The Bear Has Lost its Roar

President Clinton last week extended a warm welcome to new Russian Prime Minister Sergei V. Kiriyenko, calling his confirmation “good news” for Russia and the United States. The gesture from across the Atlantic on Thursday was less gracious: a ratifying vote by the Senate for NATO’s eastward expansion. Official Washington remains confident that the NATO decision will have no adverse effects on U.S.-Russia relations. There is a similarly sanguine opinion of Kiriyenko’s chances to improve the Russian economy.

These American views of both Russia’s security situation and its economic prospects reflect a brand of wishful thinking that could be exceedingly dangerous. Beneath the surface of the Russian political system, the combination of an economy far weaker than most people recognize and security concerns much greater is leading to pressures of volcanic proportions. In the end, it will be our problem as well as Russia’s.

The first step in understanding Russia’s economic prospects is to acknowledge just how small that economy is now and is likely to remain.

Russia today has about 150 million people, roughly what the United States had in 1950. Russia’s total economic product, however, is in terms of market value only one-quarter the size of America’s in 1950. To put it another way, Russia is currently running more than a century behind the United States in overall economic performance.

Right now, Russia outperforms hardly anyone. In this, the seventh year of market reform, only a small segment of the Russian economy can truly be said to be operating under market conditions, and most of that is finance-related activity based in Moscow. The rest of the economy remains not just outside the real market, but largely insulated against it. Essentially all of the agricultural sector and most of manufacturing persist in a nearly self-contained system that operates without market prices and almost without money.

The major commodity-producing enterprises have set up an elaborate set of barter arrangements that allows them to sustain production under conditions highly buffered from market discipline.

They induce state orders for their products and use them to meet federal tax obligations. They provide goods and services for local governments in lieu of taxes.

Because one of this system’s main objectives is to preserve jobs, it has had a major positive effect in maintaining a remarkable degree of social and political stability in Russia. But that stability comes at a huge cost. The key is the shrinking federal budget.

Consider the findings of a recent government audit of the country’s 210 largest corporate taxpayers. Those companies, which account for most of the taxes paid, paid 85% of their federal tax obligations, but only 10% of that amount was in cash. The rest was in the attributed value of products delivered and services performed.

As a result, the total cash revenue available to the Russian federal government last year, not including amounts borrowed or raised from selling state property, was barely $36 billion. It is not likely to be any greater this year.

To put it mildly, no matter how wise or skilled one happens to be, it is extremely difficult to direct the fortunes of 150 million people with a sustainable resource base of $36 billion a year.

One of the state functions that is suffering most from the budget crisis is national security. Guided by the basic assumption that it is in implicit competition with the entire alliance system of the United States plus China, Russia currently plans to preserve a military establishment of 1.2 million people. It is far beyond what Russia can afford.

By denying this, the Russian military faces the inevitable consequence of further deterioration of equipment, infrastructure and overall organizational coherence.

In reality, Russia can probably afford a military of no more than 400,000 personnel. But at that level, it could not possibly perform traditional missions against the opposition of any major military establishment. Because Russia cannot guarantee its own security in the form of a traditional security establishment, in effect, the outside world is going to have to guarantee Russia’s security for it. At present, neither Russia nor the rest of the world seems close to accepting this unavoidable implication.