Bringing market reforms and democracy in a ruined country: ‘Russia 1991’ case

There are some people who know and understand things that you just cannot possibly be aware of. And one of those men is Ilya Ponomarev — an experienced Russian politician, member of the State Duma that currently lives in exile in San Jose, California (he is the only member of Duma who voted against Russia’s annexation of Crimea). I, along with the DigiComNet team, had the chance to talk with him at Stanford University, this April.

This discussion proved to be so insightful for us that I have decided to share the highlights with the good old Internet.

On oil production costs in Russia

The real cost of oil production in Russia is only $2.5/barrel according to Mr. Ponomarev (some sources estimate the actual cost of oil production in Russia to be $18.00/barrel onshore). This is shockingly low! Even if the oil price hits as low as 15$/ barrel, Russia’s profit margin will allow them to survive and continue their reckless foreign policy, although in that case, the life standards there will drop significantly. Still, this number explains how resilient Russia might be amid a collapse of oil price.

On Putin’s tactics

Mr. Ponomarev believes “Putin deliberately depreciated the rouble in the same pace as the fall of oil prices”, thus allowing the government to pay for pensions and state obligations, thanks to a cheaper currency. Inevitably, this also made Russia’s exports more competitive.

Referring to Putin’s foreign gameplay, Ilya Ponomarev said Russia’s intention is not to conquer, but rather aims two major goals:

1. Maintaining power inside Russia — by being aggressive towards EU and US, Kremlin is creating an external enemy and an escape goat for Russia’s current economic hardships.
2. Money. You really don’t need an explanation for that.

On economic sanctions

“Economic sanctions don’t work” said Mr. Ponomarev. Instead of punishing Russia’s reckless actions in Ukraine, these “sanctions” allow Putin to blame the West for the country’s economic and social crisis. “More personal sanctions on a much higher level will be more efficient” argues the exiled Duma member. Indeed, if you look at the sanction’s list, you will find there just a few of individuals truly close to Kremlin.

On how the West lost a historic opportunity to bring reforms in Russia

That was perhaps the most meaningful topic of the discussion. In the years following the collapse of the Soviet Union, the new Russian government crucially needed international financial and logistical assistance in order to implement those sweeping economic reforms needed for the country to become a genuine market economy and democracy. The West already had by then a successful attempt in Poland, where the immediate international assistance has proved to be decisive for Poland in undertaking successful transition to market economy and democracy.

Alas, that was not the case for Russia. USA and the West did not respond to Russia’s government calls to offer assistance, even though the investments would have rather been small. Mr. Ponomarev’s anecdotic example says a lot in this respect:

If Americans would have spent just 0.5% of their Cold War expenditures towards Russia in 1991, that would have allowed the Eltsin government to cover pensions for “many years”, offering the Russian government enough cushion to undertake those radical market economy reforms.

Jeffrey Sachs, a world-leading expert on economic development and a former economic advisor to the Russian government back in 1991, shoots out in this op-ed for BBC:

“Where Poland had been granted debt relief, Russia instead faced harsh demands by the US and Europe to keep paying its debts in full. Where Poland had been granted rapid and generous financial aid, Russia received study groups from the IMF but no money. I begged and beseeched the US to do more. I pleaded the lessons of Poland, but all to no avail. The US government would not budge.

In the end, Russia’s malignant financial crisis overwhelmed the efforts at reform and normality. The reform government of Yegor Gaidar fell from grace and from power. I resigned after two hard years of trying to help, and of accomplishing very little indeed. A few years later, Vladimir Putin replaced Yeltsin at the helm.”

Then Putin came to power, so the rest is history. Undoubtedly, this does not mean the West should be blamed for Russia’s poor records on democracy, its unstable economy and reckless foreign policy, but if the West would have acted with much more wisdom back then and would have ditched that “Cold War winner” attitude, I believe Eastern Europe and particularly Russia, would have been much better of now. Would have been…

History did already provide us with a handful of examples on dos and don’ts when assisting nations in ruins to get back on their feet, particular highlights being the tragic case of Germany after the WW1, and the happy case of Marshal Plan after WW2.

Unfortunately, ‘Russia 1991’ case is on of those sad history lessons. And as someone living in Moldova, a Eastern European country particularly affected in the last decade by Russia’s economic and political blackmail, I just hope this shall be the last lesson for the world community in understanding how to deal in the future with a devastated nation, be it Poland or Russia.

The lesson from this case? Well, cooperation, assistance and empathy are key in fostering democracy, market economy and growth to nations.