published Jul 9, 2018 1:00:13 AM, by Mark Whitehouse
(Bloomberg Opinion) —

In the eyes of the West, Russia does a lot of things wrong. It meddles in elections. It poisons people on foreign soil. It rides roughshod over free speech and democratic values.

But according to one Western economist, it may also have the world’s most responsible economic management.

Martin Gilman spent 24 years at the International Monetary Fund, much of it as the fund’s man in Russia before, during and after the country’s defining crisis of the late 1990s — a devaluation and default that reverberated around the world. Since 2005, he has been a professor of economics at Moscow’s Higher School of Economics and a well-connected observer of the government’s policies.

I spoke with Gilman about the economic challenges facing Russia today and its leaders’ capacity to meet them. Here’s an edited version of our conversation.

Mark Whitehouse: You had a front-row seat for Russia’s default and devaluation in 1998. It happened in part because the country had big debts, weak budget discipline and a political commitment to maintaining the ruble’s exchange rate against the dollar. How does Russia’s economic management today differ from what it was back then?

Martin Gilman: It’s much better, largely because so many of the people now in charge experienced that crisis. For instance, the head of the central bank, Elvira Nabiullina, was a deputy economy minister. Alexei Kudrin, a close Putin advisor and chairman of the Accounts Chamber [Russia’s version of the U.S. Government Accountability Office], was a deputy finance minister. German Gref, the chief executive officer of the state-controlled Sberbank, was a deputy minister of state property. These people want to make sure that it never happens again on their watch. So as long as this economic team is in charge there won’t be another debt crisis in Russia.

They have really brought home the lesson of that crisis. Consider the oil shock of 2014 and 2015. As the price dropped by more than 50 percent, the central bank protected its foreign reserves by allowing the ruble’s exchange rate against the dollar to fall — politically, a very brave move. And they had the stabilization fund, which insulates the economy from the oil market by culling excess revenue when prices are high and providing support when prices are low.

In 2004, when Kudrin first proposed a stabilization fund on the Norwegian model, the IMF advised against it. We thought that in terms of governance, transparency and corruption Russia was closer to Nigeria than Norway, so the first priority was to build the institutions before trying to be Norway. And by God, Kudrin proved us wrong.

Now, when Nabiullina goes to the central bank governors’ meetings in Basel, she’s the one preaching orthodoxy. Almost all central banks have either negative interest rates, very low interest rates or some kind of extraordinary monetary accommodation, and here you’ve got the Central Bank of Russia with the highest real interest rates in the G-20. They are pursuing what the IMF would call a classic conventional policy.

MW: Growth recently has been much slower than what Russia experienced in the 2000s, and economists don’t expect it to be much better in the next few years. At the same time, Putin and his advisors have drawn up ambitious plans to do everything from make Russia one of the world’s five largest economies to boost life expectancy by six years. Do these plans bear any relation to what might actually happen? If not, what is their purpose?
MG: It’s good to have an objective. While very ambitious, unrealistic and probably undoable from an institutional point of view, it still sends a very strong signal to the government that this is what we expect everybody to get behind — we shouldn’t tolerate corruption, we’ve got to encourage productive private investment. Ministers know that if their performance isn’t in line with these goals, they risk getting sacked.

As regards growth, Russia is an old industrial economy. It’s not one of those places where you have a lot of peasants coming into the mainstream workforce. You can’t expect it to grow at very significant real rates, particularly given that it’s stuck in a world economy where nobody is growing significantly.

But an important aside: One can’t know the future. What if investors wake up to the financial profligacy of the U.S. and other Western nations, where government debts are at historical highs and budget discipline is not great? After the crash, who is going to look good? Can you name one G-20 country with almost no debt, positive real interest rates, a flexible exchange rate, significant foreign exchange reserves and a very prudent macroeconomic policy?

MW: There’s this odd juxtaposition in Russia’s economic management. On one hand, you have very fiscally prudent policies, like raising the pension age and the value-added tax, and stockpiling money when oil prices are high. On the other, you see people close to Putin getting very rich on state contracts. Doesn’t the latter undermine the former?

MG: Many people say that until we clean up our institutions, have full transparency on government expenditures and weed out corruption, there’s no point in trying to do stuff like pension reform. I guess the counterargument is that we have to start where we are, not where we would like to be.
Raising the pension age is crucial. Assuming these people are healthy enough to stay in the work force and can get jobs that pay enough, it will go a long way toward addressing Russia’s demographic issues.

But if you’re not dealing with institutional reform at the same time, it could make people even more cynical than they are now. That’s why it’s good to have Alexei Kudrin at the Accounts Chamber. Because of his close relationship with the president, he should be able to dig into anything he wants. And he’d better get results because the clock is ticking toward the next presidential election in 2024. The government is going to have to show that it can limit corruption.

MW: To what extent are Putin’s politics holding Russia back? He has demonstrated that property rights and personal freedoms are violable — and this attitude pervades the bureaucracy. Will the best and brightest want to stay in a country where they can’t speak freely or choose their leaders? How can entrepreneurship and investment thrive in a country where whatever people build can be stolen by corrupt officials?

MG: They won’t. My Russian wife uses the Christmas tree example. Russia is a major importer of Christmas trees, even though it has vast forests. Why? It takes seven to eight years to grow a good one. Nobody is willing to take the risk that in seven or eight years, they’ll still be able to harvest the trees and reap the profits.

It would be nice if Russia could do something like what [former president] Mikheil Saakashvili did in Georgia — just sack all the traffic police and start over. But in a big country like Russia, it could be pretty chaotic. We can’t take those kinds of risks.

I still remember what Putin told us when we at the IMF were trying to get him to push through a big package of reform legislation in his first term. He said that one of the lessons he drew from the mistakes of his predecessors is that you can’t do everything at once. If you try to go against all these vested interests at the same time, they will gang up against you. Maybe better to do one thing at a time.

We’re not seeing big reforms anymore, and we never will. Reform is a dirty word in Russia, it’s associated with the chaos of the 1990s. But small reforms are happening — in the labor force, online government, tax payments, police bribery. Putin’s first deputy chief of staff, Sergei Kiriyenko, has been creating a revolution in terms of regional governance. The young governors coming in actually have KPIs [key performance indicators]. They want to clean things up, and their KPIs are aligned with that. This is truly remarkable in a country like Russia.

There are real improvements. Despite all the bad press, Russia now ranks 35th out of 190 in the World Bank’s Doing Business ratings. It was at 124 in 2010.

To contact the author of this story: Mark Whitehouse at mwhitehouse1@bloomberg.net
For more columns from Bloomberg View, visit Bloomberg view
copyright © 2018 Bloomberg L.P