Mises Wire

Degradation and Nationalization: The Inevitable Ways of Russian Autocratic Economic Policy

As Russian political scientist Gleb Pavlovsky has quite rightly said, one should not consider the five-thousand-plus sanctions imposed against the Russian Federation as of this writing as sanctions in the normal diplomatic and economic sense. They are a conditional “second front,” a blow aimed at dismantling the Russian economy, the Russian social structure, and the institutional framework in response to the corresponding actions of the Russian authorities, with the West’s clearly stated position not to mirror such actions.

To put it simply, it is a way to bring the costs of the current Russian policy to such a level that any benefits for the people who make political decisions drawn up in their imaginations would become absolutely insignificant and ephemeral in comparison with the huge and real costs in all areas and of all possible types. And it is also a signal to all social strata that the state and its policies are not just the authoritarian domain, the affiliated elite and their decisions, but all the strata and categories of the population that make up the country and their civic engagement. 

This dismantling, in addition to the obvious and direct commercial, cultural, logistical, and other isolations, may have consequences that do not lie on the surface. Above all, of course, they are associated with social and economic metamorphosis. In particular, for example, an authoritarian dictatorship (not an informational autocracy!) and a growing market economy are mutually exclusive by definition. This is an institutional and economic axiom, and if anyone is interested in learning more about it, they can consult the classic works by Ludwig von Mises or James M. Buchanan; Daron Acemoglu and James A. Robinson’s The Economic Origins of Dictatorship and Democracy, on quantitative institutional economics; and Robert Barro’s brilliant and comprehensive work “Economic Growth.”

In addition, in this regard, I see inevitable contradictions between those statements and the already urgently enacted decrees of the Russian government to liberalize and stimulate conditions for small and medium-sized businesses and the inevitability of actually nationalizing a huge chunk of the entire economy. Yes, measures to liberalize conditions and roll back the state canopy could have been an effective step to keep the economy and social situation from falling into the abyss—I have written about this myself in several recent articles.

This is what the Soviet Union did, in particular Nikolai Ryzhkov, who was responsible for the economy in the Soviet government in 1987. He issued a decree and instructed all law enforcement agencies not to interfere with cooperatives, joint ventures and other forms of business at the time. However, the current attempt to stimulate small and medium business is, first of all, connected with a simultaneous unbinding of hands to local authorities and officials on the ground through other decrees, giving them more room for maneuver. And this inevitably and immediately scales corruption to unprecedented proportions in a vertically corrupt environment.

This can only be avoided by harsh repression and intimidation, as was customary in the Stalinist state, but the elites can’t do that, because they need the loyalty of the executive apparatus. Secondly, all these support measures are issued in a virtually stalemate state of the economy and in a new political paradigm very reminiscent of an authoritarian dictatorship.

As I have already said, the closer the political system shifts to dictatorship and totalitarianism as the final negative phase of the sociopolitical system, the less attention is paid to the effectiveness of economic and social policies and their consequences for the authorities. There is, however, a certain logic to actions: the so-called rut, when, regardless of the desires of those who make decisions, only those decisions that are no longer determined by desires are forced to be made. The power can do this not even deliberately, being put in a position where there are simply no alternatives and no possibility to think about them, where the logic and cascade of events carries the decisions made in a certain direction.

For example, this is the case with nationalization. My colleague Konstantin Sonin, a brilliant political economist and professor at the University of Chicago, made a very sensible statement on this subject. In general, his message was as follows: in order to prevent mass layoffs in shutting down companies and in shutting down enterprises, these enterprises and companies must not be allowed to close down. And how can this be done against the will of the owner?

In general, it is clear that it is easy to shut down a company that wants to cease operations, but how can one make a company that wants to shut down operate without actually nationalizing it?! And this applies not only to Western manufacturers shutting down production here, but also to Russian companies, where there has already been a series of mass layoffs and halts in production.

Nationalization can be understood as any form of taking ownership on the balance sheet of the state or state corporations and further subsidization, primarily of wages to maintain employment. I am deliberately omitting here the question of business efficiency, the waiting period for possible, but not obvious, substitution of components, etc., etc. This issue rather pointless to some extent, since the new political paradigm has happened, as I said above, and besides, the level of uncertainty and variability of the environment is so high and measured in hours that it is impossible to reason within the framework of normal economic logic, as I also mentioned more than once.

Another basis for nationalization in any form is the need to limit the superpowers of the beneficiaries of the current situation, such as producers or distributors of food and basic necessities. It is they who have the opportunity to transfer the inflation that has already happened and is undoubtedly increasing to the consumer without significant drops in output and sales, although certainly with their changed structure. If prices are regulated, however, this threatens to lead to shortages, as both producers and sellers will underestimate these volumes.

In times of acute crisis, food inflation gallops relative to all other categories of goods anyway. Neutralizing this process is very difficult, almost impossible, for example, at the end of its existence the USSR failed to cope with this. As a result, in order to contain prices and to somehow control the deficit, the state will be forced to carry out nationalization or quasi nationalization in any of its derivative forms. In what form is not so important now. Venezuela did this under Chavez. We know how it ended.

Nationalization is always bad, in any position, at any time, in any form. Even restrictions on the sale of assets to nonresidents, even restrictions on the payment of dividends and coupon income to them. Even the presidential decree on the placement of SWF resources into shares and bonds of domestic companies, apparently intended to stabilize the stock market.

One should understand that any form of nationalization is encapsulation of investment flows, isolation of the economy, and transfer to the state of the full rights and opportunities to redistribute benefits and to make corporate decisions that are motivated not by the efficiency of business but by the interests of the bureaucracy. In vertical redistribution, free pricing and the AD-AS model do not work, and market relations are at best critically distorted, at worst eliminated.

In fact, the state is left with only two options: either to finance corporate agents on the balance sheet by printing cheapening money, which will add fuel to the inflationary fire, or to close some enterprises and go to mass unemployment. This option will inevitably lead to social discontent and, accordingly, to the strengthening of repressive mechanisms. The social-institutional corrosion and the consequences of the concentration of the economy in the hands of an authoritarian dictatorship is a separate topic for discussion.

So, all the nice talk about the need to liberalize the business environment, about “giving free rein to entrepreneurship,” about how “business will find opportunities and quickly replace everything,” and so on and so forth seem more and more senseless and such scenarios seem unrealistic. This would have worked if the substitute commercial production and logistics channels had already been established or at least prepared. It would have worked if the financial system was not in a state of total isolation or had been reoriented and prepared in advance. Finally, it would have worked if the geopolitical position of the country was not in a state in which it is now.

However, none of this is the case, and the political metamorphosis makes the state of the economy and its agents not just shaky and unstable, but collapsing. And nationalization is the track: you will take it, whether you like it or not, but this is the track you’ll take, and this is where it leads.

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