13 June 2007

As Russia Fades

Russians are having a difficult time coming to terms with their loss of "superpower" status.
Russia today is a much diminished version of the Soviet Union. The population of 140 million is shrinking because of a plunging birth rate, and falling life expectancy. The Russian GDP, at $900 billion, is less than seven percent of the United States (which has more than twice as many people). That, however, is an improvement. In the early 1990s, when economists and accountants got the first good look at the Russian economy since the early 20th century, it was found that the Russian GDP was about four percent of the U.S. GDP. Add back all the lost components of the Soviet Union, and you still don't have a GDP amounting to more than six percent of the American one. How did the Soviet Union achieve superpower status on such a thin economic base? They did it mostly with illusion, and an excessive arms budget that ruined the economy.

....Soviet weapons, as impressive as they appeared to be, always came out a distant second when they were used against Western ones. The main thing that kept the Soviet military reputation going was the need of Western militaries to make the Soviet Union look strong, in order to justify high Western military budgets.

The one effective weapon the Soviets did have were their nuclear armed ballistic missiles. Better maintained than the rest of the military, enough of this missile fleet would work, if used, to devastate Western nations. Russia still has a large part of that nuclear arsenal. But that does not make Russians feel like a superpower. That's because Russia no longer has the huge fleet, air force and army.

...It took Russia over four centuries to build that empire, and the inept Soviet Bureaucrats a few weeks to lose it all. An increasing number of Russians want it back, but are unwilling to confront how they lost it in the first place, or why rebuilding the empire is an uncertain and dangerous enterprise. This is all very dangerous stuff.

Russia's problem derives to a large extent from the "knowledge problem." Centralised economies are forced to contrive false data in order to make economic plans. But the error in data compounds with time, until no one really knows what is happening in the economy.

The recent actions of the Putin government in confiscating private enterprises and nationalising them, or selling them to Putin cronies, are placing the Puting economy squarely within the danger area of the knowledge problem. There is no amount of oil and gas wealth that can compensate the national economy for these mistakes. Certainly savvy international investors understand the problem, and will keep their distance--until Russia wises up.

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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