What Putin Learned From the Soviet Collapse: To Preserve Its Global Ambitions, Russia Is Managing Its Economic Limits – Foreign Affairs Magazine

When the Soviet Union dissolved 30 years ago this month, on December 25, 1991, its end followed decades of economic dysfunction. Soviet leader Mikhail Gorbachev, hoping to implement reforms, referred to the 1970s and 1980s as zastoi, the era of stagnation. Yet though he recognized the problem, Gorbachev couldnt save the ailing socialist system. Indeed, his failed attempt at systematic reform ultimately led to the Soviet Unions collapse.

On the surface, Russias economy appears similarly dysfunctional today. Per capita incomes have not improved over the past decade. Russias share of global output has declined since 2008. And large sectors of the economy remain technologically backward or in desperate need of modernization. The general economic state could once again be described as stagnation.

Yet Russian President Vladimir Putin and his government are unlikely to suffer the same fate as their Soviet forebears. Just as Communist Party leaders in Beijing have studied Soviet history in an effort to avert its repetition, so have leaders in the Kremlin. They have learned the lessons of failed Soviet attempts to reverse decline in the 1970s and 1980s, and many key attributes of the Russian economy and Russian economic policy reflect a desire to avoid repeating the Soviet experience under Gorbachev. As the Russian economist Sergei Guriev recently remarked,Russias macroeconomic policy is much more conservative, inflation is under control, there are large reserves, a balanced budget and no external debt, and as a market economy Russia is much more efficient and resilient than the Soviet Union.

To be sure, Russia still struggles to find an economic model capable of generating continued growth and reduced dependency on resource exports. That said, Moscow has managed to fortify itself for a sustained competition with the United States. Rather than a major weakness, the economy represents a durable part of Putins strategy for ensuring regime stability, maintaining continuity, and weathering Western-imposed sanctions.

Russian policymakers have drawn lessons from the tumult of the late Soviet experience, as well as the economic disruptions of the 1990s. Oil market crashes in 1986 and 1997 inflicted enormous budgetary shocks upon the Soviet Union and the fledgling Russian Federation. Among policymakers in Moscow, these shocks generated deep-seated fears of the impact that resource market volatility can exert on the financial stability of export-dependent economies.

The creation of new stabilization funds, shortly after Putins accession to the presidency in 2000, was a direct response to these anxieties. These funds allowed Russia to accumulate reserves from export earnings that would help it weather the macroeconomic effects of oil price shocks and declining export revenues. Despite a significant drop in oil prices from the highs of the latter years of the first decade of this century, and an economic recession in 2014 and 2015, Moscow has successfully rebuilt its foreign exchange reserves, and in holdings that are less vulnerable to future U.S. sanctions. Consequently, Russia has both adapted to much lower oil prices and built in shock absorbers that make dependency on energy exports much less of a vulnerability.

Under Putin, Russia has also sought to reduce its dependence on imports. Here, too, policy thinking was shaped by the experiences of the late Soviet era, when a chronic failure to produce adequate volumes of strategically vital goodsincluding consumer staples such as grain as well as high-technology machineryled the country to rely heavily on imports, increasing its dependence on revenues from oil exports. When the 1986 oil shock hit, one in three loaves of Soviet bread was produced using imported grain.

Russias leadership has also absorbed the lesson that financial weakness curtails a countrys freedom of action on the international stage. In the late 1980s, Gorbachev faced limited options when confronted by tumult in the Warsaw Pact and the prospect of German unification. Leading states in the Warsaw Pact were heavily indebted to the West, while Moscow was constrained in its ability to prop up the faltering economies of these satellite communist regimes. Attaining German financial support was also a factor in Soviet acquiescence to German unification.

Subsequently, Russia was, in the eyes of most in Moscow, ignored on foreign policy matters throughout the 1990s. It was a great power in name only. Once Russias leadership paid back the countrys debts and reduced the states dependence on external finance, it began to restore the countrys global position.

Despite superficial similarities,particularly to the Brezhnev and Andropov periods,in practice the Kremlin today faces the world with an economic system quite different from that which hindered the ambitions of its late-Soviet-era predecessors. And despite Russias economic malaise, the policymakers who oversee this system have learned from the Soviet leaderships bungled attempts to manage socioeconomic stagnation. Several key differences have emerged.

Consider food production. The Soviet Union possessed one of the most inefficient agricultural systems in human history. By the 1980s, a large proportion of the Soviet budget was devoted to subsidizing food production. The Soviet Union was full of paradoxes: a leading producer of agricultural equipment, yet at the same time the worlds largest importer of food, placing huge pressure on the countrys budget and necessitating enormous sales of oil to finance the bulging food import bill. By contrast, Russia today is the worlds largest wheat exporter and is close to becoming a net food exporter as well. Although still dominated by the state, the Russian economy is far more market-based and far less inefficient in vital sectors compared with the Soviet economy.

The Russian leadership is also keen to avoid the profligate military spending of its predecessors. Estimates of Soviet military expenditure vary, but most contemporary analysts place the Soviet defense burden at somewhere between 15 and 25 percent of annual output. Military spending on this scale often left other economic sectors starved of resources. Today, Russias overall defense burden is lower than five percent of GDP. This level of military expenditure has been demonstrably sustainable under conditions of low growth and unlikely to bring Moscow to economic ruin. More important, it is not a significant driver of internal economic inefficiencies, nor does it starve other sectors of resources as the Soviet defense burden did.

In addition to the massive military burden borne by the Soviet Union, the countrys leadership funded a hugely expensive foreign policy, competing for leadership of the socialist world with China and against the capitalist world led by the United States. Moscow propped up living standards in Eastern Europe and subsidized client states around the world. In practice, Russia has no such commitments today. Compared with the Soviet foreign policy overstretch of the 1970s, Moscows current engagements and relationships overseas are far less costly, and many are more business-driven. Russian elites today are interested not in competitions over ideology but in opportunities for material gains. Russia has focused more on global status than on global leadership and has kept its vital interests closer to home, focusing on neighboring states and in the former Soviet space.

Finally, the Soviet economy in the 1980s faced a systemic crisis in part because of its integration with global oil and grain markets, with the Soviet collapse vividly demonstrating how exposure to international market forces carries risks for economic security. Policymakers in Moscow today are only too aware of these risks, especially since hydrocarbons continue to account for an overwhelmingly large proportion of Russias exports (though the economy itself is much more diverse). Ensuring the economic security of the country while managing the risks of integration with the global economy is a crucial component of Moscows wider strategy to enhance its sovereignty and independence. Moscow has learned that it must play an active role in key global markets such as oil to shape the external environment to its advantage. At the same time, Russian leaders have buttressed the system to reduce exposure to economic coercive instruments that countries such as the United States wield by virtue of their position and structural influence in the global economy.

Three interrelated problems confront Russias economy today. First, at around 20 percent of GDP, the level of investment is too low to generate broad-based economic modernization. Russias leaders openly acknowledge that investment levels of 25 to 30 percent of GDP would need to be sustained over a period of decades for it to become a high-income, technologically competitive country. Second, owing to a host of chronic maladies such as low investment, pervasive rent seeking among patronage networks, and inefficient state-dominated enterprises, the annual rate of economic growth is, at 0.8 percent since 2013, lower than the global average of around three percent. This means that Russias share of global economic output is declining and leads to the third problem: declining living standards. Real disposable incomes are now lower than they were a decade ago.

However, owing to a conservative approach to macroeconomic management, these weaknesses do not pose an existential threat to Russias leadership. Russia proved adaptable and resilient during the 2008 financial crisis, the more recent 201415 recession, and again during 2020s COVID-19 pandemicinduced global recession. For all its faults, Russias policy elite has built a system that is able to weather oil price shocks, recessions, and sanctions better than at any time in the past. When oil prices collapsed in 1986, the Soviet leadership was forced torun huge budget deficits, print money (which caused inflation), and borrow huge sums from international creditors. In 2020, Russia ran a budget deficit of 3.5 percent (half that of European countries) financed almost entirely from its own considerable resources. These domestic resources have also helped Russia adapt to many of the challenges it has faced since Western sanctions were imposed in 2014.

The long-term economic challenges confronting Russian leaders today are serious, but they are not deterministic of Russias future. Throughout Russias history as a great power, its per capita incomes have been substantially lower than those of its principal rivals, and it has rarely possessed the broad-based technological capabilities of its peers. Yet Russias security-oriented leaders have consistently managed to muster sufficient military power from a relatively backward economy to more than hold their own on the international stage. Russias small share of global GDP may make it appear an economic dwarf (especially when using market exchange rates), but these metrics are deceptive, speaking more to economic influence than actual state capacity or a states potential to sustain competitions. Russias ability to mobilize resources remains substantial and historically enduring.

Those expecting a repeat of the 1980s must recall that zastoi itself did not doom the Soviet system. Economic stagnation prompted Gorbachev to undertake broad systemic reforms, which set off a chain of events that substantially contributed to the Soviet Unions collapse. However, that outcome was the result of a confluence of events, ideas, and material influences, but most notably the choices made by Soviet elites. Despite slow economic growth, Russias present-day leadership favors gradual adjustment of its existing economic approaches over radical reform. Furthermore, it has studiously avoided the kinds of systemic reforms that might undermine the regimes foundation, its ability to arbitrate among elites, or its capacity to manage change.

Today, Russias economic malaise is also far less relevant to Moscows ability to pursue its interests overseas or to shape global affairs than it was in the context of the Cold War. Because global politics have changed, and Washingtons main competitor is Beijing, the economic stagnation Moscow currently faces is unlikely to result in a zero-sum decline in power the way it did for the Soviet Union during the latter part of the Cold War. In fact, with the United States locked in a confrontation with China, Russia may find that in spite of a weak economy, it has increasing room to maneuverand growing rather than declining influence on the global stage. In setting assumptions and expectations about the strategic environment, Washington should ask itself a basic question: After years of economic stagnation, is Russia an easier problem to manage today than ten years ago? If the answer is decidedly negative, then why would said stagnation dramatically ease this geopolitical burden in the coming decade?

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What Putin Learned From the Soviet Collapse: To Preserve Its Global Ambitions, Russia Is Managing Its Economic Limits - Foreign Affairs Magazine