The Spectacular Rise & Fall of Russia's Economy

Summary

This video explores the cyclical challenges of Russia's economy, from its historical roots to modern sanctions. It delves into the impact of Western sanctions, the structural issues hindering economic superpower status, and the effects of inflation and stagnation. Highlighting periods of growth and collapse, the script discusses the role of authoritarian leadership in stabilization and the need for a 'strong but constrained state' to foster sustainable economic development. Sponsored by Squarespace, the video also offers insights into building an online presence for creators.

Takeaways

• 🌐 The video is sponsored by Squarespace, emphasizing the platform's capabilities for creators to connect with their audience and generate revenue.
• 💔 The Russian economy is currently facing a significant challenge due to Western sanctions and a collapse in oil prices, leading to a weakened Ruble and high inflation.
• 🔄 Historically, Russia's economy has been characterized by cycles of stagnation, inflation, collapse, and rebirth, which have not allowed it to become an economic superpower.
• 📉 Even before the war in Ukraine, the purchasing power of Russians had dropped significantly due to high inflation, reducing their standard of living.
• 🕊️ The Soviet growth miracle in the 1950s was a period of rapid economic growth, but it eventually stalled as the economy caught up with Western economies and faced the challenge of managing a more complex market.
• 🛑 The Soviet Union's centralized state struggled with creative destruction, which is essential for economic growth through innovation and the rise of new businesses.
• 📈 Booming oil and gas exports provided a relief for the Soviet economy, but the benefits did not translate well for the people, leading to repressed inflation and shortages.
• 💸 The rapid transition from a command and control economy to capitalism, known as the 'Big Bang,' led to massive inequality in Russia as state industries were sold off cheaply to insiders.
• 📊 The Russian economy saw a period of growth under Putin, with increased spending power for Russians, but this growth was largely due to a surge in oil and gas prices and was accompanied by increasing inequality.
• 🏛️ Efforts were made to rebuild Russia's institutions to better serve the population and foster a more decentralized economy, but these were undermined by corruption and underinvestment.
• 📉 The Russian economy's reliance on oil and gas exports has been a double-edged sword, providing relief but also making the economy vulnerable to global price fluctuations and sanctions.

Q & A

What is the current economic situation in Russia as described in the script?

The script describes Russia's economy as facing unprecedented havoc due to Western sanctions, characterized by cycles of stagnation, inflation, collapse, and rebirth. It also mentions high inflation even before the war in Ukraine, leading to a drop in purchasing power for Russians.

What historical factors have contributed to the structural problems in Russia's economy?

The script points to a history of self-sufficiency without reliance on foreign capital, which paradoxically led to stagnation and inflation. It also discusses the impact of the Soviet era, including the growth miracle of the 1950s and the subsequent difficulties in managing a diverse economy, leading to creative destruction being held back by old business interests.

How did the Soviet Union manage to grow rapidly in the 1950s despite the arguments of free-market economists?

The script explains that the Soviet Union was able to grow rapidly in the 1950s because it focused on basic products and institutions, such as food, heavy industry, education, health, and transportation, which were easier for the centralized state to manage and invest in.

What role did oil and gas exports play in the Soviet Union's economy?

Oil and gas exports provided a relief for the Soviet Union, especially for its governing elites. The state used the proceeds from these exports to build up a large war chest of foreign exchange reserves, which helped to stabilize the economy.

What were the consequences of the rapid transition from a command and control economy to a capitalist economy in Russia?

The script refers to this transition as the 'Big Bang,' which led to massive inequality as state industries were sold off to friends of Boris Yeltsin for very low prices, creating oligarchs and contributing to economic instability.

How did the Russian economy respond to the global financial crisis of 1997?

The script mentions that the Russian economy seemed to be back on track in 1997, but it was still weak and unable to collect taxes effectively. When the Asian financial crisis scared global capital, it led to a run on the ruble, a default by the Russian state, and the collapse of the ruble, followed by high inflation.

What impact did Vladimir Putin's leadership have on Russia's economy?

Putin's leadership centralized the state and led to a period of growth, with the average spending power of Russians increasing significantly from 2002 to 2013. However, the script also notes that much of the economic spoils went to Putin's friends and associates, contributing to high inequality.

How did the annexation of Crimea affect the Russian economy?

The annexation of Crimea led to sanctions by Western powers and a collapse in the price of oil, causing the ruble to fall and imports to become more expensive, which in turn led to high inflation.

What is the concept of 'creative destruction' as mentioned in the script?

Creative destruction is a process where new businesses and innovations come to the forefront, potentially causing older businesses to lose out. In the Soviet context, this process was held back by old business interests, hindering economic growth and innovation.

What is the theory proposed by James Robinson and Daren Acemoglu regarding the state's role in economic growth?

Robinson and Acemoglu propose that for advanced level growth, a strong but constrained state is needed. The state should be strong enough to provide basic institutions and currency stability but also constrained to avoid hindering the process of creative destruction in the private sector.

What are some of the demographic challenges facing Russia's economy as described in the script?

The script mentions that due to the uncertain economic conditions in the 1990s, Russian women stopped having children, leading to a declining population. This, combined with the government's mishandling of the coronavirus crisis, has resulted in a significant population loss, posing a challenge to the economy.

Outlines

00:00

🌏 Economic Struggles of Russia

The script discusses Russia's economic challenges, including the impact of Western sanctions and deeper structural issues that have led to cycles of stagnation, inflation, and collapse. It highlights the economic conditions under Putin, where growth was followed by stagnation and high inflation, reducing the purchasing power of Russians. The video also delves into historical context, starting from 1916, to explain the roots of these issues, including self-sufficiency and the effects of war on the Russian economy and its people.

05:03

📉 The Soviet Growth Miracle and Its Aftermath

This paragraph explores the Soviet Union's economic growth miracle in the 1950s, which was so significant that some predicted it would outpace the US economy. However, the paragraph contrasts this with the views of free-market economists who argue that a bureaucratic state cannot efficiently manage economic growth. The script then discusses the transition from the Soviet era to modern Russia, marked by the rapid 'Big Bang' shift to a capitalist economy, leading to significant inequality and economic turmoil, including hyperinflation and the collapse of the ruble.

10:16

🛑 Sanctions, Oil Prices, and Economic Consequences

The script addresses the recent sanctions on Russia's economy by Western powers following geopolitical events, coinciding with a collapse in oil prices. This double blow led to a significant devaluation of the ruble and soaring inflation. The narrative explains how Russia's response to sanctions was to accumulate foreign reserves, which, while protective, also starved the domestic economy of investment and contributed to a cycle of stagnation and decline. It also touches on the negative effects of state authoritarianism and corruption on the economy and the exodus of talent from Russia.

15:16

🔄 Breaking the Cycle: Theories and Solutions

The final paragraph examines the cyclical nature of Russia's economy and references a theory by economists James Robinson and Daren Acemoglu, which posits that a strong but constrained state is necessary for sustained economic growth. The script suggests that Russia's problem lies in its state's lack of constraints, leading to overreach and eventual breakdown. It also points to demographic challenges, such as a declining population, exacerbated by the state's handling of crises. The video concludes with a call to consider these factors in understanding Russia's economic cycles and potential paths to stability.

📈 Squarespace Sponsorship and Further Exploration

The script concludes with a transition to the video's sponsor, Squarespace, which offers a platform for creators to build websites and generate revenue. It provides a special offer for the audience to try the service and encourages them to explore more about the impact of sanctions on Russia's economy through suggested video content and supporting the channel for further insights.

Keywords

💡Squarespace

Squarespace is an online platform for website creation and e-commerce. It is the sponsor of the video, which is a common practice where a company financially supports content creation in exchange for promotion. In the script, Squarespace is mentioned as providing a platform for creators to connect with their audience and generate revenue, highlighting its features such as gated member-only content and audience insights.

💡Currency Exchange

Currency exchange refers to the conversion of one currency to another. In the context of the video, it is used to illustrate the economic situation in Russia, where the value of the Ruble is being watched anxiously, with the price of onions given as an example to show economic instability.

💡Western Sanctions

Western sanctions are economic or political measures imposed by Western countries on another country, usually in response to certain actions or behaviors. The video discusses how these sanctions are causing havoc on Russia's economy, exacerbating existing structural problems and contributing to economic stagnation.

💡Economic Superpower

An economic superpower is a nation with a dominant economy that has a significant impact on global economic affairs. The script mentions that despite its size and resources, Russia's economy has never become a true economic superpower due to structural issues that have led to cycles of stagnation and collapse.

💡Stagnation

Economic stagnation refers to a period of slow or no economic growth. The video describes how Russia's economy has been characterized by such cycles, where periods of growth are followed by stagnation, often accompanied by inflation and collapse.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The script discusses how high inflation has eroded the purchasing power of Russians, even before the war in Ukraine, causing economic hardship.

💡Soviet Growth Miracle

The term 'Soviet Growth Miracle' refers to a period in the mid-20th century when the Soviet Union experienced rapid economic growth. The video contrasts this period with the economic challenges that followed, highlighting the difficulty of sustaining such growth in a centrally planned economy.

💡Creative Destruction

Creative destruction is a concept in economics that describes the incessant product and process innovation mechanism by which new production units replace outdated ones. The video mentions that in Soviet Russia, this process was hindered by old business interests, which stifled innovation and contributed to economic stagnation.

💡Oil and Gas Exports

Oil and gas exports are a significant source of revenue for countries with rich natural resources. The script explains how booming oil and gas exports provided relief to the Soviet economy, but also led to issues such as repressed inflation and later, when prices collapsed, economic instability.

💡Big Bang

The 'Big Bang' refers to a rapid and comprehensive economic liberalization, often used to describe the transition from a planned economy to a market economy. The video discusses how Russia's transition was too rapid, leading to economic disarray and contributing to the cycle of stagnation and inflation.

💡Foreign Exchange Reserves

Foreign exchange reserves are assets held by a central bank in foreign currencies. The script mentions Russia building up large foreign exchange reserves from oil and gas exports, which were intended to insulate the country from future sanctions but also led to underinvestment domestically.

💡Authoritarian Leaders

Authoritarian leaders are those who exercise strict, often centralized control over the country without being accountable to the public. The video suggests that while such leaders have occasionally brought about periods of growth in Russia, their rule often ends with economic stagnation and collapse.

💡The Narrow Corridor

The 'Narrow Corridor' is a concept from a book by James Robinson and Daron Acemoglu, which discusses the balance needed between a strong state and constraints to prevent it from hindering economic growth. The video refers to this theory to suggest that Russia's economy struggles because the state is not constrained enough to allow for creative destruction.

Highlights

The video discusses the impact of Western sanctions and the structural problems of Russia's economy.

Russia's economy has faced cycles of stagnation, inflation, collapse, and rebirth, never becoming a true economic superpower.

High inflation and a drop in purchasing power for Russians even before the war in Ukraine.

The historical context of Russia's economy, including its self-sufficiency and the challenges faced during the reign of Czar Nicholas II.

The Soviet Union's growth miracle in the 1950s and the debate among economists about the viability of a centrally planned economy.

The difficulty for the Soviet Union to innovate and the role of creative destruction in economic growth.

The relief provided by booming oil and gas exports for the Soviet Union and the subsequent issues of repressed inflation.

The rapid transition from a command and control economy to capitalism in Russia, known as the 'Big Bang'.

The inequality in Russia created by the privatization of state industries to a select few.

The impact of the Asian financial crisis on the Russian economy and the resulting default and ruble collapse.

The role of a strong leader in stabilizing the Russian economy and the influence of rising oil and gas prices.

Efforts to rebuild Russia's institutions and foster a more decentralized economy under Putin.

The recognition of Russia as part of the BRIC nations and the influx of foreign investment that followed.

The challenges faced by the Russian economy due to Western sanctions and the collapse of oil prices.

The use of foreign exchange reserves to insulate Russia from future sanctions and its impact on domestic investment and consumption.

The deterioration of Russia's pro-growth institutions due to underinvestment and corruption.

The demographic challenges faced by Russia, including a declining population and the impact of the coronavirus crisis.

The theory of a strong but constrained state for advanced level growth as proposed by James Robinson and Daren Acemoglu.

The historical pattern of Russian economic cycles and the potential for breaking the cycle through state constraint.

Sponsorship mention of Squarespace and its platform for creators to build websites and generate revenue.

Transcripts

This video is sponsored by Squarespace

anxiously watching the currency exchange

84 Rubles for regular onions.

How much was it?

four times twenty Rubles, four times

Look, we need to talk about Russia's economy.

It's true that Western sanctions are wrecking unprecedented havoc upon it at the moment.

But Russia's economy actually has a bigger, more structural problem.

This problem ensured that Russia's economy never became a true economic superpower.

Instead, Russia's economy has been characterized by cycles of stagnation, inflation collapse

and rebirth.

Yes, this also happened under Putin.

And after a period of tremendous growth, Russia's economy stagnated, never really reaching its

full potential.

And with high inflation, even before the war in Ukraine, hard working Russians had seen

their purchasing power drop by roughly a third since 2013.

So why is Russia's economy seemingly doomed to volatile cycles of stagnation, inflation

collapse and rebirth?

Well, to answer that question, we need to go back in time

No, no, we'll get to that point

But for this story to truly make sense, we need to go back further in time.

The year is 1916 and the Russian troops are waging bloody war on a western front.

On the surface, Russia's economy is really solid.

Its economy is rather self-sufficient.

It does not rely on foreign capital, and it has built up one of the largest piles of foreign

exchange reserves in the world.

However, for the people of Russia, the picture is not as rosy.

Their incomes have stagnated, while at the same time prices have risen by over 130% over

the course of two years.

This combination of stagnation and inflation meant falling purchasing power for ordinary

Russians, and this was becoming a big problem for Russia's authoritarian leader, Czar Nicholas

the second.

Sure, the war had rallied sentiment initially, but in hugely unequal Russia as people saw

their money evaporate They started turning against the ruling elite,

and as newly formed Soviet Russia was engulfed in revolutionary turmoil.

Regular inflation eventually turned into hyperinflation.

Until a strong leader eventually took charge and stabilized the state and its currency.

However, it was only during the 1950s that the Russian economy really came into its own.

This period became known as the Soviet growth miracle.

This growth miracle was so potent that Nobel Prize winning economist Paul Samuelson even

kept predicting that the Soviet economy would outgrow that of the United States.

On the other hand, if we follow the logic of free market economists such as von Mises and Hayek, then

the Soviet growth miracle really shouldn't have happened at all.

You see, they argue that the bureaucratic state cannot hope to grow an economy because

it can never really know which of the millions of sectors to invest in.

And I think that there they have a good point.

After all, there are already more than 350 million product types sold on the Amazon marketplace.

How can government bureaucrats ever find out how to produce each of these 350 million products?

And in what quantity to produce them?

However, the thing is after years of conflict and even hyperinflation.

The Soviet Union was dirt poor, so it didn't need 350 million product categories.

It just needed basic products such as food and heavy industry.

And for that, it just needed basic institutions such as an education system a health system

and a transportation system.

And as it turns out, these were exactly the types of institutions that the stabilized

state of the Soviet Union had put into place during the thirties and forties.

So if you look at it like that, it makes total sense that the Soviet economy could grow very

rapidly in the 1950s.

And it also makes sense that the Soviet economy then stalled after it had almost caught up

with Western economies.

After all this is where the 350 million product categories from Amazon come in.

After the economy had reached a basic level, further growth became extremely difficult

to oversee for the highly centralized states.

On top of that, in advanced economies, growth typically happens through innovation.

And innovation brings new businesses to the forefront, which likely means that some old

business interests lose.

However, in Soviet Russia, this process known as creative destruction, was held back by

precisely these old business interests.

So then how was the economy to grow?

Now that easy catch up growth was depleted Luckily for Soviet Russia, and especially

its governing elites, booming oil and gas exports provided relief.

What's more, the state used the proceeds of these exports to build up a large war chest

of foreign exchange reserves.

However, for the people of Russia, the picture was not so rosy.

Their incomes had stagnated and, sure, price controls prevented inflation.

But this led to a phenomenon known as repressed inflation.

This basically means that because prices are prohibited from rising, massive shortages

emerge.

So, as stagnation went from bad to worse, the Soviet Union tried to modernize and let go

of these price controls, turning repressed inflation into actual inflation.

Of about eight to 8-9%.

And then when this didn't work, it just tried to spend itself out of trouble, which increased

inflation even further.

And then as the Soviet Union collapsed, as higher inflation even turned to hyperinflation.

And this is the situation that the new Russian economy started out with.

Now, some influential scholars have actually argued that Russia made a crucial mistake

in moving too quickly from a command and control economy to a capitalist economy because it

happened so rapidly.

This process is even known as the Big Bang.

However, economist Branko Milanovic points out that at the time, the Soviet economy was

already in so much trouble that the new president, Boris Yeltsin, basically had no other option

than just to let go of all price controls at the same time in a big bang.

The one thing where he did have a choice, though, is whether or not to sell off all

state industries to his friends for pennies on the dime.

And unfortunately for Russia, Yeltsin's buddies got some pretty sweet deals

creating once again massive inequality in Russia.

And while in 1997 the Russian economy finally seemed to be back on the right track.

The state was still extremely weak and unable to collect taxes.

So when global capital got scared during the Asian financial crisis, a global run on the

ruble followed.

This led to a default by the weak Russian state, and it also led to the ruble to collapse

once again.

What followed was sky high inflation of roughly 85%.

And this is when a new ambitious young prime minister with a new economic plan in his drawer

enters the picture.

Indeed you could say that in 1999 a strong leader stood up, centralized the state and

the Russian economy once again began to thrive as it caught up to other nations.

Okay, you could also argue that the eightfold increase in oil and gas prices at that time was rather

convenient.

And while inflation was still high, the average spending power of Russians increased from

roughly 1800 dollars in 2002 to a whopping $16,000 in 2013.

Okay. Sure

You could argue that the average Russian spending power didn't increase by that much because

much of the spoils went to Putin's friends and associates as under Putin in Russia also

became one of the most unequal nations on earth.

But still, poverty also dropped from roughly 25% of the population in 2002 to roughly 10%

in 2013.

And sure you could argue that this catch growth was easy because Russia still had its well

educated population, fertile land and wealth of resources.

But as far as I could tell, there was a genuine effort to rebuild Russia's institutions to

work better for ordinary Russians, for example, under the so-called GREF reform program.

Barriers to opening business were lowered.

What's more, the state's tax collection apparatus was improved, and so was its ability to provide

crucial services to ordinary Russians for them to be able to build their businesses.

So now both the essential state services were in place, and there was also a more decentralized

economy that could foster creative destruction.

This was clearly Russia's time to shine.

Right.

Well, yeah, at the time it really seemed that way.

This is when Russia's economy was globally recognized as part of the BRIC rising nations

group where BRIC stands for Brazil, Russia, India, China.

This group would soon dominate the global economy.

As a consequence, an influx of foreign investment and businesses flowed into the country and

the economy was booming and the ruble was strengthening.

No wonder that Putin became so popular and, sure, the Russian economy was hit pretty hard by

the global financial crisis. But, it bounced back rapidly, reaching an all time high in

2013.

Outside a Ukrainian military base here in Crimea.

But the soldiers over here are Russian.

Now in response to the annexation.

The Russian economy was sanctioned by Western powers, but what was even worse is that the

price of oil just happened to collapse at the same time.

So the Ruble fell.

And because this meant that imports became much more expensive.

Inflation soared to 16% in 2015.

Stagnation and inflation. What is more rather than investing them in the economy.

The proceeds of oil and gas exports would now be used to build up an impressive warchest

of foreign reserves.

And the idea behind this would be to insulate Russia from future sanctions.

The problem is that foreign exchange reserves are invested abroad and not locally.

Not only is this bad for future growth, investment also represents income for the people of Russia.

And with less income, Russians buy less stuff.

Meaning that other Russians now also have less income.

After all, the economy is a circular system.

That's how macroeconomics is different from microeconomics.

On top of that, the state became increasingly heavy handed and authoritarian and it promised reforms

to make business for locals easier stalled.

The best state businesses started going more and more to Putin's friends rather than to

the best Russian businesses.

As a consequence of underinvestment and corruption, Russia's crucial pro-growth institutions then

started to deteriorate.

In that light, it's not surprising that some of Russia's most talented individuals started leaving

Russia and starting businesses in Europe instead.

To make matters even worse, because the dark inflationary days of the nineties were so

uncertain.

Russian women basically stopped having children.

And that now means that there are now fewer Russians to also make fewer children.

Combine this with the government's mishandling of the coronavirus crisis and the Russian

economy almost lost 1 million people last year. In that light,

it certainly makes sense that Putin apparently said that what really haunts him is Russia's

declining population.

So how can Russia's economy break free of its cycle of stagnation, inflation and collapse

and rebirth?

Well, let's see if we can find some common patterns in Russia's previous cycles.

But, in hugely unequal Russia, as regular people saw their money evaporate, they started

turning against the ruling elite Until, a strong leader stood up and stabilised

the state and its currency However, in Soviet Russia, this process, known as

Creative Destruction was held

back by precisely these old business interests

Luckily for Soviet Russia, and especially its governing elites, booming oil

and gas exports provided relief.

However, for the people of Russia, the picture was not so rosy.

Their incomes had stagnated.

And then, as the Soviet Union collapsed, higher inflation even turned into hyperinflation

a strong leader stood up centralised the state, and, the Russian economy once again began to thrive

rather than investing in the economy, the proceeds of oil and gas exports would now be used

to build up an impressive war chest

But, the state became increasingly heavy handed and authoritarian

As we can clearly see, the Russian economy is doing the worst when the state is in disarray

and weak

with these experiences in mind, it makes more sense that sometimes the Russian population

supports some relatively authoritarian leaders and these authoritarian leaders are actually

able to bring some amazing periods of growth from time to time.

However, their rule typically ends with a period of stagnation and inflation and eventually

collapse until the story starts all over again.

So how to break this cycle at that point?

Well, here I'm going to refer to a theory put forward by famous economists James Robinson

and Daren Acemoglu.

I actually have the book here in the back. Here, in this book. The Narrow Corridor.

In this book, they basically say that for advanced level growth a strong but constrained

state is needed.

On the one hand, the state should be strong enough to provide the basic institutions and

currency stability that is needed for growth.

At the same time, the states should be constrained enough so that it doesn't hinder the process

of creative destruction in the private sector.

And so I would say that this is the real problem that Russia's economy is facing. Unlike countries

such as Japan, South Korea and Germany, which also started out with strong authoritarian

states.

The Russian state was never shackled and therefore always got out of control until it broke down,

and so did the economy, at which point the cycle starts again.

But hey, these are just my thoughts on the matter.

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And finally, if you want to know more about the impact of Western sanctions on Russia's

economy, check out this video over here.

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