Foreig Policy (USA): Myths about Russia

The history of Russia for the West has always been fraught with misinformation. The 2009 article debunked most of the myths in the country’s recent history. Economic pit, strong leaders, foreign investment and much more: the author offers a new look at most stereotypes.

In the Soviet Union, which was a closed society, there was fertile ground for all kinds of myths, since people were allowed to make very different assumptions about almost everything, and no one cared to expose these myths. Ironically, the transformation of Russia into an open society has generated its own mythology. When Russia’s flaws were put on public display, Western politicians and the media generally began to describe this former superpower as a declining, corruption-damaged country with crumbling infrastructure. However, most of these shortcomings were inherited from the Soviet era of mismanagement, which is only now beginning to be corrected.

Myth one: “The Russian economy collapsed”

Not true. According to Russian official statistics, GNP for the period from 1989 to 1998 increased by 44%. However, this figure is greatly exaggerated due to the characteristic twists and turns of communist and post-communist statistics.

Under communism, everyone struggled to achieve the goals of a planned economy, while no one cared about the quality (or even utility) of the output. For example, in the USSR tractors were produced more than 6 times more than in the United States, but it was significantly behind the United States in terms of agricultural production, since unproductive costs were very high.

Much of what was produced in the USSR was unsuitable for consumption, and therefore, after the liberalization of foreign trade, markets were flooded with imported goods.

The subsequent reduction in the production of useless final products and unnecessary labor was not a tragedy, but a welcome change. At least one fifth of the output produced in Soviet times fell into one of these categories, and therefore estimates of the volume of GNP of the Soviet era should be reduced accordingly.

After communism, statistical estimates of output fell much more than its real level. Judging by the best possible estimates, the shadow economy accounts for at least a quarter of this discrepancy. Thus, the Russian economy has not collapsed. It would be more accurate to say that until 1998 the economy was stagnant due to sluggish and incomplete reforms. The level of economic development in Russia remains the same as it was in the Soviet era: somewhere on a par with Brazil.

Russia has not created a new “virtual economy” based on barter instead of money. The share of barter transactions in Russian industry peaked (54%) in August 1998, but the financial crash dealt a severe blow to this system of hidden subsidies, which was the norm for Russian enterprises. Transactions without payment went down sharply as soon as Russian industry realized that it was no longer necessary to rely on the state and that real money could be earned in the market. Today, the virtual economy is minimized.

According to the latest official data, the GNP of Russia in 1999 grew by 5.4%, and in 2000 – by 8.3% and its growth is ongoing. Although many systemic problems remain, Russia seems to have gained a critical mass of market reforms and privatization. (The same is true for a number of other countries in the region, such as Kazakhstan, which is also flourishing.) Given the fact that communism inherited huge distortions, this is a great achievement.

Myth two: “Shock therapy has not reached its goal.”

No, it is not. In our time, it is generally accepted that Russia’s economic and social troubles stem from radical economic reforms (such as price liberalization and privatization) that were launched too early and carried out too quickly.

However, the economic mess before the collapse of the Soviet Union – the legacy of many years of gradual, inadequate reform – almost left no choice to former Russian President Boris Yeltsin. Simultaneously with Russia, more than 20 former communist countries have embarked on the path of market economic reforms; the most successful countries with high rates of economic development and successfully restrained corruption (for example, Poland and Estonia) have undertaken much more radical reforms.

Almost all the problems in today’s Russia – excessive state intervention, corruption, high tax rates, not decreasing inflation and limited rule of law – are evidence of the lack of reform efforts. Over the past two years, Russia has seen significant economic growth and significant structural improvements after the terrible financial crisis that shocked the whole world in August 1998.

The financial crisis has reduced the financial wealth and political power of the two most corrupt groups in Russia: oligarchic magnates and regional governors. More surprisingly, he convinced both the Communists and the country’s population as a whole that there was no alternative to a real market economy. The real problem for Russia was that the shock was too weak, and the therapy of the corrupt state in the form of subsidies to the country’s elite was too strong.

Myth three: “Privatization only spawned new corruption.”

Not true. Instead of saying that privatization has generated corruption, it would be more correct to say that it has generated national wealth. Since 1997, the Russian private sector has created at least 70% of the country’s GNP.

Corruption is usually defined as “abuse of public power for personal enrichment,” but privatization forever deprives the “servants of the people” of access to public property so that they can no longer take money for the selective provision of the right to use this property. Today, bribery, which affects the whole of Russia, has nothing to do with privatization, but the vast majority is related to law enforcement practice, tax collection and government intervention in the economy.

In general, the higher the level of privatization achieved by the former communist country, the higher the rate of economic growth. Russia is atypical in that it has achieved more serious successes in privatization than in other market reforms, such as price liberalization. Consequently, people tend to blame Russian privatization for all the troubles of this country, while it would be more logical to complain about the insufficiency of other reforms. Punishment for Russian enterprises is dozens of state inspections that regularly draw money from business people.

Oddly enough, they usually compare privatization in Russia and Poland, while arguing that Poland is being privatized at a slower pace. In fact, Poland initially had a large private sector, which was larger than in Russia. But Poland carried out more reforms in all areas, and this suggests that if Russia had not been privatized so quickly, it would most likely have slipped into depression.

Ukraine is implementing most of the reforms, including privatization, more slowly than Russia. As a result of this, Ukrainian privatization is of poorer quality than Russian, since former directors and employees more often become owners of enterprises and far less often enterprises are put up for free sale. Corporate governance in Ukraine is much worse than in Russia, where last year almost 800 enterprises actually paid dividends to their investors.

Myth Four: “Russia Can’t Collect Taxes”

Pure misinformation. Russia collects about one-third of its official GNP into state revenue, slightly more than the United States, whose citizens complain that taxes are too high. Tax collection in Russia is not only high, but also very stable. Incorrect estimates of the Russian tax system stem from superficial observations. Most outside observers, including the International Monetary Fund, tend to focus on federal taxes — however, they are only part of the general tax collection for the country, which also collects regional and local taxes, and also contributes to several extrabudgetary funds, such as Pension Fund.

Another source of misunderstanding is that many observers, including some Russians, believe in the order of things that Russia should have tax levies at the level of Western Europe or the former Soviet Union, ignoring the fact that such tax practice is in all cases harmful to economic growth. As for Russia, more acceptable tax rates, corresponding to the level of its economic development, would have to give 15-25% of its GNP.

The real problem is not that Russia does not know how to collect taxes, but that the government is taking too much. Revenues to the state budget from taxes are misused and exacerbate the problem of corruption. According to the World Bank for Reconstruction and Development, in 1998 at least 16% of Russian GNP was spent on subsidies to enterprises. (Not surprisingly, public finances have collapsed.) Moreover, tax collection is carried out by cruel methods. Acts of lawlessness committed by tax inspectors have become one of the most serious concerns of the post-Soviet era.

The obvious solution that has now appeared is the low single tax rate. This year, Russia introduced a single tax of only 13% (the rate that the United States and Western Europe can only dream of). Immediate tax collection increased by 70% as people abandoned expensive tax evasion schemes.

The fifth myth: “The infrastructure of Russia is crumbling”

Think again. Dramatic episodes like the tragic flooding of the Kursk submarine and the fire at the Ostankino television tower in Moscow created the impression that Russia was creeping apart. In fact, Russia’s infrastructure has improved significantly. Investments in real estate (buildings, equipment) last year increased by 18% – amounting to about 20% of GNP (higher than the standard share of these investments in the USA, amounting to 16%). It is true that in the USSR the share of such investments amounted to about 30% of GNP, but this only indicated useless expenses. The Soviet Union was notorious for its neglect of infrastructure and its maintenance.

Today, privatization and a market pricing system are revitalizing a large part of the infrastructure. Free-market competition has contributed to the incredible expansion of the telecommunications sector. Likewise, airports and airlines have been improved. The construction of roads is increasing. Around St. Petersburg, new sea ports are being built. If once the ruins spoiled the look of even the Soviet capital, then in modern Russia the construction boom has spread throughout the territory. The problems of maintenance and repair where the state monopoly structures continue to do this, for example, Gazprom’s natural gas monopoly, and partly municipal services, are still not resolved.

Myth Six: “Russia is in desperate need of foreign investment”

This is not entirely correct. Worldwide, from East Asia to post-communist Eastern Europe, exports, rather than foreign direct investment, have contributed to a healthy economy. Even Poland, which had achieved the greatest success in transforming the economy, had no direct foreign investment above $ 100 per capita until 1998. In contrast, Hungary and the Czech Republic managed to attract large foreign investments at an early stage of economic reform, but these investments, as it turned out, did not contribute much to economic growth. After all, most investments are almost always domestic.

Russia does not need foreign capital in order to accelerate the pace of investment. Although large capital is constantly flowing out of the country (more than $ 20 billion a year), the share of investments is higher than that of the United States. The leak of capital is explained by the fact that a significant part of the savings the Russians place abroad – a resource for the future. Enterprises, like wealthy citizens, prefer to keep their money in safe banks outside of Russia, where legislation is stronger.

However, the investment climate in Russia remains poor mainly due to the excessive dominance of bureaucracy and corruption in law enforcement agencies. In order to continue sustainable economic growth, Russia needs to solve this problem.

Myth seven: “Russia is suffering from an irreversible crisis in the field of public health”

Exaggeration. Indeed, statistics from today’s Russia are shocking. The average life expectancy of men in the period 1989-1994 decreased from 64 to 57 years, and the population of the country decreases annually by more than half a million people. But statistics alone will not tell everything. The decline in population has two reasons.

The first is a low birth rate, which is typical for Europe as a whole. The economic incentives that existed under communism for young people to have children as early as possible have disappeared. Today in Russia, as in many other Western countries, women put off procreation for later. Another reason for the decline in population is high mortality.

The age composition of the population is uneven, since very few children were born between 1930 and 1945, which is associated with state terror and the war, and a significant group of people born before 1930 are dying out today. According to the latest UN forecasts, the decline in Russia’s population (by 28% by 2050) is not much worse than in some other parts of Western Europe.

Population reduction is not a purely Russian problem, but the problem of the whole of Europe. The situation is much worse in Estonia and Bulgaria, where the UN predicts a 40% decline in the population by 2050. The drop in the average life expectancy of men (women still live long enough) is characteristic not only of Russia, but also of the East Slavic and Baltic countries. (Oddly enough, there is no such decline in the devastated wars and really impoverished Georgia and Armenia.) The direct causes are cardiovascular diseases and accidents, partially triggered by alcoholism.

The dramatic decrease in life expectancy can be explained by the anti-alcohol campaign of former USSR President Mikhail Gorbachev – which temporarily limited the population’s access to alcohol and thereby increased the average life expectancy by a couple of years – followed by a sudden increase in alcohol consumption, when excessively active Soviet times were canceled high excise taxes on the sale of vodka.

Nothing says that average healthcare standards in Russia have declined. The quality of health care is closely linked to child mortality, which increased by 17% between 1993-1998. Both public and personal expenses of citizens to maintain their health have risen sharply (as a percentage of GNP). Capitalism made drugs affordable for the general public, which was never the case in the Soviet era, and the equipment of hospitals with medical equipment has improved significantly.

However, some problems give cause for genuine concern. One of them is the spread of drugs and the increase in the number of HIV-infected citizens, which is an inevitable consequence of open society. Another concern is the tuberculosis epidemic (a new, drug-resistant strain of this bacillus is of particular concern). Moreover, since the healthcare system remains predominantly public, it suffers from all the problems associated with low salaries, low efficiency and bribery, which were characteristic of the public sector under communism.

Myth 8: “Russia is a Black Hole for Western Aid

Nonsense. The deep conviction that Western aid to Russia is enormous prevails. In fact, this help is negligible. For the period 1992-2000, the US Agency for International Development promised to allocate $ 2.6 billion to Russia. However, actual payments are always less than promised: Russia received only about $ 200 million from the USA in the form of subsidies, while the European Union gave only about 150 million dollars a year.

In addition, the United States provided food assistance – partly in the form of subsidies, partly in the form of loans for food purchases – but this was done at the request of the American agricultural lobby and could qualify more as financial assistance to American farmers. (In fact, this prevented the reform of Russian agriculture.) The United States also financed a decrease in the nuclear status of the former Soviet Union, but again this was mainly done in the interests of the United States, not Russia.

Russia received nearly $ 15 billion from the International Monetary Fund in the form of stabilization loans, all of which must be repaid with interest, and Russia has already returned almost half of the above amount. The World Bank allocated a total of $ 12 billion to it, but also in the form of loans, which must be repaid with interest. Thus, since the end of the Cold War, Russia’s Western subsidies totaled about $ 5 billion (equivalent to the total US assistance to Israel and Egypt in one year), with most of this money spent on Western consultants.

The United States, for its part, received huge benefits from peacetime dividends that came with the disappearance of the Soviet military threat. In the 80s, the United States spent 6% of its GNP on defense compared to 3% ($ 300 billion a year) – at present. Americans should thank Messrs. Gorbachev and Yeltsin, and not their former President Bill Clinton or the US Congress, for budget bridging. The US $ 300 billion annually donated by Russia to the United States should be compared with so much of the American compensation discussed in the amount of some $ 200 million per year (a difference of 1,500 times). But be that as it may, Western aid has done a lot in Russia.

The International Monetary Fund helped the Russian financial stabilization, and at no cost to American taxpayers, and therefore today this fund can declare its victory and go home. At minimal cost, the United States Agency for International Development and the World Bank have contributed to Russian privatization — the largest that the world has seen, and one that can still be a huge success. The consultants helped to bring about such profound changes in the Russian economic worldview that today the vast majority of Russians are more oriented towards a market economy than Western Europeans.

In short, Western aid to Russia was an astounding success, given its meager size. It seldom happened that such little money allowed a decisive turning point to be realized. It must be admitted, however, that if Russia had been given more money in the initial period, then more could have been achieved.

Myth nine: “Russia needs General Pinochet”

No thanks. Many Russians and foreigners believe that Russia’s problem is its lack of a strong leader, and many consider democracy to be an obstacle to active economic reforms (these are the arguments of the school of modernization). Similarly, supporters of the Chinese model for Russia advocate dictatorship instead of democracy. Even worse, these ideas are popular with the Russian elite.

All over the world, there is a positive correlation between democracy and market reforms, and in the former communist world this correlation is extremely close. The reason is obvious: the main threat to successful transformation is the old, powerful elites who usurp the state for personal gain. Democracy and vibrant media are the best counterweight to this elite. Strong presidential power also does not benefit reform. Countries in transition, where reforms have progressed least, are just under presidential rule, while in the most liberal countries there are parliamentary systems that can limit the power of centralized governments.

A significant part of anti-democratic statements stems from the notion that political stability is good for reform. However, in practice it is fairly opposite. The lengthy tenure of President Yeltsin, who had health problems and passive Prime Minister Viktor Chernomyrdin, gave Russia “stability,” which favored a corrupt elite. Poland, the three Baltic states and Bulgaria in the last decade have changed their governments on average almost every year and today they are among the most successfully reformed countries.
Contrary to popular belief, the Communists do not threaten truly radical reforms, such as were carried out in Poland and Estonia.

(In recent years, the old Communists won elections in just two countries, Romania and Moldova, where government officials implemented very modest reforms). Russian communists remain relatively strong because reforms in Russia are slow. However, these reforms have advanced enough to prevent the Communists from running.

The notion that democracy is bad for reform suggests that the elite are good and smart, while ordinary people are stupid and short-sighted. However, all evidence indicates that the illicit enrichment of the elite creates problems for society. The population needs to mobilize and organize to keep the elite from excesses, and the most effective way of public control that we know is democracy and freedom of the press. Widespread disrespect for democracy and the suppression of media freedom are the greatest dangers in today’s Russia.

Myth Ten: President Clinton Lost Russia

Arrogance. First, Russia is far from lost – only in the minds of some people. At the same time, it is too pretentious and wrong to think that the United States could dictate the course of events in Russia. Although Russia is no longer a superpower, it remains a huge sovereign country, retaining a great influence on world affairs. The very idea that the United States “lost Russia” suggests that America disrespects the sovereignty of other countries.

America had one short opportunity to influence the future of Russia. This was at the beginning of 1992, when Russia had a government led by Prime Minister Yegor Gaidar, who was seriously trying to carry out radical economic reforms.

The United States, however, did nothing to support Mr. Gaidar’s efforts at a time when even a little support could change the course of history. But at that time, the president of the United States was not Bill Clinton, but George W. Bush (George Bush Snr). Such a historical opportunity no longer presented itself, and therefore the epitaphs on the grave of Mr. Bush Sr. should have been: “The man who overslept the end of the Cold War.”

The Russians are beginning to believe more and more that President Yeltsin was wrong, agreeing to many US demands in his attempts to establish friendly relations with them, while China’s tough foreign policy with regard to Washington turned out to be more successful.

The United States of America expanded NATO eastward, creating a threat to Russia, but did not give it anything in return. The American media and the US Congress aggressively criticize Russia more often than China. Many Russians even claim that China acted wisely, retaining a tough dictatorial regime under the hegemony of America. (source: rambler)