In most Russian bookstores, there is a bookshelf or two dedicated to so-called “patriotic literature” – reappraisals of Stalin against “liberal revisionism”, overviews of Russia’s secret super-weapons, the exploits of its special forces and Russian theo-philosophy. Much of it is (apparent) nonsense, but the economic crisis has forced me to reconsider one particular “patriotic” thesis – Andrei Parshev’s Why Russia is not America.
His big idea, an elaboration and tying together of earlier work, is that Russia’s economy is structurally uncompetitive on the world stage, and that integrating with the global economy will lead to catastrophe. This is because of his counter-intuitive observation that Russia is overpopulated. Though its population density is low on paper, the cold climate, huge landmass and poor riverine connections means that the carrying capacity of north Eurasia is nowhere near as high as that of the world’s other centers of economic and political power – the US, China, and Europe. Because manufacturing is inherently loss-making on the Eurasian plains, it is much more economically “efficient” to just ship out Russia’s mineral resources to fuel manufacturing in warmer, coastal regions such as the Pearl River Delta or the Great Lakes. No more than 20mn Russians are needed to service the pipelines and grow fat from the proceeds; the other 120mn are free to eke out a subsistence living on Russia’s marginal lands, or die out (as indeed many did during the era of neo-liberal reforms). He recommended a return to sovereignty, autarky and sobornost as the solution to these woes.
I agreed with Parshev’s analysis upon my first reading of his book in 2002, a time when I still thought Putin was no more than a better-dressed, sober gangster in Yeltsin’s mold and the country showed little signs of real recovery. Yet as evidence mounted that Russia really was prospering by the mid-2000′s and I became influenced by Krugman’s criticisms of competitiveness, I increasingly came to reject his ideas (e.g. see this comment). However, since then increasing awareness of the vital role played by protectionism in “catch-up” industrial development, the reality of peak oil and above all the economic crisis forced me into reconsidering Parshev.
Russia’s Geographic Curse
According to the geographic-determinism school of economic development, Russia is afflicted by a panoply of woes experienced by no other country or region to anywhere near the same extent. This is held to explain its special path of development, in which attempts to “catch up” with the West only end up reinforcing a Sisyphean loop of unrealized ambitions and tragic legacies.
1) Russia is too cold.
But aren’t Canada and Finland prosperous liberal democracies, despite their harsh climate? Yes, they are. But most of Canada’s 30mn-strong population is concentrated around the Great Lakes, Vancouver and Newfoundland. The former has great riverine connections with the dynamic US heartlands, while the latter two have maritime climes with excellent deep sea ports. There are a few millions living in the agriculturally productive Canadian Prairies (equivalent to Russia’s Black Earth regions). However, Canada has nowhere near so many people living so far north and so far inland as Russia.
Without central planning and subsidized energy flows, it is highly unlikely that settlements in deepest Siberia or the High Arctic could have developed into substantial population centers. Manitoba-Saskatchewan-Alberta (5.9mn) together have fewer people than the demographically weakest Russian Far East (6.7mn), let alone Siberia (20.1mn), the Urals (12.4mn) and the Volga (31.2mn) which all have similar or worse climatic conditions. Just compare the populations of the following rough climatic equivalents: Moscow (14.8mn) and Calgary (1.1mn); Irkutsk (594k) and Yellowknife (19k); Norilsk (135k) and Churchill (923).
As for Finland, it is climatically and geographically equivalent to St.-Petersburg and the Leningrad Oblast, which are atypical in having relatively mild climes and sea access during the warm seasons. Even so, Finland has an unremarkable GDP per capita compared to other developed nations, despite it having some of the best human capital in the world.
The cold makes growing seasons short and late spring droughts are a recurrent problem. This traditionally made Russian agriculture outside the southern Black Earth regions (where the cold is mitigated by exception soil fertility and access to the seas) unproductive and barely sufficient for population subsistence.
This in turn gave rise to peasant cultural traditions deeply averse to the development of capitalist enterprise, with its emphasis on individual initiative and steady capital accumulation. The classic Kluchevsky quote from the 19th century:
There is one thing of which the Great Russian is sure − that a sunny summer day is valuable, that nature would allow little time convenient for agricultural work and that a short Great Russian summer can be shortened even more by a sudden untimely turn of bad weather. This would force the Great Russian peasant to hurry up and toil in order to achieve as much as possible over a short while and take the crop in good time… In this way the Great Russian would learn to take an extraordinary but short effort, would learn to do rush, hasty work and then take a rest during forced idleness in autumn and winter. No other nation in Europe is capable of such short extraordinary effort; but, on the other hand, such lack of habit to regular, moderate, constant work is unlikely to be found anywhere in Europe.
Though peasants view capitalists with suspicion throughout the world (money relations are a threat to the village social relations that serve to guarantee subsistence to its members), the precariousness of Russian agriculture reinforced the antipathy and encouraged the formation of a strong state capable of accumulating and protecting surpluses in the good times to insure the people from dearth in the bad times. It is probably no accident that the Russian state arose out of Muscovy, one of the remotest and least agriculturally productive regions, which however compensated with overwhelming military and political power.
Of course, the influence of climatic factors is much weaker on industry and services, than on agriculture. They have higher added value and the severe cold is mitigated by Russia’s energy riches, made exploitable by the Industrial Revolution. That said, the infrastructure costs remain significantly higher than in more climatically benign nations.
As you can see from the map above, east of Poland and north of Romania, Crimea and the Caucasus, Eurasia is afflicted by deep permafrost. This necessitates laying thick, heated concrete foundations and makes constructing housing, factories and skyscrapers far more costly than in developed nations, despite Russia’s cheaper labor force.
2) Russia is too big and remote.
Russia is in the paradoxical position of being at once overpopulated and underpopulated. Overpopulated in that it is too cold and harsh to sustain a big population; underpopulated in that the population density is low, which makes transport costs per capita prohibitively high. The challenge posed by its huge size and lack of sea ports was noted as far back as the 18th century by Adam Smith in his Wealth of Nations.
…all that part of Asia which lies any considerable way north of the Euxine and Caspian seas, the ancient Scythia, the modern Tartary and Siberia, seem in all ages of the world to have been in the same barbarous and uncivilised state in which we find them at present. The Sea of Tartary is the frozen ocean which admits of no navigation, and though some of the greatest rivers in the world run through that country, they are at too great a distance from one another to carry commerce and communication through the greater part of it.
This is also a constant theme of Stratfor‘s analysis (e.g. see The Recession in Russia).
Throughout history, Russia has lacked navigable river transportation and access to ocean trading routes. Furthermore, Russia’s population is scattered across its vast territory, its natural resources are mostly found in unpopulated areas and a number of regional challengers constantly threaten its territorial integrity. Russia’s core is essentially the northeastern portion of European Russia…
With vast territory, constant expansion to the buffers and a lack of internal transportation, Russia requires a substantial amount of resources to maintain and defend its borders. It requires top-down management of the economy to focus resources on overcoming geographical impediments to development and security. As such, Russia is not a capital-rich country; it is starved for capital by its infrastructural needs, security costs, chronic low economic productivity, harsh climate and geography. Unlike the United States or the United Kingdom, where industrial and post-industrial economic development can spring forth with little or no direction thanks to favorable geography (intricate river transportation systems in the United States and access to oceanic trade routes for both) and the relative security of oceanic barriers, Russia has had to rely on firm state-driven economic development.
Railways ameliorated Russia’s situation by vastly decreasing transport costs across its barren continental swathes, thus reducing the relative advantages enjoyed by the Rimland nations through virtue of their access to sea traffic. (This development was noted more than a hundred years ago by the geopolitical theorist Mackinder, who was concerned by the strategic threat Russian railways posed to British-ruled India). Meanwhile, the telegraph, telephones, radio, TV and eventually the Internet nullified the effects of distance on information exchange.
Nonetheless, Russia continues to incur great costs on account of its cold, continental nature. Road and railway maintenance are relatively hard and expensive in Russia, which has more limited spare resources in the first place. It also largely misses out on the great productivity gains accruing from the cargo freighter revolution of the late industrial age. Outside the Moscow road rings and the Moscow – St.-Petersburg corridor, highways remain little more than directions.
3) Russia has too many enemies.
Given its origins as a settled, economically-weak civilization surrounded by foreboding plains dominated by Asiatic horsemen to the east and Germanic, Scandinavian and Polish rivals to the west, Russia’s rulers have always felt insecure. This drove them to expand the Empire since the 15th century to occupy natural buffers, as far down the North European Plain as possible, to the Carpathian Mountains to the southwest, the Caucasus and Hindu Kush to the south and the Altai Mountains, Tian Shan and Stanovoy Range in the Far East. As Catherine the Great pithily put it, “I have no way to defend my borders except to extend them”. Below is a map showing how Russia’s geo-strategists view the world:
Poor internal communications and technical deficiencies forced Moscow to main large standing armies on every potential front, incurring a constant drain on scarce resources and the productive labor pool. More resources were required for administering non-Russian lands, maintaining a formidable internal policing apparatus, and funding the development of strategic sectors, above all those tied to military applications. Security vacuums in Russia’s periphery drew in Russian troops and bureaucrats. All this makes imperial overstretch, economic inefficiency and primitive consumer markets constant features (not bugs) of any Eurasian empire.
4) Russia retains a burdensome Soviet legacy.
Though technological developments partly mitigated the negative roles of climate and geography in Russian economic development, the Soviet physical legacy of single-industry towns, “gigantism”, remote settlements, and “structural militarization” acted in the opposite direction.
Towns were built in remote areas, including the High Arctic and the Far East, regardless of costs and explicitly designed to serve a planned economy. Heating in apartment blocks was centralized, meaning that even if half the inhabitants left the rest were still entitled to utilities services. All this constituted a massive diversion of energy flows from more “efficient” purposes. Many of these towns relied on just a few large industrial employers to survive; closing the enterprise down, even if it was high unprofitable, would have resulted in humanitarian catastrophe. Incidentally, this is precisely the reason why the neoliberal reforms of the 1990′s weren’t (and probably couldn’t be) really carried through.
Stalin built up the foundations for a gargantuan military-industrial complex (MIC) centered in the remote, uninviting Urals. After the 1960′s, the MIC metastasized to such an extent as to constitute around 30% of Soviet GDP by the mid-1980′s. Though activity collapsed in the 1990′s, Russia retains a structurally militarized economy. Though currently dormant and atrophied, it can be easily reconstituted. In the mean-time the MIC continues to lock up a great deal of Russia’s human and capital resources, along with the armed forced and its vast array of security agencies.
Why America is not Russia
The US is structurally different in almost all respects. Though it has a huge continental interior, its fertile areas are interconnected by an extensive riverine network that remains ice-free throughout the winter months. It possesses excellent sea ports on both coasts. The Great Lakes region is perhaps the best place anywhere in the world for industrial development.
America’s strategic isolation and massive internal potential allow it to maintain a world class navy and expeditionary forces with ease. The US uses them calculatedly and sparingly to check the emergence of any Eurasian hegemon, the only construct that has any chance of challenging its global preeminence. And it is not afflicted by economic distortions from its deep past because America was, at least internally, a consistently free market nation since the earliest days of its founding. Its small population and abundant resources produced large per capita surpluses, sparing it from the Malthusian crises that periodically stunted older civilizations, and instead spurring on the development of free-wheeling capitalism.
From Stratfor‘s The Geography of Recession:
The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.
Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intracoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.
The real beauty is that the two overlap with near perfect symmetry. The Intracoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.
The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy — transport capability — geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)
Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.
Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport…
With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.
Like the transport network, this also helps the U.S. focus its resources on other things.
Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.
Russia’s Return to the Future
As I pointed out earlier here and here, Russia is returning to the future. Its demography is stabilizing after the precipitous collapse of the 1990′s, and social morale and faith in the nation is slowly returning, to the dismay of geopolitical competitors, “Russophobes” and “social progressives” alike. Russia is implementing an industrial policy aimed at manufacturing growth and technology diffusion. The state brought the regions back under its thumb and is again becoming the linchpin of the Russian economy. The party’s over for Russia’s oligarchs:
Because of the financial crisis and government consolidation, the once-powerful oligarchs no longer have a say in their future and are merely along for the ride. Indeed, they no longer constitute a powerful and distinct business “class.” Some oligarchs will survive the shakeout, but not with their independence. To some degree, they all will become part of the Kremlin machine so carefully engineered by Putin. As copper oligarch Iskander Makhmudov said in a rare interview: “The oligarchs now have mixed fortunes, but we will all end up being soldiers of Putin one day.”
Instead of liberalizing, the economic crisis has simply reinforced already latent trends in Russia’s economic development. Russia’s ongoing globalization since the 1970′s is slowly beginning to reverse itself; Russia’s decision to apply to the WTO as part of a customs union with Belarus and Kazakhstan is an early indicator of an accelerating trend. Much of what I predicted in The Importance of Self-Sufficiency half a year ago is already coming to pass:
A wave of consolidation will occur in the Russian banking industry, Russia Inc. will close the oil windfall-foreign intermediary-cheap credit loop that was its prior financing mechanism and the country will emerge with a stronger, self-sufficient financial system. The oligarchs, Moscow and the middle classes bear the brunt of the crisis, while the provinces, agriculture and domestic manufacturing benefit, thereby reinforcing already latent tendencies in national development.
Though the drop in Russia’s output was far greater than I expected, it was far worse in Ukraine and the Baltics. Ukraine’s project of Westernization has failed utterly. According to my quick back of the envelope calculations, its GDP is currently (taking into account the recent collapse) around 30-40% lower than it was in the late USSR! (Russia’s is around 0-10% lower, but it is not faced with a fiscal or political crisis). Thus, though there is a possibility of a humanitarian crisis and a demographic shock in Russia, it is much lower than in Ukraine – where in any case a post-Soviet fertility recovery is much less in evidence in the first place. Damningly, opinion polls indicate that Putin and Medvedev are by far the most popular politicians in Ukraine.
Decline and disillusionment in Ukraine, and the return of isolationist nationalism to Russia. What next? History is a guide. A fundamental feature of autarkies is that to be truly self-sufficient they need to expand their domain, much as the Bolsheviks created the Union of Soviet Socialist Republics, which in turn expanded it to COMECON. It has to expand territorially in order to have access to all the vital building blocks of an industrial economy and to be able to hold its own against other economic blocs, which are more tightly interwoven into the world market. As such, it is very likely that within the next decade Ukraine, Belarus and Kazakhstan will again become integrated with Russia, on a spectrum of possibilities ranging from an EU-like structure to a unitary state-empire.
Reintegration will create a state with 210mn souls and will significantly increase the industrial (including military-industrial) power at Moscow’s disposal by at least 50%. One has to keep in mind that Eurasia’s industrial base was meant to be unified when it was constructed during the Soviet era, and as such the gains accruing from reintegration will be more than just the sum of its parts. One of Russia’s geopolitical priorities is to thwart an independent energy corridor for the proposed Nabucco oil pipeline and to link up with its ally Armenia, so it will no doubt continue pressuring Georgia to return into its orbit. Saakashvili’s days in power are almost certainly numbered. Whether Russia will choose to expand in Central Asia is more questionable. On the one hand, they have respectable energy reserves (especially gas), constitute demographic reservoirs amidst graying Slavdom and are geopolitically important. There are few problems with radical Islam and on the whole they appreciate Russian culture. On the other hand, they will present a development burden and China will likely oppose an overt Russian reassertion in Central Asia.
I do not think these trends are possible, or even desirable, to arrest, even should the Kremlin leadership want to (they will be pulled along by the Russian people). The reasons why they are inevitable, I leave to a later post.
Why they are nothing to lament over can be answered now – because of other key global trends. Russia’s oil production very likely peaked in 2008, along with global production. Conserving what remains for its own use should be a priority; exports should only be allowed on the most favorable terms, in exchange for Western technologies, not US Treasuries, Chinese trinkets or oligarch mansions in London. One consequence is that there will be increasing competition for resources. The industrial core (the US, Europe and China) will probably strike up strategic alliances to control and influence resource-rich nations, either overtly (latter-day gunboat diplomacy) or covertly (influence operations, information wars, etc). In this world, much like in the 1930′s, the strong will beat the weak. As such, Russia’s geopolitical priorities would logically be – and this already seems to be happening – to a) maintain its military strength, including the nuclear deterrent, b) neutralize and co-opt Europe and c) extend influence over the energy-rich Arctic, Central Asia and the Middle East. To pursue these goals effectively, it needs economic sovereignty, morale, and the attributes of an empire (in Russia’s case, these are all inter-linked).
The era of childish enchantment with the West, pursued by Andropov’s successors, is coming to an end, at last dispelled by the deafening crash of globalization.