Russia’s War Shows the Chaos in the World Order
Economist Branko Milanovic saw firsthand the soaring inequality of Russia’s 1990s transition to capitalism. He spoke to Jacobin about how Vladimir Putin’s war has plunged the country back into crisis — and placed a bomb under the globalized order.
- Interview by
- Pablo Pryluka
- Kate Reed
In the 1990s, as the former Soviet republics turned to the gospel of market liberalism, it was widely claimed that Russia could take up its place in a Western-led, globalized capitalist order. Yet while Boris Yeltsin steered Russia into the G8, the experiment brought mass joblessness and soaring mortality rates at home — feeding a climate of instability that aided Vladimir Putin’s rise. Now, Russia’s invasion of Ukraine and the Western sanctions in response are bringing fresh hardships for ordinary Russians — and they’re also sure to have major effects on the global economy.
Branko Milanovic is a former World Bank economist renowned for his work on global inequality. He spoke to Pablo Pryluka and Kate Reed about Russia’s place in the globalized capitalist order, the fallout of the war domestically, and the effects the invasion may have on its relations with China.
Inequality in Russia increased tremendously in the 1990s. This had begun already around 1987, then there was a macroeconomic shock due to the reforms in 1992, and then privatizations, with the famous “loans-for-shares” scheme in 1996 which led to the privatization of large companies, practically to the stealing of assets.
I would like to point out that an increase in inequality under conditions of huge decline in real incomes, is entirely different than having the same increase in inequality under conditions of growth. Just compare China to Russia. China also had a tremendous increase in inequality, but at the same time, its income increased by — depending on what year you want to use as the base — five, six, or twelve times. Between 1987 and 1993, Russian GDP, on the contrary, fell by about 40 percent. Compare that to the US Great Depression, which saw about a 30 percent decline, from the peak to the trough. If you were in the lower part of the Russian income distribution, not only would you lose 40 percent of your income, but because inequality went against you, you would lose 60 or 70 percent.
I think it’s useful to start with that tremendous decline. It’s easy to talk of decline in percentage terms, but behind it there are people who lost their jobs, faced massive wage and pension arrears (some wages would not be paid out six months), and had to re-qualify and find new jobs. You had doctors and engineers who had to drive taxis or sell trinkets on the street.
A further point is the increase in mortality rates. Life expectancy in Russia declined at the fastest pace ever in recorded history during peacetime. Put all this together and you have a total societal collapse — that can’t be overemphasized.
I worked in Russia in the early 1990s. For foreigners there — I was there with the World Bank — it was great: for $10 or $20 or $50, you had everything. For the people living there, it was horrible. While I’m a fan of János Kornai, the term he invented — calling it a “transitional recession” — is misleading in the Russian, or more broadly, Soviet case (including of course Ukraine and other ex-Soviet republics).
When you see how strikingly deep that depression was, how it affected people, how the industrial base was destroyed, calling it transitional recession seems inadequate because it implies a one-off and inevitable event, recognized as such by the people who suffer. I think that “inevitability” often distinguished observers from the population. If you pronounce that something is inevitable, then the losses that occur seem to be justified; but if you are yourself on the receiving end, it is hard to take such a detached attitude.
Things eventually did turn better in Russia. But it took quite some time, including yet another smaller collapse in 1998 — in this case because of the Asian financial crisis. The 1990s were disastrous years, and Putin was very lucky that he came to power in 2000, so that he was not associated directly with that decade. In the 2000s, the situation improved for many reasons, including the stabilization of the ruble, increased oil prices, higher agricultural output, and Putin’s own contribution in the sense that he got rid of many of the oligarchs who were fighting each other and dragging the country close to the civil war.
There’s a book, Godfather of the Kremlin, that impressed me quite a lot — I reviewed it — by Paul Klebnikov, the Forbes editor gunned down in Moscow in 2004. The reason why I read the book is that I was interested in Russian land reforms under [Pyotr] Stolypin, and Klebnikov did an enormous and excellent PhD dissertation on the topic. So that’s how I “discovered” him. Then I read his book, which is a story of the oligarch Boris Berezovsky. It’s really worth reading, because Klebnikov describes the technology of destruction, how the oligarchs not only stole the money, but while stealing the money, destroyed the economy.
That’s something many economists, including myself, hadn’t understood fully. It consisted in taking over a company, either by bribing or threatening the management (that is why it was useful to have a mafia), then stripping everything out of the company and making it go bankrupt, but even as it goes bankrupt it still produces income and you collect all the money until it ceases production. The employees are all sent home, and then you move to the next company. What is important to understand here is that those politically connected oligarchs not only made themselves rich, but made themselves rich by destroying the means of livelihood for thousands.
You have described Russia as an “oligarchic capitalist economy” and the Russian government as “technocratic and neoliberal.” Could you expand on what the Russian economic model is, under Putin?
Putin was always very neoliberal in the economic sphere: in favor of private enterprise and entrepreneurs. That neoliberalism stems, in his case, from anti-communism, and as we now see, Russian imperialism (which he might have acquired along the way). His heroes are anti-communist heroes of the Civil War. So that was his ideology, which is obvious nowadays as when on the first day after the invasion of Ukraine, he called the meeting with big business and essentially said: now’s the opportunity to show what you can do; we will get rid of all the restrictions, you hire as many people as you like, pay them whatever. Basically, full freedom for them. He talked about cutting taxation further, reducing regulation, etc.
I’ve heard people from the Russian government speak at several occasions. They are neoliberal, very technocratic, like obviously the famous technocratic group in the National Bank of Russia. Their power over key political decision-making is nonexistent. Someone recently aptly described how Putin makes these big geopolitical decisions, and then the technocrats have to find a way to somehow soften the economic blowback of such big decisions. Putin doesn’t seem to take an interest in how they would do it: he basically treats the government the way some people treat people who clean up their home: clean up the mess I made. I don’t think that he would have informed them of the decision to invade Ukraine. They were all, I suppose, shocked by the extent of the sanctions. I think these are skilled and competent people, and ideologically they are very neoliberal, but I don’t think they can do very much now given the current conditions.
Let’s turn to the background of the current invasion of Ukraine. Do you think that after the fall of the USSR, Russia could have been involved in a “common European home”–type process as Mikhail Gorbachev hoped, and is the current conflict — if not provoked by the West — nonetheless somehow the fallout of the mismatch between turn-of-the-1990s optimism about Russia’s place in a liberalized, globalized world, and the reality?
I think so. I may be biased because I knew Russia reasonably well in the 1990s. I always thought that that period was extremely important. And I understand that many young people don’t know the period, or that it’s rather irrelevant to them. But it fundamentally shaped the worldview of the generation that is now in power in Russia. If you look at Putin and people around him, they’re all between sixty-five and seventy, so they were thirty or thirty-five at that time and themselves — including Putin — experienced that decline. There was thus a huge discrepancy between their expectations as they were growing up in their twenties and what then happened.
So, I always thought that one really needs to go back to that period to understand what is happening today. Now, to answer your question directly, I’m not sure that Russia could even have been integrated into the Western order entirely, and be another Italy, which after being the enemy during the Second World War became an unquestionable US ally. But I think that if many mistakes had not been committed, we would not be today in this situation: Russia could have been integrated in a normal sense, that is, in not becoming a revisionist power, and we would not have to face a war and certainly not have to face somebody deciding possibly to use nuclear arms. Thus, today’s outcome is a clear indictment of the policies pursued after the end of the first Cold War.
We’ve also seen attempts to explain Russian aggression in terms of a supposed age-old national culture…
I don’t like such explanations in economics and I don’t like them in political science. They are always wrong because they are basically a distillation of whatever is commonplace at a given time. Thus, they always seem correct at a given point in time, but they are always wrong when you look at them ex post. Thus, you had essentialist explanations for Japan’s behavior, for Germany’s behavior, for Italy’s behavior, etc., but when these countries change, then somehow you rush to have a different essentialist explanation.
The same is true in economics. We had books written on how East Asia could never develop because of inordinate respect for the elderly and conservatism implied in Confucian ideology. Then, fifty years later, we read that precisely because they are Confucian and care about education, they have become developed. You also had Max Weber’s famous contrast of Catholics versus Protestants, but then in the 1960s and ’70s, you had all Catholic countries in Europe growing faster than predominantly Protestant countries. So, how does this work?
People also like to offer such explanations because they are profitable. You get your book published, and when people read it, precisely because such stories are a compilation of commonplaces, they say, “Wow, this really is phenomenal; it fits beautifully with what I thought.” But it fits beautifully because it gives the slice of today interpreted as a somehow inevitable outcome. But things change. Then you take another slice of history, and claim another essentialist explanation really matters.
For the last ten years, the Russian economy has been stagnant, with falling GDP per capita (at least in most years) and rising inflation. The handling of the COVID crisis was another source of potential discontent. What are the ties, if any, between the economic situation in Russia and the decision to invade Ukraine?
It’s difficult to say. I think that Putin was principally driven by the geopolitical factors which are very clear in his speeches. But certainly, the economic situation in Russia in the last ten years has not been good.
First, there was practically no growth. There were a few years when incomes went up, then a few years when they went down. Then the COVID crisis happened. Russia was not an exception: almost every country in the world had negative growth rates, and Russia was not, in that sense, worse than the others. But its control of COVID was pretty bad, maybe not so much compared with the US, but certainly as compared with China. I think that reflects the institutional inefficiency of the health system in Russia.
So, this crisis — pardon the expression, because it’s an atrocious war — is like the cherry on the cake. There’s been a lack of growth, a feeling of stagnation, the COVID crisis, and then a war. It’s a circular history of Russia: you improve the situation for ten or twenty years and then you have a calamitous decline. It has happened several times in the past hundred years and it is happening now again.
The West has imposed enormous economic sanctions on Russia since the invasion began. We wanted to ask what you think about what Nicholas Mulder has recently called “the economic weapon”: How effective are economic sanctions vis-á-vis more direct military involvement, not just in this case but overall? And what are the humanitarian costs of economic sanctions?
Mulder’s book has just been published. It was not a response to the current crisis; and I think that makes it even more useful because we often tend to project the present into the past, while that probably isn’t the case with his book.
Looking at the effects on Russia, the sanctions are obviously comprehensive. They are unparalleled in extent, and in particular the financial sanctions are something quite new. I don’t think we’ve ever seen a seizure of central bank assets. So, that’s a big step. And in Russian papers you could read of the effects of sanctions, for instance, on air transport: soon, people may not be able to fly from Moscow to Vladivostok. If the planes which Russian airline companies are currently leasing — which now they plan not to return — cannot be serviced and repaired by Boeing and Airbus, they won’t have adequate Russian substitutes. You cannot develop an airplane industry in a couple of years.
Aside from that, machine-building, and gas and oil industries entirely depend on Western technology. I wrote about it on my blog: the Soviet industrialization in the 1930s was also largely based on Western technology.
Now, car companies in Russia have already sent thousands of staff on twenty days’ leave. Many cars like Toyota, Nissan, and others are produced in Russia, but from the parts that come from all over the world. When these parts stop arriving, what are workers going to do? In the 1990s, some might have said, OK, let’s try to do import substitution. It might not have been a great policy, but it was feasible because the industrial base was there. But for the reasons that we discussed before, that industrial base has been either destroyed or totally changed. So, you cannot do import substitution now without foreign technology, without some essential industrial base, and without an increase in labor force (as Russia has a declining population).
You’ve mentioned the question of time and sanctions, noting that the US, for instance, has imposed sanctions on Cuba for over sixty years. How might the longevity of sanctions — and the fact that there is apparently less popular demand to remove them than, say, to end the presence of active troop involvement — affect the next years and decades? Are there ramifications beyond Russia?
I think that the sanctions would be very difficult to lift. When you look at other cases, like Iran, recently some sanctions were lifted, but most are still in place. The technological development of Iran and its ability to even sell oil have been impaired quite a lot. The fact that the sanctions have been put in place by Congress makes it even harder to lift them. Take the Jackson-Vanik amendment, the sanctions on the USSR because of limits on Jewish emigration. They were kept on the books for twenty years after the whole reason for them had disappeared. Every year the administration had to notify Congress that the sanctions shouldn’t be applied because there was no reason for them, but they were still on the books.
That’s why I think this is such a major event. Even if the war were to stop tomorrow, the willingness to remove sanctions would be very low and imply such a list of concessions that any Russian government that came after Putin’s would find it politically difficult to accept. It would require another Brest-Litovsk. In some form or another, we should thus expect sanctions to be around for a long time, even if perhaps not all of them will be equally binding.
And what are the consequences of those changes? You recently wrote: “The problem is not that the government is making wrong policy choices; the problem is that, in the current situation, there are almost no good policy choices to make.” Politically, do you think this might influence the stability of Russian institutions as they work now?
I think the government is basically doing a mopping up operation because it’s presented with a fait accompli. There are no good decisions: they are practically squeezed, given that the domain of decision-making is so narrowed by Putin’s political decisions, and by the response of the West.
There will be, certainly, increased rate of inflation, and then possibly shortages, and then inflation combined with shortages, with in addition many working-class Russians losing their jobs. It may be difficult to get even the elementary food and survival goods, and then the government will be pushed by events toward rationing.
I said before, the government is neoliberal. But if the alternative is people rioting, which might also happen — and I think economic reasons are very good reasons for rioting because nobody can accuse you of being an enemy or traitor if you are rioting because you don’t have enough to eat — the economy would have to move to some kind of wartime footing. Not necessarily because the government wants to do it, but because it would be led in that direction.
I see already the signs of shortages happening. Obviously, they won’t come immediately: there’ll still be stocks and people filling them up. Kornai had this very good idea that the other side of shortages is glut, or in other words, wastage. Because when you have a shortage of sugar today, what is everybody going to do? Try to buy ten, fifteen kilos. That makes the shortage worse, which makes people more likely to buy a hundred kilos. You build up stocks of it at home, some of it is wasted, but eventually the stocks run out.
So, I think that things will get worse and worse.
One of the other likely consequences you’ve signaled is mass displacement: the immediate crisis faced by Ukrainian refugees, but also Russian emigrants. You suggest massive internal migration might be a medium-to long-term response in Russia: How might that play out?
We are in the midst of the war and we don’t know how many migrants there will be. In the case of Bosnia, it was more than 20 percent of the population. Before this war started, I thought that if there is a war in Ukraine, migration might mean 5 million people leaving Ukraine. Now, it’s approximately 3 million already, and as it is being said, it is the fastest wave of migration ever, because it’s relatively easy to get from Ukraine to Poland.
But in the longer term, I think it’s impossible to tell how big the migration would be. And secondly, is there going to be a ceasefire soon? I think that if there is some kind of a political solution, many of these people would come back. They are nearby and, if their homes have not been destroyed, many of them might prefer to return rather than emigrate permanently. But the longer the war goes on, the more you create a new environment for yourself in the new country, the more likely you are to get a job, to find a cousin or somebody else to stay with. In the Syrian case, when it started people went to Turkey and the nearby countries. But as the war went on in Syria — now for more than a decade — people didn’t go back.
And how about migration within Russia?
I referred, in a recent blog post, to the link between internal migrations and the current sanctions regime. There is a strain of thought in Russia regarding its economic and geopolitical uniqueness: Eurasianism. Russia is almost entirely, population-wise, based on Europe, but under conditions like the current ones, you can imagine — and it is imagination more than reality — Russia trying to pivot toward Asia.
If you were to move people as if by decree, putting more people in East Asia would make sense and have certain advantages. East Asia is the most dynamic part of the world. Europe is declining both in population and in economic importance. Being close to Korea, Japan, China, trading with them and not being necessarily exposed to the sanctions and the issues that you had with Europe, would theoretically seem like a good proposition.
The problem is, however, that 80 percent of the population of Russia lives in the European part of Russia. The distances within Russia are enormous, the infrastructure is nonexistent or very inadequate, and the jobs in the East are few and insufficient. Vladivostok, for example, which is the largest city in the in the Pacific area, has a population of half a million, while Moscow’s is 12 million. So we are talking about a huge movement of population, which is difficult to envisage.
The Soviets tried to develop the northern parts of the country. They wanted to have more people there because it was where resources are. They paid them much better and many people went there — not in millions, but in thousands. But most of these one-company towns disappeared after the transition. If you look at Norilsk, where Roman Abramovich is making his money from nickel, it is not particularly attractive. Probably there’s darkness for eight months of the year. But it has made him one of the richest people in the world. But do you really expect maybe 2, 3, or 4 million people to go and live in such cities? I don’t think it’s realistic.
Do you see a geopolitical movement to the East — and will this put Russia more at the mercy of China?
I do. One of the points in both Capitalism, Alone and Global Inequality is that we are in the presence of a massive shift. This is a shift equivalent in importance to the Industrial Revolution. It’s a rebalancing of the world, with the rise of Asia: I don’t mean only China, but also Vietnam, India, and Indonesia — obviously large, populous countries — with the center of gravity of economic activity shifting from West to East. I think it is happening and will continue happening in the next two generations or maybe more.
When you look at the map of Eurasia — de facto one continent — you might end up with a situation like that of the 1400s and 1500s, with fairly rich parts on both the Atlantic and Pacific end, while the hinterland is relatively poor. There are studies that look, for example, at the level of income in 1400 or 1500 in England and China, and at grain yields in the Netherlands versus the Yangtze River Valley. Basically we are talking about the same level of market development and same or similar level of income. Obviously, those were very modest incomes compared to today, but they were the two end-parts of the Eurasian continent, the two maritime parts, both relatively similar in income, whereas in the continental Eurasia where Russia is now, you had the Mongol Empire that was much poorer and at a lower level of technological development. That would be Russia’s situation tomorrow too and the war with Ukraine makes this outcome even more likely, for all the reasons we mentioned before. I wrote about that in the introduction to my Russian edition of Global Inequality.
I won’t be around to study the long-term consequences, but I do think we might end up seeing this war as the really crucial event that accelerated such a development. The lack of economic development or relative poverty might raise other issues too, including how sustainable is the current political configuration of the whole area or Russia. The oil producing regions might ask why they need Moscow; why not create another United Arab Emirates? I don’t mean that seriously today, but clearly it does open up many possibilities.
We are already seeing the EU and US move to dramatically cut imports of Russian oil. Rising fuel prices are adding to preexisting concerns about inflation and a cost-of-living crisis. What short- to medium-term impacts do you see for the EU and US, and how will the burdens and benefits be distributed?
It seems to me, it looks like stagflation because we will probably have a decline or face no, or very modest, growth. This is especially problematic coming after the decline in 2020 and just a rebound in 2021. On the inflation part, there was a large monetary expansion due to COVID-related expenditures on maintaining adequate standard of living for many people. And now there are issues with higher food and gas prices.
With regard to food prices, I’m more worried about the impact on poorer countries, where food prices and riots and changes in government have often gone together. Egypt is a particularly good example: whenever you have an increase in food prices, you have riots. It doesn’t mean the government is bound to fall, but it is a permanent concern. Food and energy, including transportation costs, count for more than half of the expenditure of poorer and middle-class households. So, I find such price increases quite concerning and I’m not sure that international organizations will be able to deal with it. Political instability may follow.
That’s what my guess is now. I was very pessimistic about the political effects of COVID, though I must say they were relatively limited and not as bad as I had thought — that is, assuming that Putin’s decision to invade Ukraine is unrelated to his COVID self-isolation. But in the poorer countries, COVID, high morbidity and mortality rates, shortages of food, and the high price of energy create a very combustible combination.
You write about the measures Russia may have to take in the short term to control consumer prices and ensure basic needs are met, such as rationing. Even before the war, economists like Isabella Weber had (controversially) floated the idea of reviving tools like price controls elsewhere. Do you think the policy landscape regarding these interventions in the West has shifted or will shift?
I think that Isabella Weber was wrongly interpreted to have argued for price controls, period. Her view — the way I understood it, she could obviously say more — it is that there are certain prices, like the prices of energy or food that we mentioned (which you could also call “wage goods” in a Sraffian or Ricardian framework) that are by their very nature more important than other prices. This is because they are important for the livelihood of large groups of people.
There is a beautiful statement by David Ricardo when he says that whatever happens to luxuries, whether their import price goes up or down, is totally irrelevant for profits because profits depend entirely on wages, and wages on the costs of wage goods. If the price of luxuries goes up, it really only affects the consumption of capitalists, not the distribution between profit and wages. So putting Weber’s thinking in this classical framework, I think what she is saying is that there are goods that we should pay special attention to. And this seems to me to be true, and not sufficiently appreciated.
In her book on China, Weber uses the historical examples of what Chinese governments have done over the years with granaries, using them as a mechanism to control the supply, and thus the price, of grain. And, more recently, they have done the same with the supply of pork, obviously an important ingredient in the Chinese population’s consumption. When there was the swine flu they essentially used the supply coming from government sources to dampen the price increase. The US has for example a similar mechanism in strategic oil reserves. To repeat: I think that Weber is right in the sense that there are certain goods — and as I said, you might call them wage goods — which are really important for the maintenance of the normal life of large parts of the population. We have forgotten that.
This isn’t only about consumption by the way: you need to look at other key goods, at inputs whose effects spread throughout the economy. It used to be steel, maybe today it’s microchips, which are really built into the price of many final goods. For instance, the prices of used cars in the US have gone up because of shortage of chips. Shortage of microchips has led to a lower production of new cars, which has led in turn to an increase in the price of used cars.
So, it’s an argument that chips are very important, in a way that, say, perfume isn’t. This is my understanding of Weber’s points.
You, along with other economists studying global inequalities in income and wealth, have highlighted the importance not only of tax havens of the extremely wealthy, but also financial centers like London in laundering their money. The UK has recently moved to target sanctions very specifically at certain Russian oligarchs with assets in the UK like Abramovich. First, what do you make of these targeted sanctions, and second, do you think this opens the possibility that governments begin to develop the political will to address the problems of offshore accounts, tax havens, money laundering, etc. more broadly?
On governments addressing the problems of tax havens: I’m totally in favor. I think that the minimum corporate tax rate of 15 percent is right and that coordinated action by the major governments really could make a huge difference to the ability of rich people to hide from their own countries and from taxation, generally.
But I’m somewhat ambivalent about what has happened now. Because we are not really changing the rules of the game. We are basically giving individual governments the right to seize assets on entirely political grounds. Even the definitions are very unclear. I mean, who is close to Putin? Who is not close to him? How do we know? There used to be the Almanach de Gotha detailing the German nobility, but we don’t have that for the Russian elite today. We are in totally uncharted waters.
These governments, especially the British, and the elites in these countries, have been huge beneficiaries of the transfer of wealth, or to be blunt, thievery that happened after the fall of the Soviet Union. People may say, if we now take this money from the oligarchs, it’s good for global inequalities. Of course, arithmetically it is: you would have fewer billionaires. But the question is, to whom will that money go? One possibility, which I think is not unreasonable, would be to use it for reparations for Ukraine.
Politically motivated seizures of assets open up a Pandora’s Box. Let’s suppose China decides that wealth inequality in the UK is too high. So, should China then seize the assets of the British oligarchs? I understand that these decisions are made for political reasons, but we should not treat them as if they were based on some concern for common good and that they were suddenly made out of desire to reduce wealth inequality.
If similar decisions were made in a coordinated fashion by a number of governments, and with the participation of the UN or international organizations, affecting billionaires from many countries, and with clear rules regarding the use of such funds, they could be supported. But what we see today is wartime decision-making by individual governments, which may be OK for wartime conditions but cannot be used as a general principle and should not be camouflaged to be an attempt to exact justice. It has nothing to do with justice or equality. So, I’m more ambivalent toward that.
Let’s start by talking about Russia’s internal inequalities. How did the collapse of the Soviet Union affect income and wealth inequality in Russia? Did Putin’s arrival as president in 2000 change that?