Monthly Discussion

Will Putin Fix the Russian Economy?

When Bill Clinton first got to the White House in 1992 most Americans' concern was whether he would fix the economy. America had been partaking in a worldwide recession and improving the economy was top priority in everyone's mind (unlike nowadays). Well, Clinton did fix the economy, or more accurately perhaps, Clinton was in power when the economy improved. But the same question is now being asked about Vladimir Putin and the Russian economy.

Treating a country as a species, or even a set of countries with a definite affiliation and common purpose such as the Soviet Union, can shed light on this question. Exhibit 3 below shows the association of life cycles with S-shaped growth steps, and assigns the names of seasons to the various phases of growth. A whole chapter in Conquering Uncertainty is devoted to the attributes of each season, such things as centralization, order, and conservatism in the summer, segmentation, chaos, and entrepreneurship in winter, hard work ethic and investments in the spring, tightening-the-belt tactics and disinvestments in the fall.

The discussion in Conquering Uncertainty concerned products and markets but the attributes of seasons are generally valid and extend well beyond the world of business. One example is the politicization process in Europe. When communism collapsed in the mid-1990s (end of a life cycle), the Eastern European countries found themselves drifting into a state of chaos. Appropriately, they were torn apart by bottom-up forces, decentralizing, segmenting, subdividing, searching for identity and political system, and in general, exploring all directions including extreme ones, such as private police units in Moscow and murderous belligerencies in former Yugoslavia. Bottom-up forces make leadership unstable. Exceptional leaders like Mikhail Gorbachev, Eduard Shevardnadze, and Boris Yeltsin proved rather ineffective in controlling the strong and turbulent cultural forces.

In contrast, Western European countries have undergone considerable political development and enjoy certain maturity as a result. Mediocre leaders have no difficulty surviving there. The name of the political game is unity, for example, the European Union (E.U.). Such centralizing actions are timely and portend a dominant role in the world economy during the next economic development phase. (This promise becomes enhanced by the formidable need for development of E.U.’s next-door neighbors, the central and eastern European countries.)

THE COLLAPSE OF THE COMMUNIST EMPIRE

The ultimate sin of a forecaster is to predict something after it has happened. Well, my work revolves around innovative forecasting techniques, and here I am about to present arguments demonstrating that the collapse of communism could have been predicted with devilish precision as early as the 1960s. What makes me indulge in such an unprofessional exercise is the fact that recently one more person threw at me the by now classic remark: “Who could have ever predicted the fall of the Berlin wall?” His comment was the last straw.

As we mentioned earlier, the chaotic period begins with the end of the growth process. At the same time, life cycles are generally symmetric. Communist rule began in 1917. It peaked 40 years later, in the mid-1950s, when the Soviet Union successfully competed and often surpassed the US (for example, with Sputnik in 1957).

The life cycle associated with natural growth is to a first approximation symmetric. A symmetric life cycle would position the end of communism another 40 years later, the mid-1990s. The headlines-making event, the collapse of the Berlin wall in 1989, took place in a sharp discontinuous way, reflecting the first large fluctuation of the chaotic state that sets in as we approach the end of the natural growth process. With the end of the process anticipated in the mid-1990s, chaotic tremors are to be expected several years earlier. These are rather accurate predictions for the collapse of communism and the Berlin wall. They ensue from a rigorous and precise reckoning. They could have been made as early as the 1960s, when it became clear that the Soviet Union had already gone over its peak. The Soviets had begun losing, first in 1963 with the Cuban missile crisis, then in 1969 with the moon race that was doomed for lack of funds. The Soviets could not afford adequate testing of their superior rocket, and it exploded during the critical launch.

The fall of the Berlin wall punctuated the end of the Communist growth curve and signaled the beginning of the chaotic phase. It will take a while for free market forces to become established there, however. According to the seasons metaphor, the four seasons have equal duration—in this case, 20 years (one fourth of the 80-year life cycle of the Soviet block). In that light, the present winter in Russia could last until 2010.

Exhibit 3. A schematic (but to scale) representation of the rise and fall of the Soviet Union and forecast. Prominent among the chaotic fluctuations of the first winter is the Russian revolution (1917), whereas a large early fluctuation in the second winter is the fall of the Berlin wall (1989). The zenith of the Soviet era is taken as the launching of the Sputnik (1957).

Exhibit 3 sketches two life cycles for Russia, one for the communist regime and one for the free-market economy. It is an idealized picture equating political stability with economic prosperity. In reality the two life cycles may not turn out equal in length or exactly symmetric. But the trend is a steady and slow improvement process turbulent for the better part of the new decade. Putin will have a hard time, and even if he survives his full term in office there will be little to boast about at the end. Disasters like the Kursk and the tower inferno at Moscow are not mere accidents, but signs of the times.

The period for safe investments in Russia begins around 2007. If you go there earlier, you are doing it on your own risk!