Security Above All

13 february 2016

Russia’s Growing Militant Economy

Richard Connolly is Co-Director of the Centre for Russian, European and Eurasian Studies (CREES), University of Birmingham, UK; and Associate Fellow at Russia and Eurasia Program, Chatham House, London.

Resume: A new system of political economy is emerging in Russia in which greater control is exerted over key industries to help generate the economic basis to compete in what its leaders perceive to be an increasingly hostile geopolitical environment.

Against the backdrop of heightened international tensions and economic warfare between the West and Russia, there are signs that the configuration of Russia’s system of political economy is changing. Russia’s economic policy debate is increasingly characterized by an emphasis on self-reliance that is justified in the name of security, with economic policy subsumed within a wider effort to insulate Russia from a growing array of internal and external threats. It is this tendency towards economic securitization that is the subject of this article.

To date, official plans for economic securitization in the form of public statements and government documents and decrees are inchoate and lacking in cohesion. There is no clear agreement on desired objectives or on the precise means that might be deployed to achieve those objectives. And a powerful array of constituencies remain opposed to the rolling back of many of the market reforms undertaken since the collapse of the Soviet Union. Yet the growing sense of insecurity felt by those in the Kremlin may be leading to an increase in the relative power of those groups in and around the state apparatus that would like to see Russia adopt a new, securitized, agenda for economic development.

What is Securitization?

Edwin Bacon, Bettina Renz and Julian Cooper in their 2006 book Securitizing Russia introduced securitization as a concept that can be applied to the domestic politics of a country a decade ago. They argued that securitization is what happens “when normal politics is pushed into the security realm,” and that the “securitization of an issue in a policy sector occurs when a political actor by the use of the rhetoric of existential threat…succeeds in justifying the adoption of measures outside the formal norms and procedures of politics.”

The first stage of securitization—the “securitizing move”—occurs when policy makers deploy the rhetoric of securitization to move away from the “normal” politics of the given policy area. The second stage—successful securitization—occurs after the securitization of a policy area has been accepted as legitimate by specific key audiences, such as the government, a specific ministry, or a political constituency (e.g., a nationalist party).

It is also worth noting what securitization is not.

First, it is not necessarily synonymous with militarization, even if it is plausible that both may occur simultaneously. Successful securitization is likely to result in a broader array of policy areas being defined as issues of national security, well beyond those related to military affairs.

Second, securitization also does not necessarily imply the blanket securitization of all policy areas, or even sub-sets of policy area.

Third, securitization need not, at least in principle, be synonymous with centralization, state ownership or the rejection of foreign capital.

Evidence for the Securitization of the Economy

In order to discern any moves towards securitization of the economy, it is first necessary to establish what constituted “normal” economic policy before the war in Ukraine. Because the 1990s were a period of systemic change, it is useful to pinpoint the key features of Russian economic policy since Putin’s ascendency to the presidency in 2000. 

They are:

  • Macroeconomic orthodoxy. In matters of both fiscal and monetary policy, the macroeconomic framework of Russian economic policy, built largely under the supervision of Alexei Kudrin, was orthodox. Monetary policy and fiscal policy were conservative in nature, and largely set by the Central Bank and the Ministry of Finance, respectively, much to the chagrin of the lobbyists;
  • An inconsistent commitment to microeconomic reform that was undermined by the selective application of the law coupled with, and at least partially caused by, weak state administrative capacity. This meant that the property rights were conditional and the business environment was generally poor;
  • A tendency towards state intervention in “strategic” sectors of the economy. There was significant evidence of dirigisme, in the natural resources, finance and defense sectors. State control was not absolute; private firms, both Russian and foreign, were present, although their property rights were insecure and subject to revision;
  • Relative freedom to allocate resources in sectors outside strategic sectors, with many sectors of the economy, especially those in retail, business services, and IT, subjected to lower levels of state interference;
  • A commitment to capital account openness. Although Russia’s financial sector is dominated by state-owned or state-influenced banks, the banks, firms and households have been free to move capital around with minimal restrictions;
  • A commitment to integration with the global economy, especially with Western economies, which acted as a source of vital capital and know-how;
  • A formal commitment to multilateralism. While the implementation of international rules has not always run smoothly, Russia was persistent in seeking membership of international organizations (such as the WTO and the OECD). While success was patchy, it is notable that Russia demonstrated a desire to approximate international norms and standards to a historically unprecedented level.  

The broad outcome of this set of policies was a balance between the Economic Bloc (i.e., the economic “liberals”) and the combined forces of the power ministries and the industrial lobbies (the “lobbies”). Security concerns played a marginal role in this liberal-lobby equilibrium and the spectre of an existential threat was rarely deployed in economic policy debates. Even the shift towards reequipping the armed forces in 2010 (the GPV-2020) was as much a step towards economic modernization as it was towards national security concerns (with Putin repeatedly emphasizing the defense industry’s potential for innovation).

During this period, economic policy was not securitized. However, if economic policy was largely a struggle between lobbies and liberals during the biggest part of the Putin period, then the war in Ukraine represents a turning point. After the annexation of Crimea and the subsequent imposition of sanctions, the invocation of an existential threat to activate security concerns beyond the confines of military policy became much easier. As this securitization agenda became—and continues to become—more entrenched, the equilibrium between them was disturbed.

It is in this context that Russia’s reaction to Western economic statecraft can be more clearly understood: in a world that appears increasingly menacing from Moscow’s perspective, many officials see economic security as an important component in ensuring Russia’s wider national security. From the Russian perspective, the West, with its preponderance of economic resources, has proven capable of using wider means than just military to conduct a form of “hybrid” warfare that encompasses economic statecraft as well as resort to funding of NGOs, support for “color revolutions,” etc. Against this backdrop, centralization of resource allocation and the management of Russia’s external relations are, for many in the Russian elite, a logical response.

As the securitization agenda has encroached on economic matters, discernible changes are evident in the spheres of macroeconomic policy, financial sector policy, and industrial policy. 

1. Securing macroeconomic policy

Over the past eighteen months the power traditionally exerted by the Ministry of Finance and the Central Bank over macroeconomic policy has diminished significantly as the Kremlin has exerted greater control over broad macroeconomic policy in an attempt to enhance Russia’s economic security.

In the realm of monetary policy, the Central Bank’s independence and commitment to a free floating exchange rate have been severely eroded. The Kremlin has demonstrated a clear preference for a weak ruble policy: intervening only to moderate periods of sharp ruble depreciation and to build up reserves when oil prices rally. In the context of low oil prices, this reaction is not unreasonable. However, the fact that the broad contours of monetary policy now appear to be defined by the Kremlin rather than the Central Bank represents a significant volte-face in macroeconomic policy.

Control over fiscal policy has also shifted to the Kremlin. In July, it was announced by Deputy Prime Minister Arkady Dvorkovich that decisions over federal budget spending to 2018 would be made in consultation with the President, formalizing the erosion of government and Ministry of Finance control over public spending. While in the past the President only defined the broad direction of public spending, this move reflects the reality that his intervention is required to ensure that public spending of increasingly scarce resources supports Kremlin economic priorities.

This turn in macroeconomic policy represents a determined attempt by the Kremlin to insulate Russia from the confluence of its own domestic economic slowdown, the decline in oil prices and the threat of Western sanctions. It has occurred as Nikolai Patrushev, Secretary of the Security Council, asserted that a new state strategy for economic security should be drafted, perhaps in part to formalize the objectives for centralized macroeconomic policy in the future. These objectives, while not stated explicitly, are evident through the Kremlin’s revealed preferences. They include: the maintenance of large foreign exchange reserves; the avoidance of large budget deficits; control over the priorities of public spending; and a reduction in external debt, especially among state and quasi-state entities. Together, these objectives are intended to increase Russia’s durability in an uncertain and turbulent world.

The road away from “normal” macroeconomic policy has not been entirely smooth. Resistance from the traditional bastions of orthodox thinking (i.e., the Ministry of Finance, the Ministry of Economic Development, and the Central Bank) remains concerted. Indeed, the fact that control over fiscal policy has moved to the presidency illustrates the degree of intra-elite conflict over macroeconomic policy.

It is notable that while claimants over the resources of the state’s National Welfare Fund are numerous, the volume of actual funds dispersed remains relatively low. In this respect, the full operationalization of securitized economic policy has yet to be achieved. However, the legitimization of such thinking has progressed apace, both on the margins and in challenging several central tenets of macroeconomic policy.

2. Securing financial autonomy

The Russian financial sector is one of the “commanding heights” of the economy, and is characterized by a highly concentrated banking sector, with the vast majority of assets and deposits in the hands of state-controlled or influenced entities. As well as channeling funds to politically-favored enterprises, they also act as transmission mechanisms for monetary policy, expanding and tightening credit at the behest of the authorities. Russia’s state-controlled (through direct or indirect ownership) banks are “too big to fail,” enjoy soft budget constraints, and rely on public funds for recapitalization, as illustrated in 2008-2009 and in the recent anti-crisis package developed by the government.

The close links between the state and the financial sector is a crucial component of Russia’s national system of political economy. As a result, it is no surprise that the impact of heightened security concerns is leading policymakers to develop new measures that are intended to insulate Russia from possible external threats by enhancing state control of the financial sector. These measures include the development of an alternative national electronic payment system that replicates the existing SWIFT payments system, and the formation of domestic credit rating agencies that will act as alternatives to existing Western companies.

Both are direct policy responses to the Western sanctions regime imposed in response to Russia’s annexation of Crimea and involvement in the conflict in Ukraine. By setting up parallel rules and systems to govern the economy, and through the forced (by sanctions) reduction of aggregate external debt, Russia has made significant progress in reducing the intensity of its financial integration with the Western segment of the global economy.

Elsewhere, the state’s strong influence over the banking system is being used to facilitate targeted lending to sectors considered important by the state. This was evident in the anti-crisis measures developed in early 2015, and more recently, in the development of a multi-sector import substitution plan that will utilize state-owned banks to channel credit to selected enterprises. This will complement macroeconomic policy by reducing the use of federal resources.

3. Securing industrial independence

Finally, the influence of securitization over state industrial policy has also grown. National security concerns have been cited to justify enhanced state measures to stimulate domestic production in a range of industries, including the pharmaceutical, food production, agricultural equipment, and oil and gas equipment industries. In each case, it has been argued that the objective is to reduce import dependency in key sectors of the economy. Indeed, the desire to promote domestic production and reduce competition from imports provides a persuasive explanation as to why the Kremlin opted to impose sanctions on agricultural products, as argued in Silvana Malle’s piece in this collection.

Many sectors have been set ambitious targets to increase import substitution. To achieve these objectives, the state has assigned additional financial resources and institutional support. For instance, changes have taken place to public procurement to limit the role of imports and encourage domestic production and “localization” in those areas where foreign producers are most active. Financial resources in the form of direct budgetary support or access to preferential loans from state-owned banks have also been provided. The Ministry of Industry and Trade continues to lobby for even greater resources. In addition, state control over the myriad large state-owned enterprises (SOEs) has also risen, with the progress made in separating government officials from representation on the boards of SOEs now largely reversed. 

The shift in industrial policy over the past year represents a significant deviation from the previous trajectory. The scope of industrial policy has expanded to encompass a wide array of sectors that are now considered vital to national security. Furthermore, the resources allocated to achieve import substitution are significant, and are both financial (e.g. access to preferential loans, preferential access to state procurement, federal budget spending) and institutional in form (e.g. the creation of government commissions to supervise import substitution, use of public procurement to benefit domestic producers).

That these measures are now supported by a favorable exchange rate policy is evidence of a more cohesive approach to industrial policy. Moreover, the enhanced role of government commissions in directing these new and expanded programs indicates a preference for centralized management. The role of foreign firms has also not been ruled out. In fact, the role of foreign companies—for practical reasons—has been encouraged. Foreign firms in targeted sectors are now directed towards “localizing” their production in Russia rather than exporting their products to Russia. In principle, this is a positive feature of the emerging industrial policy. However, given the additional resources available to domestic producers, the participation of foreign firms in Russia’s import substitution drive may prove problematic.

Finally, it is important to recognize that while the securitization moves described above have emerged as a significant feature of Russian economic policy over the past eighteen months, it does not affect all sectors of the economy. Many remain relatively untouched. Moreover, even in those sectors where economic policy has deviated from its past trajectory, there are elements of continuity. Several sectoral plans for import substitution, for example, were proposed before the outbreak of hostilities in Ukraine. In these instances the securitization agenda has increased elite support for import substitution and changed the nature of these plans. 

Prospects for a “Secure” Economy

Any further move towards economic securitization will be presented by the authorities not as an attempt to lock Russia into a perpetual state of backwardness, but rather as a vigorous effort to promote the modernization of the economy, which in turn will provide a stable base to better guarantee Russia’s state sovereignty and territorial integrity well into the future.

Whether these tools prove appropriate to the task in hand is another matter: securitization could result in reduced competition, a turn away from the global economy, and ultimately a reduction in Russia’s long-run rate of economic growth. But its use of alternative means to achieve economic development should be taken seriously. Not all countries will adopt Western routes to economic prosperity. China’s (so far) successful economic transformation means that policymakers in many countries are seeking alternative recipes for economic success. 

Ultimately, the success of a securitized economic policy—both in terms of Russia’s long-term economic performance and its capacity to ensure its national security—may well prove contingent on the state’s capacity to guarantee that state policy serves state objectives and not those of private or elite interests. Historically, this distinction between public and private interests has not proven easy to achieve in Russia. In addition, if Russia’s new securitized economic policy is to foster the development of domestic industries, then an improvement of the incentive structure—both in the state and market—will be required. Achieving this without increasing the intensity of competition—both political and economic—is likely to prove difficult.  

While an enhanced role for the state is a feature of securitized economic policy, this does not mean that Russia is on the verge of resurrecting the centrally planned economy from the Soviet era. The demands of the twenty-first century economy would make such an endeavor impossible to implement and ultimately self-defeating. Moreover, the nature of the global economy has changed dramatically since the collapse of the Soviet Union. During the Cold War there were no economically significant “third” powers. This is no longer the case. In addition to the obvious example of China, there are a number of other rapidly growing non-Western countries with which Russia can, in principle, develop closer economic ties. And during the Cold War, the choice of development models was more limited; today, there are a wider variety of capitalist models to choose from.

What appears more plausible is that a new system of political economy may be emerging in Russia, and one that could satisfy the Kremlin’s urge to deal with what it perceives as an increasingly threatening geopolitical environment. The onset of economic securitization is a sign that not only are new approaches to economic policy emerging, but perhaps even a new system in which greater control is exerted over key industries to help generate the economic basis to compete in what its leaders perceive to be an increasingly hostile geopolitical environment.

} Page 1 of 5