tax fraud. It is painful that this reform was just rolledback by Putin and moreover he publicly said that whoever disagrees with this roll-back should leave the government. And there are a number of things like this. We worked very hard on proposing an amnesty for entrepreneurs and eventually this amnesty did happen under Putin but it was completely cut to the extent that the number of entrepreneurs who benefited from this amnesty was reduced by a factor of hundreds or even thousands. So,most things that Medvedev introduced were rolled back,withdrawn,many things did not get implemented. By now,the only thing that persisted is the change in time zones! I would say it is not the most important measure for long-term economic prosperity and modernisation of Russia.

Q: Each “transition economy” has its own peculiar problems,apart from the patterns it shares with other transition economies. Russia has had this unique case of the oligarchs — more billionaires in Moscow than in any other city –that has created a closed system,that in order to play the game you must already be playing the game. How has the phenomenon of the oligarchs hindered long-term growth and kept this BRICS economy from realising its potential?

A: It’s a big issue for social,political and economic development. One should not think of the oligarchs per se as a problem. The fact that the oligarchs exist and that wealth is concentrated in the hands of a few super-rich is also a symptom,a signal that other entrepreneurs cannot develop. To prosper in the Russian economy you have to be rich and politically connected to protect you from expropriation by the state. There are economies of scale in terms of having political connections. The bigger businesses can prosper because they have deeper and stronger political connections. In that sense,the concentration of wealth in the hand of the oligarchs gives an indication that the business climate is not appropriate in Russia. And that is seen to different degrees in other emerging economies. But,indeed,Russian case is extreme in this sense.

Oligarchs are a product of crony capitalism. Of course,they also defend crony capitalism.

Q: The economic news from Russia isn’t good. Putin won’t be able to meet his growth projections. It’s about 3 per cent or less now? To what extent is this because of global factors?Aren’t Russia’s problems mostly of its own making?

A: By now,it is clear that it is not because of external factors. If you go back just a year,the Russian government was very worried about the global economy. But looking back,the eurozone didn’t blow up — it isn’t doing well,but it didn’t blow up. On average the global economy is doing better than expected. The Russian slowdown is due to Russia’s own problems. Now even 3 per cent a year looks like a good number. The projection for 2015 is 1.5 per cent. The long term projection is also very low,about 2.5 per cent. So things are pretty bleak. This is also a matter for debate. Three to four years ago,we wrote about a “70-80 scenario” where we warned the government and public that even under high oil prices the Russian economy may not grow because of the lack of reforms. Things will come to look like the 1970s-80s when we were stuck in the Brezhnev stagnation. We see now how that happened –after the post-crisis recovery is over,growth is out of steam and to further growth it requires new investment and improvements in productivity. This new growth has not come because there is no reform and there is no reform because the political elite wants to keep the closed system in place. And of course the debate about the coming stagnation is not welcome for the Russian elite.

Q: So we are looking at stagnation in the near future if the reforms don’t happen?

A: Yes.

Q: Also,leveraging Russia’s oil and gas resources more as a geostrategic asset,not letting it play to market factors,that has been adversely affecting the economy as well?

A: It does. If you look at how investors see Rosneft and Gazprom — both are perceived by investors as quasi sovereign companies. So investors think that if something happened,the government would help those companies. But the market valuations of these companies are very low. Why? Because investors believe that these companies are not market companies. That they are used as geopolitical or internal political tools. In that sense,you don’t need to speculate,you just need to look at the stock prices.Stock prices tell you the full story.

Q: If you remove the state from behind these companies…

A: Then the management of these companies won’t be there and maybe a better management would do a better job.

Q: The way Venezuela’s PDVSA had a first-rate professional management. Then Chavez took over a very efficient company and ruined it for his politics.

A: Exactly. Then you have two versions of it: you can keep supporting the company at taxpayers’ expense. Or you can just ruin the company. If you keep supporting,it looks like a profitable company. But then often of course the whole country may go bankrupt. It’s a little bit like the Soviet Union. In the Soviet Union,there were no corporate bankruptcies,because it was one big enterprise. But then the whole enterprise,the whole system went bankrupt. This is a very dangerous story that the Russian government should not forget.

Q: You have been a part of Russia’s economic transition for 20 years. What were the biggest challenges in transforming Russia from a complete control economy?

A: I think the pain of transition was under-appreciated in the very beginning. Both within and outside the country. The West thought of the Soviet Union as a powerful empire and couldn’t imagine that it would face such huge economic difficulties and therefore under-provided the help and support which would have been very timely and useful. The government also thought transition would be quicker,and did not anticipate how quickly it would run out of cash,which imposed a huge pain on the public. And for the public now the transition was about pain,unfairness and inequality. What’s most painful is that some of the reformers did not avoid the temptation to get rich quickly themselves. On the other hand,the basic idea that Russia should become a capitalist economy stands. It’s proven by the economic growth performance of the last 20 years. While growth happened in Putin’s years,it did happen in private firms and in sectors which were more competitive,privatised and regulated. You should just compare oil and gas. Gas was always monopolised and Gazprom was so much more inefficient than the oil sector,which was,till recently,private and competitive. Government companies in Russia are corrupt and inefficient like anywhere else.

Q: You are lecturing on the BRICS here. Against the undeniable reality of the power of this loose group tied together by little except their fast-growing (or fast-growing till recently) economies,there is growing scepticism(and criticism) of the BRICS. What future do you see for this quasi-bloc? Also,your opinion of the “BRICS bank”?

A: BRICS have more financial power than developed countries. For example,if Russia needs an IMF programme,the IMF cannot afford it. Also,if Russia and China want to bail out some country,it’s easier for Russia and China to do so together than asking the IMF or World Bank to do it because,simply,Russia and China together may have more resources and can deploy them very quickly.

The BRICS bank may be a good idea,if it’s designed and run well. So far,these countries have not demonstrated their ability to do that together. China on many occasions has done a very good job in sovereign wealth funds management. But as a group,so far we haven’t seen that from the BRICS. Maybe it’ll happen,maybe not. The BRICS summits are very important for these countries to talk together and talk to each other about their problems and learn from each other.

As a geopolitical force,the BRICS still do not exist. For example we do not see any evidence of BRICS voting together in international organisations.

Q: In fact,geopolitically,BRICS may pull in very different directions.

A: Yes. It’s tough. These countries have very different interests. But since they are all emerging markets with similar challenges,they can learn from each other. The summits are good for that. But one should not expect miracles from the BRICS.

Q: You track the Indian economy too. We have been doing very badly. Although the joke that the “I” in BRICS would soon be Indonesia is past its tell-by date,things are not likely to pick soon enough. But then,Brazil seems to be in the process of throwing away its gains too and landing in a long-term mess.

A: This is a tough year for the BRICS countries and all emerging markets in general. I think there is nowan emerging view that the BRICS countries have gone too far in state capitalism and need to rethink their models. As usual,these views come and go like fashions. In 1997,it was thought that Japan is the champion of the world and the US should take a backseat and learn. It turned out that wasn’t that easy.

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In India,one of the things that has to be sorted out is macro policy. Structural reforms are important,but one of the lessons from Russia’s 1990s is that unless you have macroeconomic stability investors will not invest. I’m happy that Raghuram Rajan is heading the RBI,it’s a great appointment. Then with macroeconomic stability many more things can be done. But for that you’d need political credibility from the government. And that’s exactly what the general election should bring.