F W Engdahl -- Putin: Nyet to Neo-liberals, Da to National Development

02.08.2016 Author: F. William Engdahl

Putin: Nyet to Neo-liberals, Da to National Development

Column: Economics

Region: Russia in the World

After more than two years of worsening economic growth and an economy struggling with 10.5% central bank interest rates that make new credit to spur growth virtually impossible, Russian President Vladimir Putin has finally broken an internal factional standoff. On July 25 he mandated that an economic group called the Stolypin Club prepare their proposals to spur growth revival to be presented to the government by the Fourth Quarter of this year. In doing so, Putin has rejected two influential liberal or neo-liberal economic factions that had brought Russia into a politically and economically dangerous recession with their liberal Western free market ideology. This is a major development, one I had been expecting since I had the possibility to exchange views this June in St. Petersburg at the annual St. Petersburg International Economic Forum.

With very little fanfare, Russian press a few days ago carried a note that could have a most profound positive significance for the future of the Russian domestic economy. The online Russian blog, Katheon, carried the following short notice: “Russian President Vladimir Putin instructed (the Stolypin economist group–w.e.) to finalize the report of the Stolypin Club and on its basis to prepare a new program of economic development, alternative to Kudrin’s economic plan. The program itself should be given to the Bureau of Economic Council in the IV quarter of 2016.”

In their comment, Katheon notes the major significance of the decision to drop the clearly destructive neo-liberal or free market approach of former Finance Minister Alexei Kudrin: “The Stolypin club report advises to increase the investment, pumping up the economy with money from the state budget and by the issue of the Bank of Russia. In turn, the concept of the Center for Strategic Research (Alexei Kudrin) suggested that investments should be private and the state is to ensure macroeconomic stability, low inflation, reduced budget deficit.”

Kudrin failed

In the current situation of severe Western economic and financial sanctions against Russia the flows of such private investment into the economy as the Kudrin camp advocates are rare, to put it gently. Cutting what is a very minimal budget deficit only increases unemployment and worsens the situation. President Putin has clearly realized that that neo-liberal “experiment” has failed. More likely, is that he was forced to let economic reality unfold under the domination of the liberals to the point it was clear to all internal factions that another road was urgently needed. Russia, like every country, has opposing vested interests and now clearly the neo-liberal bested interests are sufficiently discredited by the poor performance of the Kudrin group that the President is able to move decisively. In either case, the development around the Stolypin Group is very positive for Russia.

In convening the new meeting of the Economic Council Presidium on May 25, after a hiatus of two years, President Putin, noting that the group deliberately consisted of opposing views, at that time stated, “I propose today that we start with the growth sources for Russia’s economy over the next decade…The current dynamic shows us that the reserves and resources that served as driving forces for our economy at the start of the 2000’s no longer produce the effects they used to. I have said in the past, and want to stress this point again now, economic growth does not get underway again all on its own. If we do not find new growth sources, we will see GDP growth of around zero, and then our possibilities in the social sector, national defense and security, and in other areas, will be considerably lower than what is needed for us to really develop the country and makeprogress. “

Now just two months later, Putin obviously has decided. He clearly has an eye as well to Russia’s next presidential elections in March 2018. In doing so he has selected the one group of the three on the Economic Council that believes that the state has a positive role to play in development of the national economy.

The Stolypin group in many ways harkens back to the genius behind the German “economic miracle” after 1871, whose ideas created the most impressive economic growth from backwardness in all Europe within just over three decades. The only other countries to come near to that German economic achievement were the United States after 1865, and the Peoples’ Republic of China after 1979, with the Deng Xiaoping “Socialism with Chinese Characteristics.” The national economic development model is based on the work of the now-all-but-unknown 19th Century German national economist, Friederich List, the developer of the basic model of national economic development.

Three Camps

During the Shock Therapy years of Boris Yeltsin in the 1990’s, Harvard economists like Jeffrey Sachs, financed by meta-plunderer George Soros, advised Yeltsin. The disastrous policies of Yeltsin’s economic team, then led by Yegor Gaidar, implemented wholesale privatization of state assets at dirt-cheap prices to Western investors like Soros. They made drastic state budget reduction, cuts in living standards, elimination of old age pensions of the population. All was done in the name of “free market reform.” After that trauma, beginning with Putin’s first Presidency in 1999 Russia slowly began a painful recovery not because of the Gaidar-Harvard shock therapy, but rather despite it, a tribute to the determination of the Russian people.

As astonishing as it might seem, those free market ideologues, followers of the late Gaidar, until now have held a virtual monopoly over policies of the Economics and Finance Ministries of Russia.

They have been aided by the leader of a slightly different but equally destructive monetarist camp, Central Bank of Russia Governor Elvira Nabiullina who only seems obsessed with controlling inflation and stabilizing the Ruble.

This past May Putin gave the first sign that he was open to the idea that the ever-reassuring reports of his finance and economic ministers about how “recovery is just around the corner” (as Herbert Hoover allegedly said at onset of America’s Great Depression in 1930) were not right. The Russian President convened the Presidium of the Economic Council, a group which had not met in two years, charging them to come up with a plan to solve Russia’s economic problems. The Presidium consisted of thirty five members representing each of the three major economic camps.

Former neo-liberal Finance Minister Alexei Kudrin headed one camp backed by Finance Minister Anton Siluanov and Economic Minister Alexey Ilyukayev. This group demands the usual Western laissez-faire remedies such as drastic reduction of the role of the state in the economy via wholesale privatization of the railways, energy companies like Gazprom, and other valuable assets. Kudrin was also named by Putin to chair the newly-reorganized twenty-five-member economic strategy group in May. Many national economists feared the worst at his naming, namely a revival of Gaidar shock therapy, Mach II. That now will clearly not happen. Kudrin and his approach have been rejected as not effective.

The second group was represented by central bank head, Elvira Nabiullina. They were the most conservative, claiming that no reforms were needed and that no economic stimulus was needed either. Just hold a steady course under double-digit central bank interest rates and that will somehow kill inflation and stabilize the Ruble, as if that was the key to open the economic growth potential of Russia. It has instead been the key to slowly kill the economy and increase inflation.

Stolypin Group

The third group represented was the one most Western observers ridiculed and dismissed, with the US Pentagon-linked Stratfor referring to them as a “strange collective.” I have personally met and talked with them and they are hardly strange to anyone with a clear moral mind.

This is the group which after two months has emerged with the mandate from Vladimir Putin to lay out their plans to boost growth again in Russia.

The group is in essence followers of what the great almost-forgotten 19th Century German economist, Friedrich List, would call “national economy” strategies. List’s national economy historical-based approach was in direct counter-position to the then-dominant British Adam Smith free trade school.

List’s views were increasingly integrated into the German Reich economic strategy beginning under the Zollverein or German Customs Union in 1834, that unified one German internal domestic market. It created the basis by the 1870’s for the most colossal emergence of Germany as an economic rival exceeding Great Britain in every area by 1914.

This third group, the Stolypin group in the May, 2016 meeting, included Sergei Glazyev, and Boris Titov, co-chair of Business Russia, and Russia’s “business ombudsmen” since the creation of that post in 2012. Both Titov and Glazyev, an adviser to Putin on Ukraine and other matters, are founding members of the Stolypin Club in Russia. In 2012 Glazyev was named by Putin, then Prime Minister, to coordinate the work of federal agencies in developing the Customs Union of Belarus, Kazakhstan, and Russia, today the Eurasian Economic Union. Titov, also the Leader of Right Cause party, is a successful Russian entrepreneur who in recent years has turned to work advancing various economic policies within the state, often in vocal opposition to Kurdin’s free-market liberal ideas. Notably, Titov is also co-chairman of the Russian-Chinese Business Council.

A broad indication of the kind of proposals the Stolypin group will propose to revive substantial economic growth in Russia and deal with major basic infrastructure deficits that greatly hinder productive enterprise came in a series of proposals Glazyev made in September 2015 to the Russian Security Council, a key advisory body to the President.

There, Glazyev proposed a five-year ‘road map’ to Russia’s economic sovereignty and long-term growth. It was aimed toward building up the country’s immunity to external shocks and foreign influence, and ultimately, toward bringing Russia out of the periphery and into the core of the global economic system. Goals included raising industrial output by 30-35 percent over a five year period, creating a socially-oriented ‘knowledge economy’ via the transfer of substantial economic resources to education, health care and the social sphere, the creation of instruments aimed at increasing savings as a percent of GDP, and other initiatives, including a transition to a sovereign monetary policy.

In 1990 the first priority of Washington and the IMF was to pressure Yeltsin and the Duma to “privatize” the State Bank of Russia, under a Constitutional amendment that mandated the new Central Bank of Russia, like the Federal Reserve or European Central Bank, be a purely monetarist entity whose only mandate is to control inflation and stabilize the Ruble. In effect money creation in Russia was removed from state sovereignty and tied to the US dollar.

Glazyev’s 2015 plan also proposed to use Central Bank resources to provide targeted lending for businesses and industries by providing them with low subsidized interest rates, between 1-4 percent, made possible by quantitative easing to the tune of 20 trillion rubles over a five year period. The program also suggested that the state support private business through the creation of “reciprocal obligations” for the purchase of products and services at agreed-upon prices. As well Glazyev proposed that the Ruble build up its strength as an alternative to the de facto bankrupt dollar system by buying gold as currency backing. He proposed that the Central Bank be mandated to buy all gold production of Russian mines at a given price, in order to increase the ruble gold backing. Russia today is the world’s second largest gold producer.

Obviously Russia’s President has realized that whatever impressive advances Russia makes in the foreign policy area can be fatally undercut by a failing economy, Russia’s Achilles Heel as I noted in an earlier piece. The July 25 announcement by Putin has the potential to reverse that if done with resolution on all levels. There the President has a responsibility to clearly lay out their strategy over the coming five years—by the way a very useful time frame to judge results having nothing to do with old Soviet five-year plans, as France’s De Gaulle understood as well. By giving the population a clear vision of their future, he can tap into the remarkable Russian human resources to literally accomplish the impossible in turning the economy into a genuine prosperity based on sounder foundations than that of the monetarist laissez faire West which today is de facto bankrupt. Bravo Russia!

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”
http://journal-neo.org/2016/08/02/putin-nyet-to-neo-liberals-da-to-national-development/