Tuesday, October 20, 2009

The second fall

The Soviet Union collapsed in 1991.  It's successor, Russia, is in grave danger of collapsing soon.  The Russian government was on the ropes, but got a reprieve from the high oil prices of 2007 & 2008.  Now they are hurting again.  Do they deserve to be saved, or are we actually fighting Cold War II right now?

Nazis, fascists, and communists are the three primary examples of centrally controlled economies.  These types of governments perform exceptionally well in short sprints.  A few central planners can give lots of specific orders, and an economy can make a tremendous amount of progress in a certain direction in a very short period of time.

Witness the military build up of nazi Germany leading up to World War II.  Part of the story that we have lost today is the utter devastation that Germany was in after World War I.  Many of the world leaders of the day simply could not believe that the Germans could rebuild that quickly.  And they didn't rebuild for many years after World War I ended.  The nazis built their giant war machine in only six years (1933-1939.)  There had never before been a true centrally controlled government before, and the other world leaders were completely taken by surprise.

That's fine for a sprint, but the race of nations is a super-marathon.  The Soviet Union conclusively proved that central planning will eventually collapse under it's own weight, and the weight of the corruption that inevitably sets in to any government.  Centrally controlled governments are particularly vulnerable to corruption because the lack of freedoms (press and speech, specifically) and uneven justice mean that they have no working mechanisms for cleaning out the corruption.  Where competing political parties in other forms of government keep the ruling party in check, these centrally controlled governments have only the silent graves of the ruling party's enemies.

I loved Reagan.  And I believe that he understood what he was doing when he announced the SDI defense shield.  He knew that the Soviets were running out of money and could not afford another arms race.  But to give him credit for winning the Cold War is overdoing it.  The Soviets were bankrupt and falling apart before he was elected.  He saw that and pursued policies to make sure that they did not escape.  But the Soviet Union lost the Cold War and collapsed because of the inherit weaknesses of centrally controlled economy.  The system is simply fatally flawed.

The Soviet Union collapsed in 1991.  The Union split up and formed a number of independent republics.  I had predicted that in 1990, and I was surprised by two things:

  • There was very little bloodshed among the republics as they split.
  • Moscow retained as much land and power as it did.

The new Russia that was formed in Moscow retained the vast majority of the resource wealth of the former Soviet Union.  And the government that they originally formed under Boris Yeltsin had the trappings of a free-market democracy.  But the transition from control to free markets was more complicated than the free marketers in Russia understood.

The election of Vladimir Putin in 2000 was the end of free market democracy in Russia.  It had only lasted eight years.  Putin was a wolf in sheep's clothing.  He said encouraging free-market things in public but worked in private with the old hard-line elite to build a new controlled economy based upon the various factions that eventually became the oligarchs.

Now Russia is an oligarchy and secret police state.  Medvedev and Putin rule a sham government in public.  But Russia is ruled by a competing set of hidden oligarchs who sometimes work with Medvedev and Putin to maintain the facade that Russia is a traditional state that other nations can negotiate with.  These oligarchs are the rich men who have succeeded in one way or another since the collapse of the Soviet Union.  They maintain private secret police forces, and openly war against each other and anyone else who gets too close.

An oligarchy is the worst possible hybrid between a free market and a centrally controlled economy.  All power is held by just a few people.  Those people have no responsibility to anyone else for how they use their power.  They probably all know each other, but they never know who really owns what.  They compete with each other, often not knowing who they are fighting with.  So the government, such as it is, is going in many different directions at once.  It is centrally uncontrolled.

The hallmark of an oligarchy is the looting.  Every oligarch is afraid that another oligarch will invade his companies or kill his workers at any minute.  So there is little long-term investment.  Every time a company turns a little bit of profit an oligarch steals it for himself.  Companies, lives, towns, and even wars are bought, sold, and ransomed on a regular basis.

Putin and Medvedev have lately become strutting peacocks, showing off their power and virility.  It's a show. It's a sham.  They understand that they have no real power.  They are only riding the oligarchs for as long as they can.  In many ways Putin may qualify as an oligarch himself, but the mantle of trying to keep up the appearance of respectability greatly limits his freedom of action.  True oligarchs stay hidden in the shadows, anonymous and unknown, so they can have a maximum number of options and escape hatches.

Unlike a centrally controlled economy, an oligarchy can't even sprint.  It can't figure out which direction it wants to go.  The only thing it can do is fight for short term profit.  It's a ponzi scheme government.  As long as their is enough cash flowing in to pay all of the necessary bribes and protection extortions, the government will remain stable.  As soon as the cash flow stops the government will collapse, because it is no longer serving the short-term cash-flow needs of the oligarchs.

This is an unstable situation which we have to unwind as safely as we can.  We can't leave that nuclear stockpile in the hands of such short-term thinkers.  We can't negotiate and make international progress with a partner that lacks the ability to control itself.

So, how do we dismantle a hidden oligarchy?

It's never been done.  There is no manual.  There is no plan.  There are very few people who even understand what we are facing.  But there are a few things that we can do which will put significant pressure on the oligarchs themselves, and at least bring them into line.  And there are strategies that we could employ to force the oligarchs into a straight-out fight amongst themselves for supremacy.  But the latter strategy is much more dangerous.

I have four ideas for relatively safe things that we could do to defuse much of the danger in this situation in Russia:

  • Out the individual oligarchs.  The CIA certainly knows who the oligarchs are.  We should out them and talk about them openly.
  • Ignore the sham government and negotiate with the oligarchs directly as much as possible.  Treat them like the princes of their country and talk to them each directly.  Final international agreements may be signed by the sham governments, but we have to get all of the oligarchs on board.  This will involve a whole lot of horse-trading and bribe paying.
  • Talk publicly about the real structure of power in Russia and encourage the oligarchs to formalize their power into a governing body of some sort.
  • Over time, especially as the oligarchs deal with succession of their seats on this governing body, encourage the oligarchs to relinquish control and institute market reforms.

These steps merely formalize the oligarchy and introduce a small amount of accountability to the oligarchs.  The richest ones should love the idea.  The young and most energetic of them will try to forestall this as long as possible, so they can gain as much power as possible under the current chaotic hidden system before the formalization solidifies everyones' positions.  That probably means more secret police raids and disappearances in the short term.

But it introduces some accountability among the oligarchs and forms the basis for a government that we can negotiate and work with for the long term.  Japan was an oligarchy at the beginning of the nineteenth century, and they were able to make the transition to a more free market economy and democratic government (though you may rightly protest that the Kieretsu in modern Japan are still an oligarchy.)

Failure to do this will result in more international diplomatic stumbling, like failing to get Russia to buy in to sanctions on Iran's nuclear weapons ambitions.

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