T N Ninan: Putin model & Russia's future

The Soviet system collapsed because its economy underperformed. From growing faster than the developed market economies in the 1950s and 1960s, and matching their speed in the 1970s, Soviet growth in the 1980s slipped to well below those of the market economies. By 2000, when Vladimir Putin came on the scene, Russia was on its knees as its economy had shrunk by nearly a half since the Soviet collapse, causing widespread misery. The country's resurgent power after that was on the back of renewed growth at a sustained annual rate of seven per cent. That, however, has slipped to 3-4 per cent in recent years, and now to virtually zero. Can the country, while losing economic momentum and witnessing a flight of foreign capital, hold out in a new test of wills against the West?

The fate of the Soviet system's former satellite states tells its own story. Those that became more market-oriented and swung westward have done better than those that stayed within the Russian fold as members of the Commonwealth of Independent States (CIS). The main economies of Central and Eastern Europe (Poland, Hungary, the Czech Republic and Slovakia) suffered a sharp initial decline in gross domestic product (GDP), as did all the "transition" economies. But they have more than recovered since then, and significantly outpaced Russia. Some of the smaller Balkan and Baltic republics have also done better by looking westward in varying degrees.

Those that have not done well are the ones in the CIS, and Ukraine is perhaps the worst-performing of them all. It had the second largest economy in the Soviet zone, but Poland and the Czech Republic have overtaken it, and Hungary has closed the gap, as has the smaller Slovakia. In fact, Ukraine - historically a granary and centre of heavy engineering - saw its GDP shrink by nearly two-thirds in its first decade as an independent country. By 2000, its per capita income was only a third higher than India's! The subsequent recovery has only taken it back to where it was in 1990. Its economy is badly managed, desperately in need of reform.

The message in this brief, potted history is clear: economies that manage the transition to market orientation do better than others; those that chase other economic paradigms or fail to manage the transition fall behind. This could be the problem that Russia faces. Mr Putin has been lucky with oil and gold prices. Russia happens to be the largest exporter of natural gas, the largest exporter of refined petroleum products and the second largest exporter of crude oil - and it has been diversifying its energy markets. So Russia has healthy macroeconomic indicators (trade is pretty well balanced, the currency has been stable, the budget has a cash surplus), and can afford its big military budgets (more than twice India's). It won't be easy for the United States to bludgeon such an economy into subservience, so Moscow may well have Kiev over the barrel of its gun.

But Russia's economy remains vulnerable to commodity price swings, and Mr Putin has pushed ideas that belong to another era, like creating large state-owned national champions in key sectors. Most Russian non-military manufactured goods are not competitive in export markets, and this is unlikely to change because the country remains more statist than free market. It has received much more foreign direct investment than India, but the value of its listed companies is only two-thirds of India's - pointing to the absence of a diversified corporate base. The confrontation over Ukraine is likely to take Russia even further away from necessary reforms - economic and political. That, in the not-so-long run, could prove its undoing once more.