US has no way to end Putin's dream

By Wu Fei & Wu Yuhong
0 Comment(s)Print E-mail, August 23, 2015
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Outsiders have had a blurred version of Russia's economic development since Putin took office in 2000. They think it a development mode based on banking and energy that cannot withstand any economic crisis in the West. Certainly, the United States held that view. However, Russia's internal development model is not that simple.

Russia has spent heavily on defense and welfare since its energy-based economy began to make a profit, because good social welfare enables the government to meet the common aspirations of the people unfulfilled since the disintegration of the former Soviet Union.

The inexorable trend of Russia's leading position in science and technology will be the smooth transition of military technology for civilian use, so the government will certainly continue this investment.

America has lost contact with Russia since 2008

American think tanks faced a predicament when handing the Ukraine crisis, reflecting a lack of expertise in Russian affairs. Since the Soviet Union's disintegration, many experts divided their research focus between the Commonwealth of Independent States (CIS) and China.

Now, the United States faces three major questions. First, how strong exactly is the anti-strike capability of Russia's economic model? Second, how severely did Western economic sanctions imposed on Russia hurt the EU? Third, how firmly is Russia determined to bear sanctions to resist NATO's eastward expansion?

In fact, Putin has pointed out that the economic issue is not simply about the market economy, but also involves politics and society. Even if Russia enjoys rapid economic development, with its enterprises gaining profits and its people's income doubled and redoubled, it would still not be a strong power, and would continue to be regarded as the Cold War loser.

Russia's development must have its own model to cope with crisis and transform smoothly. Blind imitation of the American market economy will only result in having to face US sanctions with no strength to hit back. This was undoubtedly exposed in the 1998 Russian financial crisis.

Since 2008, Putin has sought to achieve a balance between the market economy and the national one, and establish an immunity mechanism to cope with any Western economic sanctions. China may also face such sanctions due to the South China Sea issue or the Diaoyu Islands issue, so this sort of immunity is our need, too.

End of oligarchs and the establishment of a state-owned economic system

While coping with the financial crisis in 2008, Putin agreed with economist Alexei Kudrin's proposal to implement tax reform starting Jan. 1, 2009 to reduce the tax on the profits of domestic manufacturing enterprises.

However, a considerable Ruble devaluation occurred, and Premier Dmitry Medvedev and President Putin repeatedly ordered the central bank governor Sergei Ignatyev to conduct appropriate exchange rate operations to regain control.

However, Kudrin strongly discouraged Ignatyev from using the gold reserves to interfere with the free floating of the currency; in his opinion, artificially holding back a devaluation would make it hard to determine the actual market price, leading enterprises to make a wrong judgment. Moreover, it is very stupid to use gold reserves in the operation of an exchange rate. Fortunately, the oil price soon began a slow recovery to rescue the currency.

Early in 2009, Kudrin encouraged government departments to reduce spending, and Putin agreed.

Strengthen social welfare to meet common aspirations of the people

In Kudrin's opinion, a crisis is the best time to reform; expansive policies are necessary, but reform is fundamental – that is to mobilize social enthusiasm to solve the most entrenched problems involving the social welfare system, especially pensions.

In mid-2009, Putin began to reform the pension system, and payments soared more than 50 percent. Kudrin believed this decision was determined by populism, and the Russian government didn't have the money to support it, and therefore was forced to increase taxes to meet the bill. In fact, he continues to hold that view.

National defense serves national strategy again

After the war between Russia and Georgia, three Russian governmental departments applied for budgetary allocations – 28 trillion rubles for the Ministry of Defense, 13 trillion rubles for the Ministry of Economic Development, and 9 trillion rubles for the Ministry of Finance. Putin held a coordination meeting that produced an agreement all sides could accept for the moment.

To Kudrin, the president's and premier's attitude marked the first step deviating from the normal track of economic reform.

On Nov. 30, 2010, Medvedev formally announced the plan that Russia would strengthen its national defense and promote military construction. On Dec. 31, a 20-trillion grant was formally signed for the Department of Defense. Later, an additional 300 billion rubles was allotted to cover a series of necessary plans, such as raising soldiers' living standards.

After that, Kudrin refused to take the position of central bank governor which Putin had kept for him and quit completely.

Putin has chosen the policy of developing the economy and national strategy at the same time. He believes that only in this way can Russia return to the forefront of strong powers. Former Treasury Secretary Kudrin couldn't understand this thinking, yet, they remain good friends and Kudrin's economic policy remains in use.

Russia's political rise has been very obvious since the crisis in Ukraine. This is Putin's dream that the United States presently can neither understand nor end.

Wu Fei is a senior research of the Charhar Institute and professor of the School of Journalism and Communication at Jinan University. Wu Yuhong is a researcher with Jinan University.

This article was translated by Li Jingrong based on the original unabridged version published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of

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