© "Russia in Global Affairs". ¹ 3, July - September 2005

Mikhail Yuryev is President of Evrofinance Group, former Deputy Speaker of the State Duma (from 1995 through 1999). This article was abridged from the Russian version published in the Glavnaya Tema magazine (1/2005).

Russian society offers a broad array of prospects for the country’s future, and all of them have one thing in common, namely, the conviction that Russia must become an active member of the global community, which includes a profound integration into the global economy and politics. The idea also suggests that isolationism from global civilization (in reality, it implies Western civilization only) will be the equivalent of death.

And yet the fact remains that a policy of isolationism (or perhaps a systematic vision of the world and not merely policy) is quite feasible. This article makes an attempt to explain why isolationism is as much possible as it is vitally important for Russia’s survival.

Isolationism means a national mode of existence where the state builds a relatively small number of external contacts, as well as a relatively limited interaction with it in all spheres of life – economy, politics, culture, ideology, and religion. Thus, the influence of external forces is incomparably smaller than that of the internal forces. The definition is somewhat incomplete, yet suggestive of rather significant phenomena. First, it says nothing about administrative bans. This is no accident, since contacts may be limited due to administrative prohibitions of some kind and objectively existing barriers, such as the geographical remoteness of a country, language differences, religion, traditions and level of development, which naturally makes the use of bans unnecessary. The United States had become quite an isolationist country due to its geographic remoteness. Its foreign trade accounted for less than five percent of its Gross Domestic Product in the 19th century (versus up to 50 percent as compared to present-day Russia), and the country even lacked special customs barriers. This isolationism, however, did not prevent the U.S. from taking the leading position in terms of GDP by the end of the 19th century.

Second, infrequent contacts with the outside world do not mean they are nonexistent. Nobody would choose to grow coffee, for example, in an isolationist country if it does not grow there naturally, nor will anyone want to drink a substitute instead. However, if organizational and entrepreneurial talents work to create a strain of genuine local coffee, the producer will not have to compete with foreign producers: all imports will immediately cease, even though the local strain of coffee may be more expensive. Third, isolationism means ignoring contacts with the outside world, not ignoring its existence. A normal state, even an isolationist one, will maintain a strong army, which implies knowledge of everything about the enemy. And the military sphere is just one of the instances.

Most Russians are likely to react to this proposal as follows: endless Soviet-style queues in the shops? Not again! Admittedly, I fully share their dislike for store queues, and the Soviet economy was a closed one, indeed. The difference, however, between the Soviet model and today’s Russian economy is that the Soviet-era economy was not based on a market economy. There is no full synonymy between ‘market’ and ‘openness.’ Apart from “open-market” and ‘closed state-governed’ economic systems, there are also open non-market economies (like in the majority of oil-producing countries of the Middle East) and market-oriented closed economies. The latter type is cherished by most isolationists. In the epoch of early capitalism, almost all countries (besides the commercialized republics like Holland) had that kind of economic relations, and it is noteworthy that all capitalist countries became economic giants at the time.

It is not economic openness that predetermines the quality, assortment and accessibility of consumer goods, but rather the motivation of the owners, competition and natural selection of the market players. If Russia makes a turn to isolationism while maintaining the current principles of organization, it will not turn into an ascetic. It is enough to recall that the Nazi Third Reich, the breaker of 20th century economic growth records, was quite far from being ascetic. Despite the bold proclamations that guns had superiority over butter, German manufacturers were not restricted to constructing just Tiger and Panther tanks. German plants produced Volkswagens, an automobile as revolutionary for their time as affordable for the people, and Maybachs, the auto grand of all time.

Let us now ask ourselves: What rate of economic growth does Russia actually need to catch up with the U.S. in terms of GDP per capita in the next 30 years? This particular time period marks the necessity of economic planning, while the postwar “economic miracles” of Germany and Japan also lasted some 30 years. China is set to take over the world’s leading economic positions by 2010 or 2011, which is also 30 years after the start of economic reforms in that country.

Since Russia’s specific GDP is smaller by a factor of 10 to 12 than America’s (16 times formally, since the ruble is underrated), it is easy to predict that Russia’s economic rate of growth must outstrip America’s growth by 9 percent annually over the next 30 years. It means that Russia’s economic growth must total 11 percent if the U.S. economy grows 2 percent, and must be bigger than 11 percent if the American economy grows more than 2 percent. Now, is a growth rate of 11 percent for 30 straight years at all possible? Granted, it is hard to attain, but theoretically possible if the entire nation mobilizes for such a task. In the meantime, an 11 percent growth rate is completely unfeasible in an open economy. An integrated economy cannot grow like that at a time when other economies are making a mere 2 percent a year. Today’s global economy resembles a system of communicating vessels where not a single element stands out, as the flow of capital and currency exchange rate fluctuations will level it off all the same. This does not mean that the global economy shackles the development of national economies – it simply trims growth rates to size. That is why the Russian economy, if it remains open, will never grow 11 percent a year, while other countries are experiencing an increase of just 2 percent. And if those countries slide into a recession or crisis, Russia will not be able to rely on 9 or even 7 percent growth rates. Russia will also slide into a crisis, maybe even a worse one, since the Americans have perfectly mastered the sophisticated art of relegating their problems to allies, to say nothing of foes. That is why the prospect of a GDP rate on the same level with other industrialized nations does not shine on Russia. If the economy improves in the West, it may also improve at home, but it will be impossible to narrow the gap in any sizable way.

Is this a bad thing, though? After all, specific GDP has a direct bearing on living standards only, while the country’s political and military might depends exclusively on the general GDP. This is so because people’s living standards depend on the share of resources per capita in contrast to the power of the state that depends entirely on resources concentrated in the hands of the government. This fact goes far at explaining America’s misgivings about China’s growth. The latter will never approach the U.S. in the next century if just the specific GDP is the subject of debate. However, China’s general GDP – and here we must remember that its population is four times greater than that of the U.S. – has reached one-third of the American GDP, while the share of the GDP at the government’s disposal is much higher.

Meanwhile, a look at Russia’s general GDP suggests that we are far worse off since our population is 50 percent smaller than in the U.S. and 80 percent smaller than in the entire Western world. Our general GDP is smaller than America’s by a factor of 20 to 25 times (30 times formally) unlike the specific GDP, which is smaller by a factor of 10 to 12. Just consider that our military and political might would still remain 80 percent below the Western bloc even if we were to attain the same specific GDP as the U.S. (this requires not doubling our GDP per capita, as President Vladimir Putin has demanded, but increasing it by 15 times). Add to it that the Russian government will not be able to concentrate the lion’s share of resources in its hands the same way that the Soviet government did, as this may arouse popular discontent and the people’s refusal to support the authorities. Thus, the world’s largest territory and collection of resources, where the military and political capabilities are far smaller than that of the world’s Big Brothers, begins to look very appetizing. And it would be vain to place too much hope on the nuclear umbrella, but not simply because our nukes are rusting and falling apart. Remember the eloquent Russian proverb that for every smart lock there is a crowbar. And we should not entertain any doubts that the crowbar may appear soon enough in the form of a highly efficient anti-ballistic missile defense system.

To sum up, an open economy that presupposes the impossibility of catching up with the West paves the way for Russia’s disappearance as a state, even under conditions of parity that are unimaginable in real life. Recall that our discourse has not mentioned any inequality of conditions so far. The brutal reality, however, rouses an uneasy feeling that someday our export-bound oil pipelines may be shut down under the pretext of, say, encroachments on the rights of sexual minorities in Chechnya or some sort of nonsense along those lines. It will certainly happen should Iraq become too messy, OPEC collapse, or crude reserves overflow the markets for some reason. That is why the real situation appears much grimmer for us in an open economy where the promises for high growth rate may quickly turn into sheer fantasy in comparison with the scheme discussed above.

Should Russia place its hope in a closed economy? Unlike the open economic systems, closed economies are isolated vessels, and have little communication with the outside world. Would it be possible, then, to pump more water, for example, into a closed vessel than in a communicating vessel? That depends wholly on the force of the pumping. No doubt, this is a problematic issue, but the history of the Russian people should suggest its immense capabilities for making titanic efforts. The problem is that the moment Russia opens the hatch of its vessel the water will drain away elsewhere at supersonic speed and this is what our economy has been experiencing over the past 15 years. On the face of it, the people who are urging us to make better conditions for capital in Russia – so that our own money could return to Russia together with an increase in foreign assets – seem to be making their suggestions in a state of confusion. If they want such a thing to happen in a global economy, they must make the conditions truly superlative, not just simply favorable. Is it really possible? Even if foreign investment really began streaming here, the centers of power in today’s world would quickly block the channels of financial flows to Russia by non-economic methods. They do not need the Russian Federation becoming robust at their expense.

Moreover, the Western world could take persecutory measures that are partially economic in nature, including statements about the heightening risk of investment in Russia and sliding sovereign borrower ratings. As for Russian money hidden elsewhere, it will not return en masse under any circumstances. The reason is that a genuine thief – and there are few innocent people among the owners of drained capitals – will never believe that they will be fully pardoned. This would defy common sense, and besides, those individuals would hardly put themselves in such a situation. But should Russia take moves to isolate its economy with clear borders drawn up between state power and capital, then unparalleled financial liberalism will become possible, thus making the Russian capitalist system the world’s most efficient.

What is more, closed economies have recipes of speedier economic growth, including the issuance of special government bonds, which are impossible in open economies due to the possibility of amassed economic crises. It is at the moment of a crisis that Russia’s finest hour will come, provided our economy is sealed and remains insensitive to world upheavals. If the economy develops dynamically, it only stands to gain from others’ problems. That is how lions, the kings of the animal world, ambush their prey; that was how the U.S. turned into a superpower after World War II. The scenario is realistic for Russia too, if it reverts to isolationism.
Economic growth is nothing more than an instance of autarchy. It does not take Solomon to prove that a nation grows into a world power only after a period of isolationism. This happened to Rome before the Punic wars and to the United States before World War I.

On the strategic plane, nothing is more important for Russian economic policy than to declare autarchy its goal and to prepare for making a turn toward it. Preparations presuppose a development of ideology explaining the importance of such a turn and convincing the majority of Russian society of it. This would not prove particularly difficult, even without allusions to the traditional ‘Russian mentality,’ since the idea of autarchy is based on a universal value of independence of a nation and state that is placed above other values. Any interaction with the outside world means becoming dependent on it, and the stronger the interaction, the greater the dependence. At a certain moment it develops a critical mass, and Russia is going through that moment now.

A turn to autarchy includes complex measures to discourage exports/imports, on the one hand, and the inflow/outflow of capital, on the other hand, which actually embraces all export/import operations. An essential move in this direction would be to declare the ruble unconvertible inside the country and to tighten up monetary and financial regulations. An accent on checking the flow of money is much more efficacious than checking commodity flows at customs offices. This tightening concerns business transaction with the outside world only, but it must proceed hand-in-glove with the liberalization of general regulations for domestic businesses.

The tightening of currency controls must envision mandatory sales of all hard currency revenues from exports, or even a transition to exports paid in rubles together with prohibitions for purchasing hard currency for any reasons other than imports. This means stringent control over exchange rates and the liquidation of opportunities to make money on the difference of these rates. Foreign currencies will be purchased from the government only (actually speaking, these will come directly from the exporters only). The exchange rates must be lowered against the ruble, and it would be most desirable to have fixed rather than floating rates (the dates of changes of which would be announced in advance). Establishing the rates outside the market will shield the ruble and, consequently, our economy from the impact of external forces. This model will be feasible, however, if a clear and balanced mechanism is devised; a mechanism free of bribes and useful in determining who would like to become an importer and purchase hard currency. And if, for some reason, the plan fails, the exchange rates will be established through tenders organized by the state. A direct or indirect revival of multiple rates – through excise duties on particular groups of commodities and services, or on some transactions – is also possible.

The principle of the discouragement of imports determines that the first step is to establish if commodities of a quality comparable to imported items are manufactured in Russia. If they are not, we must determine when their production might possibly begin. For instance, to use the coffee example again, this commodity does not grow in Russia and the current stage of technological development does not make its production here possible. This means the government will always sell hard currency for buying it abroad and will, at the same time, ensure that the number of unaffiliated importers is large enough to maintain market competition. The exchange rate (that is the price of this commodity) will take account of Russia’s hard currency potential. If a certain commodity is not produced here, yet businessmen launch an investment cycle making it possible for the commodity to appear on store shelves in two years’ time, while covering the entire demand for the product for four years, then hard currency for purchasing its foreign analogs will be sold at a low rate during the first two years, at a higher rate during the third year, and will cease altogether in the fourth year.

At the same time, the government must consider special stimuli for facilities producing import-substituting commodities if the volumes of investment make a spontaneous emergence of investors scarcely possible. The entire cycle of automobile production provides a good example. The list of stimuli may include interest-free or low-interest loans, the interest on which will be equivalent to a certain percentage of the monies invested. Quite obviously, the principle is easy to implement even in a situation where corruption has not been fully liquidated but simply curbed.

That is basically the mechanism for discouraging imports. Those who claim this sounds something like Marx’s Communist Manifesto might be surprised to know that super-capitalist postwar Japan restored its economy in precisely such manner, and perhaps even more stringently. For instance, the government did not sell hard currency to importers for purchasing antibiotics during an outbreak of streptococcal angina, although the country did not produce such drugs at the time. It did sell currency, however, for buying equipment and ingredients used in the production of antibiotics.

The discouragement of exports entails a much simpler mechanism. In addition to a changeover to ruble transactions, it implies a revision of effective export duties. While the final objective for imports is their full eradication, the objective for exports is to discourage the exporters and reduce the share of export operations in the general GDP or in separate branches of the economy. What is so bad about exports, one may ask, especially if we export the products of high processing to countries that are not considered to be our foes?

It is not so bad from the economic point of view, and yet it is important to make the economic entities, as well as other players, realize at the level of subconscious social archetypes that everything which happens to them (enrichment or impoverishment, ups and downs, joy or grief) occurs on the space between Russia’s eastern and western borders, and nowhere else. And if one day those borders become too tight for us, we must expand them, not just cross over to other countries. Only then will Russia turn into a power from a territory; we will become a nation rather than mere populace.

As for foreign investment, the story is much simpler since it only brings us hazards and we must develop a policy toward it as we would toward a hazardous thing. No foreigners have found companies here – or elsewhere – with truly noble goals in mind. They mostly invest in affiliates of their corporations which handle the assembling, molding or packing of a particular product. In other words, this is imports. Foreign investors will always try to export their profits from Russia, and the argument that they create jobs here is misleading since the consumption of any commodity is generated in a market economy by demand and not by supply. This is to say that if a commodity enjoys demand, a Russian businessman will build a factory to produce it – unless foreigners have not built a factory of their own; thus, the number of jobs will be quite the same. Just look at the number of Coca-Cola factories in Russia. This phenomenon suggests that the same number of factories that produce the popular Russian drink Baikal were never built. Another reason for this heavy presence is that foreign corporations like moving their operations abroad because often their production processes are prohibited, or their products are simply unneeded, at home. Look at reformist China where Volkswagen and Audi produce very good cars – except that these are the models of the 1970s.

There is no need to nationalize the foreign factories which have been already built. It is enough to declare that the government will not convert the rubles they earn into hard currency, while currency purchases on the market would be impossible. Of course, warnings that nobody will invest in Russia for another 100 or 200 years will rock across the world. That will only be music to our ears. 

I would like to present a few more comments about Russia’s macroeconomic policies during its transition to isolationism. Since the ruble has hardly been real money for so many years, a ban on its exchange for foreign currency will certainly cause serious psychological problems (which other countries would not see and actually never saw during the periods of harsh currency regulations). That is why the package of new laws on isolationism must have a provision for the introduction of a gold (or gold-platinum) standard. Simultaneously, the authorities must declare the content of pure gold in the ruble effective over a period of no less than 10 years (it would be fine to feature the content in the Constitution in order to make the reform unchangeable). Also, there must be provisions for the dual circulation of bank notes and gold coins (denominated by their value rather than weight), as well as for a free exchange of paper rubles for gold.

Naturally, such an exchange would be possible inside Russia and for Russian citizens only, while foreign countries would be unable to present illegally exported rubles for exchange. The gold standard seems to be quite a practical move for Russia. The main reason behind its abolition in the West was the shortage of gold, the global output of which was smaller than required by the money supply and increasing along with economic growth. In Russia, the per capita reserves of gold and especially platinum are much greater than elsewhere in the world, and their production can easily be boosted to meet the objectives. Initially, Russia may wish to purchase some amounts of gold from other countries, and this will be a convenient way of using our huge foreign exchange reserves. We should exclude the misgivings that everyone will rush out to exchange bank notes for gold, since this metal can only be stored in a safe (if it returns to the bank, it loses the functions of gold and becomes ordinary money in circulation). When kept in a safe, gold does not generate interest – an untypical scenario in a market economy, which is known for its tendency of slashing the circulation of cash, something which we are now witnessing. The gold standard will be a serious psychological counterbalance to the abolition of currency exchange.

This begs the question: How will Russians travel abroad for vacations? – Since Russia’s climate is not at all one of God’s blessings; the very impossibility of crossing the border would create the effect of a forbidden fruit, as it was during the Soviet era. Each Russian citizen should have the right to purchase foreign currency at a high official rate in proportion to the taxes he or she pays over the year. That is, by spending a percentage of wages. The government may consider, of course, the sale of currency above the established limit but at a much lower ruble rate. Traveling abroad then will be as easy as now, yet much more expensive. As for the numerous business trips and sabbaticals, these would be done away with. Isolationism means ending any contacts with the outside world, not just in the realm of imports and exports. Trips fully financed by foreign hosts should be banned altogether.

Microeconomic policy during the transition to isolationism should also facilitate the closing of the economy and the country in general. Imports and exports can be efficiently discouraged by a variety of non-tariff barriers, such as standards of technology, sanitary and food industry norms, and tougher language requirements. The best possible option would be to revert to the old Russian system of measurements and weights, including the verst (1,067 meters) and the pud (16 kilograms). These measures would not block imports, but would make them more problematic and expensive. Incidentally, this is the way that the United States, a nation where everything differs from the rest of the world, protects itself. From the standard of measurements, to the voltage of the outlets, everything is different in America. Thinking along these lines, we must ban the sale of computers, mobile telephones, and other electric appliances that contain any letters beside the Cyrillic, even if each button has two types of letters on it. Let those who need the Latin script use “Anglicized programs.” All this may be done, but it would create additional costs and inconveniences.

In the meantime, the microeconomic features of the transition to isolationism must not differ very much from the features of today’s economy. The main difference is that there must be much greater responsibility. This is necessary in light of different antitrust policies, which would become one of the major objectives contrary to the current situation where imports still exist. It concerns the toughening of approaches and changes in legal norms. The market monopolization limit set at 35 percent is enormous for an isolated economy and should be reduced to no more than 20 percent. Making competition inside the country more intense than is the case across the world must take precedence, and that is why the seizure of more than 20 percent of the market by groups of affiliated companies should be banned regardless of their future business scruples, fairness in pricing and so on (as opposed to the way the current antitrust law regulates things).

The main thing, however, is to stimulate the establishment of new factories or expand the old ones. This move would help to break up the monopoly of other producers and increase competition in general. In 2003, a budget surplus windfall of several billion U.S. dollars was generated. Why not spend half of that money to build several state-of-the-art automobile factories?

The most important microeconomic task for the government is to ward off any factors that may impede the growth of businesses. The most glaring factor in that sense is administrative and criminal pressure. A gangster or government official who comes to a shop to extort bribes from the owners must be treated as a person impinging on the vital interests of the state (defense interests in the final run), not simply as an individual who is covetous of another person’s private property (since this will never be really treated as a crime in Russia). A governor, who builds his own business in the region by stifling all other businesses, must be “enfettered in iron and delivered to Moscow for investigation and execution,” as czarist decrees would advise in the old days. Such practices shall be viewed as the equivalent of high treason.

Generally speaking, Russia’s rampant corruption stems from ideological or, rather, psychological factors. U.S., Italian or Chinese officials have as many weighty reasons for taking bribes. They engage in this illegal activity every bit as willingly, albeit more cautiously. Further, the problem of bribing is just the same as in Russia, especially in Italy and China. And yet 999 out of 1,000 corrupt officials in those countries would never do things that would damage national interests regardless of the bribes, because they have not crossed their countries out of heart; the same thing cannot be said about Russia’s bureaucrats. As we declare this country “Fortress Russia,” and as we rehabilitate the original national idea coupled with trust in Russia’s powerfulness (that is the only hope during isolationism and the essence of the latter), rampant corruption will subside without any especially bloodletting measures. As a result, we will reduce it to the limits, within which it has always existed in Russia and in all other countries, including Western ones.

Changes in the foreign policy must be even more resolute. Our foreign policy has evidenced just two modalities over the past 50 years – the bitter confrontation with the West during the Soviet era, and the policy of “common human values,” that is, full capitulation and servility to the West, launched in the late 1980s.
Once autarchy is established, the need for whatever foreign policy measures will decrease, as it will be reduced to intelligence and defense policy built upon intelligence data. Foreign policy, however, must be different even during the transition period. We must say in a clear voice that we will not support any countries’ standoffs with the West, nor will we support the West in standoffs with those countries. We will support neither international terrorism nor the fight against it. We will not support violations of human rights or the struggle against those violations. We will not support any of the above issues materially or morally – by diplomatic resources, finance, materiel, natural resources or military force. At the same time, we shall avoid discussions about such topics.

We will generally pull out of any multilateral relationships, as we believe the world community has not yet matured into a real community and will not do so for many years. Hence we will pull out of all multilateral organizations – European and international – and will crown the process with the abandonment of the UN.

We will make the formula of “Do it as you like and we will react as we find it necessary” the guideline of our foreign policy. If Britain, Spain or Israel once again refuse to extradite our criminals, we will tell them: “Well gentlemen, you owe nothing to us.” But we will also tell them: “You are welcome to flood us with requests if people on your wanted lists come here. Your papers will not be considered, or they may, but the possibility of denials will be very high.” This rule would apply to Irish, Basque, and Palestinian terrorists, among others.

Was it not the Americans who said they would not observe the Anti-Ballistic Missile Treaty any longer? Fine, they have a right not to. On our side, we have a duty before our country to pull out of the Intermediate Range Nuclear Forces Treaty. Intermediate range missiles are fairly inexpensive and more valuable for Russia as a less affluent country. Also, we have the right to pull out of Missile Technology Control Regime and later from the Nuclear Nonproliferation Treaty. The time of treaties is over, although it may come back again during a future new world order. But as for now, the Americans are right to say that treaties are out of place.

At the same time, we must avoid Cold War-era mistakes and deny our enemy the chance of making us search for burdensome solutions. The Soviet Union let itself get involved in an unbearable arms race “to catch up with them,” while it might have settled for inexpensive asymmetric options.

It is important to ban the registration of all public associations and non-commercial partnerships where foreign organizations or individuals are co-founders. Previously registered organizations should be given a few months to disband or reorganize themselves so as to meet the new requirements. All purely foreign organizations shall be told to wrap up their activity and leave Russia, and the foreigners entering Russia shall fill out questionnaires concerning their membership in public associations with international activity. If they are, they shall file formal recognizance not to propagate it while visiting Russia. All foreigners working in the political sphere (the list of activities may be shorter or longer) shall enter Russia only on diplomatic visas that are received upon exchange of notes between Foreign Ministries. All types of grants from abroad – either benefits for works or contracts for works tantamount to exports of non-material resources – shall be forbidden. Naturally, no government or budget-receiving organizations will be able to issue contracts to or employ foreign legal entities or individuals, except for operations outside Russia. Russian companies with more than 25 percent stakes held by foreigners would also fall into this category.

Ideology is the most problematic area, as overt bans are unproductive against it. Nor do we have a unifying idea like Soviet-style Communism to maintain an opposition to the West. Let us remember that the ideological support of isolationism through the establishment of insurmountable civilizational barriers is solved not so much through the imposition of bans, but through devising new concepts.  The concept of a Fortress Russia, with its inherent revision of economic, social, foreign, and – if need be – internal policy, should stay in place over several decades to enable us to win another Cold War, or perhaps even a Hot War. After the threats are gone, it will be time to drop the concept or, at least, its version described herein.