Sunday, September 7, 2008


Can the United States and the West punish Vladimir Putin for his hot war on Georgia in a way that catches his attention? The answer is probably no.

Mr. Putin and his apprentice Dmitry Medvedev operate a “soft” dictatorship based upon high popularity ratings. Josef Stalin ran a “hard” dictatorship in which he forced his policies, such as collectivization, on a generally resistant population. Mr. Putin has basically delivered what Russians want: payment of wages and pensions on time and a resurgence of Russian national pride.

Mr. Putin’s war against Georgia will likely raise his popularity. The subservient press will explain it was Georgia’s fault, and the Russian population will buy this story. Public opinion polls show the Russian people, like Mr. Putin, regard the political breakup of the Soviet Union as a mistake. U.S. or NATO aid to Georgia will be interpreted as a sinister attempt to encircle a valiant Russia. Kicking Russia out of the G8 would be interpreted similarly. We now know the Soviet Union’s invasion of Afghanistan was based on faulty KGB intelligence that the United States planned to use it as a launching pad against Soviet Central Asia. Could not the same be said of America’s “friendship” with Georgia?

How about economic measures and sanctions? Mr. Putin has conclusively demonstrated he is willing to sacrifice economic for political goals. He, like V.I. Lenin and Stalin before him, regard the economy’s “commanding heights” as an essential instrument of domestic and international policy. Gazprom is nothing more than a Soviet-style industrial ministry that carries out the state policies of intimidating Eastern and Western Europe and Ukraine and ensuring that satisfied domestic consumers receive electricity below the cost of production. The same can be said of Russia’s pipeline monopoly Transneft.

Although the Baku-Ceyhan pipeline through Georgia could actually raise Russian export earnings by reducing congestion in its own export pipelines, it would lessen Russia’s political stranglehold on Western markets. Mr. Putin liquidated Russia’s most efficient oil company (Yukos) without batting an eye, turning its assets over to inefficient state concerns.

In the days of the Soviet Union, the economic costs of such arbitrary state interventions could be hidden. In today’s world of international capital markets, they cannot. Despite the state’s goal of making Gazprom the world’s most valuable company, the Georgian incursion likely cost Gazprom a hundred billion in market capitalization.

Despite Mr. Putin’s gifts of billions of barrels of reserves from other companies, Gazprom’s market capitalization is about half of ExxonMobil despite proven reserves more than 10 times larger. This “Putin discount” cannot be overlooked, but it is a price Mr. Putin is willing to pay.

Mr. Putin and Mr. Medvedev would like a booming Russian economy; they would like Russia’s most visible companies to be highly regarded by international investors; they are proud of Russia’s healthy growth rates. But they remain willing to sacrifice economic goals for political ones. Mr. Putin’s soft spot is his popularity ratings, but with his control of the media, it would take an economic disaster for them to fall. At this point, the United States and Europe are not able to produce such a result.

The willingness to sacrifice economic for political goals goes back to the critical debate between Stalin and his rival, Nikolai Bukharin, in 1929. As Stalin began extracting grain from agriculture by force, Bukharin argued (correctly) that this would destroy agricultural production. Stalin’s paraphrased answer: “I do not care about agricultural productivity; I want agriculture under my control.” In this regard, Mr. Putin appears to have learned from Stalin. He will place politics above economics.

Paul Gregory is a research fellow at Stanford University’s Hoover Institution and professor of economics at the University of Houston. He is the author of “Lenin’s Brain and Other Tales from the Secret Soviet Archives” (Hoover Press, 2008) and his book “Terror by Quota” is forthcoming from Yale University Press.

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