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Are Russia's Choices Down to Capitulation or Autarky?

A new and improved autarky distinct from what was attempted in the 1930-80

Branko  Milanovic – When autarky becomes the only solution

Despite all the talk about the waning power of the state and the rising power of ”foot-loose” large corporations what the sanctions do show is that the state is still the most powerful actor in contemporary global capitalism. Apple or Amazon could not impose sanctions and destroy Rusal. Actually, no company in the world —even those who are Rusal’s major customers—could not destroy it. But a state can. Putin showed the power of the Russian state, at the time when it seemed weak and insignificant, when he overnight imprisoned Khodorkovsky, the richest man in Russia, and despoiled him of Yukos. Trump, or rather US treasury, shows the power of US state in destroying overnight the largest aluminum producer in the world.

This post-Cold War idea that corporations are taking over the world always seemed ridiculous to me.

Consider the following:

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    Wealthiest individual ~$100 billion (Bezos)

  • Wealthiest corporation ~$1 trillion (Apple)

  • Wealthiest country ~ $100 trillion (USA), of which states typically own 20%-70%. Plus, they have 95%+ of the guns.

In fact, I suspect relative corporate/state power reached its peak in the 18th century, during the heyday of the East India Company.

What current sanctions, and those that may yet come (as for example on Gazprom), show is that Russia is now at the same crossroads at which it was in the early 1920s. Its access to Western markets, technology and capital is all but cut off. It is true that there are nowadays other sources for all three, including in China. But the breadth of sanctions is such that Chinese actors, if they themselves plan to do business or raise money in the United States, will too avoid doing business with Russian entities. So Russian industry will be left to grow, if it can, using only domestic resources, which compared to global resources, are small and inadequate (given how Russia’s relative economic and population role in the world has declined). Autarky is thus preordained.

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This is what I pointed out in my post on US sanctions: “The US market is an order of magnitude larger than Russia’s, so it is not only US corporations that will defer to Uncle Sam. This will also hold true for European corporations (most of Russia’s trade is still with Europe), for Chinese corporations (unless the CPC expressly orders them to flout US restrictions), and even for other Russian corporations (e.g. Russian state banking giant Sberbank still doesn’t have any branches in Crimea in what is probably a futile effort to avoid US sanctions).”

It would be wrong however to believe that the current impasse in which Russia finds itself can be overcome through different policies. It could have been done several years ago, but no longer. The reasons listed in the imposition of sanctions that cover everything from the annexation of Crimea to fake news are so comprehensive that no new post-Putin government of any conceivable kind can accept them all. They can be accepted only by a totally defeated country. In addition, US sanctions are notoriously difficult to overturn. The US sanctions against the Soviet Union started in 1948 and were practically never discontinued. The Jackson-Vanik amendment that linked trade to the freedom of Jewish emigration was on the books from 1974 until 2012, i.e. lasted more than a quarter century after the ostensible reason for its imposition ended. And it was repealed only to be replaced by another set of sanctions contained in the Magnitsky Act. The sanctions against Iran have been on, and despite the recent talk of their loosening, for almost 40 years. The sanctions on Cuba have lasted, and many still do, for more than half-century.

Putin has thus, through a series of tactical successes, brought to Russia a comprehensive strategic defeat from which neither him, nor the governments that succeed him, will be able to extricate the country. There is moreover no ideology, short of extreme nationalism, on which the autarkic system can be built.Bolsheviks in the 1920s had an ideology which led them ultimately to accept autarky and to work within it. Such an ideology does not exist in today’s capitalist Russia. Yet the industrialization debate of the 1920 may again become indispensable literature for economic policy-making.

Pretty grim conclusions, but not obviously incorrect ones.

In particular, it certainly seems that sanctions are here to stay and are going to be incessantly ramped up. More “serious” sanctions have been introduced under the “pro-Russian” (or even “Putin’s puppet”) than under Obama, and one can only imagine how things will go once the Dems seize control of the House (and maybe Senate) in 2018, and when Trump is likely ousted after 2020. To a large extent, further sanctions are built into America’s political trajectory. For instance, there has been a trend of ascribing criticism of the West’s course (on immigration, on bombing Syria, etc.) to this universal scapegoat called “Russian bots.” Consequently, short of Russia completely cutting itself off from the global Internet, Russian “elections meddling” in Europe and the US is all but assured for the indefinite future, each such case constituting grounds for further sanctions.

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And so long as the US remains the world’s largest market and lynchpin of the global financial system, the effects of its decisions are going to reverberate throughout the Russian economy.

Consequently, with integration into the West definitively closed of, Russia has several options:

1. Capitulation. This is unrealistic, short of either a military defeat (hard to imagine in the context of Russia’s vast tactical nuke stockpile) or total ideological subversion (as happened to the USSR).

2. Autarky. The USSR was a military-industrial empire of around 400 million souls (including its East European satellites). Russia is a country of 150 million ruled by a comprador elite, that has much less influence over Kazakhstan or Belarus than the USSR had over Czechoslovakia.

Conversely, many modern technologies need more and more scope to be developed. Even during the Cold War, a high quality population of just around 10 million was enough to develop a first class righter (Sweden). That’s no longer the case – the only countries seriously competitive in these sphere are the US, to a lesser extent China and Russia, and perhaps eventually India. Another example: The negative inverse of Moore’s Law is Rock’s Law, in which the price of a semiconductor chip fabrication plant doubles every four years. Information technologies more than anything else benefit from economies of scale. It’s not a coincidence that the world’s top VC powerhouses are now the US, China, and increasingly India.

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Bearing this in mind, Russia’s strategy needs to be more sophisticated than what it had in the 1930s-80s (a model that failed, incidentally).

a) Free markets and internal competition should be a sine qua non. Central planning is incredibly inefficient, and as technological complexity increases, it becomes even more relatively inefficient. Within a continental market, technological solutions can be close to optimal.

b) Piracy. Especially if restrictions on copyright/IP are lifted. If the US wishes to isolate Russia, it has no rational incentives to pay it tribute. It should become a pirate state de jure, as well as de facto. Russia may indeed be moving in that direction already.

c) Extreme nationalism. Well, as Milanovic himself says, it’s the only ideology which can combine autarky with free markets. Fortuitously, extreme nationalism would also inevitably lead to what the ecologists call “scope expansion,” raising Russia’s population from 150 million to around 200 million within years of its institution (reincorporation of East Ukraine, North Kazakhstan, Belarus).


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d) Centrality of China. While Russia can survive without the West, it can’t do so entirely alone. China has an order of magnitude more people, and will soon become big enough to set up a parallel global financial system. Relations with China will have to be further cultivated, and Russia should increase its current low levels of China expertise. In particular, big Chinese companies don’t exactly operate in the context of a free market, but have to answer to the CPC via the red telephone. Because their overall market sizes are comparable, the US should be very hesitant about getting involved in a full-fledged trade war with China. Russia should indeed work and if necessary offer concessions to make Zhongnanhai pressure its largest companies and banks to ignore US restrictions on dealing with sanctioned Russian companies.

Although some might criticize some aspects of this program, the only realistic alternative is Capitulation. If they want Capitulation, they might as well do it now, crawl to the US for forgiveness, give Crimea back to the Ukraine, and save Russia a few decades of missed opportunities.

Otherwise, the “Autarky” recommendations will have to be in the form of a package. Or at the very least, any viable model will have to include most of the recommendations.

For instance, trying to return to the Soviet model will depress living standards, and lead to demoralization and eventual collapse.

Proof: Moscow 1990, sovok bugmen queue at McDonalds. USSR falls a year later

Alienating China would also be a very bad idea. With no alternate sources of capital, Russian billionaires would have more incentives to engage in pro-Western subversion. This would lead to either a coup and Capitulation, or more state control and consequently inefficiency, etc.

3. Wait & See. Another strategy is to just wait it out, in the hope that nationalist movements in Europe opposed to the US gain power. This is indeed the kremlins’ current approach.

Least immediately risky variant – but also highly questionable that it will actually happen, or that nationalists once in power will actually be any more pro-Russian than neoliberalism.txt. Maybe even the converse.

Source: The Unz Review

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