and Mills, 2020). Ivan the Terrible, Grand Prince of Muscovy from 1533 to 1547 and Tsar of All Rus’ until his death in 1584, devised an economic system to serve his great power autocratic aspirations. He claimed freehold ownership of the means of production, including the peasantry, allowing the nobles acting as his agent-servitors to run the economy on assets that Ivan “rented” to them in return for a share of the crop, fealty and military and government service. He dispensed with markets, unconcerned about productive efficiency and consumer satisfaction. His patrimonial “rent-granting” economic scheme fostered affluence for himself and his loyal supporters, military might for his conquests, gradual military-intensive economic development and the perpetuation of his political authority (Rosefielde and Hedlund, 2008).
Putin’s contemporary Russian economy is more sophisticated than Ivan Grozny’s, but similarly patrimonial. Putin is the system’s de facto sovereign. Everyone else is his agent-servitor or tool. He not only rationally chooses to support and harness markets to enhance Russia’s economic might but also uses market controls and market rigging to build personal wealth, buy the loyalty of his supporters, maintain powerful armed forces for diverse purposes, foster economic modernisation and perpetuate his political authority. Western markets promote consumer sovereignty, that is, consumer control of the private sector through the purse and democratic control over the public sector via the ballot. Russia’s economy principally serves Putin’s autocrat power agenda. This is why Russia is an imperfectly competitive market system with Muscovite characteristics.
Costs of Private Sector Anti-Competitiveness
Putin pays a price for the benefits the Kremlin reaps from Russia’s Muscovite market system. The economy is inefficient and underproductive. The autocrat could improve the system’s performance by eliminating anti-competitive aspects that do not serve his purposes. He could streamline rent-granting, curb superfluous anti-competitiveness and improve the climate for entrepreneurship and direct foreign investment. This would enhance the efficiency of factor allocation, enabling at least one producer to increase output without incurring diminished production elsewhere, while making factor prices more consonant with competitive marginal factor productivities. Increased competitiveness would also shift production towards an equilibrium more closely attuned to consumer demand, within limits fixed by Putin’s priorities, and the productivity of the whole system would increase through improved entrepreneurship, indigenous technological progress, technology transfer and diffusion. These gains in their entirety would be “Pareto” superior; that is, they would make consumers better off, simultaneously advancing one of Putin’s political goals, without entailing losses in other aspects of his agenda.
The competitive principles guiding this line of reasoning assume that workers can freely negotiate terms of employment and the quality of the work environment and are able to insure themselves against layoffs, dismissals and medical exigencies. Insofar as Russia violates these assumptions, room exists for improving the risk insurance aspect of worker well-being on a “Pareto” superior basis. Both workers and Putin could enjoy improved economic security without sacrificing any other benefits. These gains would be invisible in national income statistics because implicit insurance transfers are not included in GDP.
Benefits of Public Transfers
The competitive market ideal is horizontal. The people themselves seeking profits and utility run the economy, with no governmental assistance beyond facilitating private activity through what John Locke called the social contract: “rule of law”, basic infrastructural support, border protection, defence and elementary education. This ideal mischaracterises modern realities. Contemporary market economies across the globe have become vertical.
Governments provide a vast array of public programmes, including social safety nets. They establish the rules of market conduct and regulate economic behaviour. Some public programmes in Russia, like munitions production in state-owned factories, education in state schools, roads and mass transportation, are included in the GDP. Standard comparisons of Russia’s economic performance fully capture this value-added. Other government sector activities like unemployment, healthcare and retirement insurance-transfer schemes do not generate value-added for the national income accounting purposes and are disregarded in standard comparisons of Russia’s economic performance and potential, making GDP an incomplete indicator of the comparative quality of Russian life. The same principle holds for intangibles like democracy, civil liberties, civic harmony, social justice, environmental purity (greenness) and spiritual community (sobornost). Any comprehensive assessment of the comparative merit of Russia’s imperfectly competitive market system with Muscovite characteristics must take into account the utility of insurance transfers and intangibles. Russian economic performance on both these scores is poor by Western standards, but is improving.
Macroeconomic Management
Perfectly competitive freehold market economies in theory should perpetually maximise consumer utility. No one should be involuntarily unemployed, price levels should be stable and GDP should grow at the “golden age” rate of technological progress (Solow, 1956, 1957; Acemoglu, 2009). Business activities may fluctuate, but only as required by transitory factors and changes in people’s demand for leisure.
Imperfectly competitive market systems necessarily fail to meet these goals. Involuntary unemployment, business cycles, deficient economic growth and inflation may blight economic performance. Along with assistance from the World Bank and the International Monetary Fund, Russia tries to manage these disorders by applying the same macroeconomic tools used in the West. The Kremlin regulates the supply of money and credit with open market operations and uses fiscal policy to affect aggregate demand. It deficit spends (increases government purchases with borrowed money), reduces taxes, increases subsidies and devalues the ruble when business is weak, reversing the field when business is strong.
Russian macroeconomic management is a challenging task. The Kremlin’s banking system is weak, hampered further by Western economic sanctions that bar Russia’s access to medium and long-term international credit. State revenues are heavily dependent on volatile natural resource prices. Soaring oil prices swell Moscow’s coffers, flood the country with foreign direct investment and stimulate aggregate economic activity. Plunging natural resource prices reverse the process causing recessions and depressions. When the sun shines, Russian macroeconomic policymakers should avoid overspending, creating reserves for rainy days. The Kremlin has been prudent in this regard. Russia’s debt-to-GDP ratio is only 13.5%, a small fraction of the American figure.1
Russia’s macroeconomic performance more broadly has been good, given its exposure to natural resource price shocks. Its labour force participation rate is high,2 and its 4.8% unemployment rate is close to what World Bank economists consider full non-transitory employment,3 and the inflation rate is 3.4%.4 GDP growth is dyspeptic at 1.8% per annum, but still faster than the European Union,5 and real wages including pensions are growing. Russia ran a 35.4 billion dollar current account trade balance surplus in 2017 and holds relatively high levels of international reserves ($461 billion). It has low external debt levels (about 29% of GDP) and a comfortable import cover (15.9 months) that enables the Federation to readily absorb external shocks.6 The Kremlin’s primary foreign trade vulnerability lies in Russian dependence on natural resource exports to pay for the country’s imports. Export diversification is limited. Since 2014, Russia’s non-energy export volume growth has been outpacing that of energy, contributing to export diversification. Yet, Russia’s progress in export diversification is modest. The share of oil/gas exports in 2017 was still high at 59%, accounting for 25% of the fiscal revenue, with diversification mainly driven by established product lines.
There is little doubt that Russian macroeconomic performance in all these regards would be substantially better,
