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Reversal of Fortune

Vladimir Putin's social contract has been premised on an authoritarian state delivering rising incomes and resurgent power. But the economic crisis is unraveling all that. And what comes next in Russia might be even worse.

For the Western world, 1929 marked the start of the Great Depression. For the Soviet Union, it was a year that Joseph Stalin called the "Great Break" -- the ending of a short spell of semiprivate economic policy and the beginning of the deadly period of forced collectivization and industrialization. Often mistranslated as the "Great Leap Forward," "Great Break" is truer to Stalin's intentions and much more befitting their tragic consequences. The events he set in motion 80 years ago broke millions of lives and changed human values and instincts in Russia. It was, arguably, the most consequential year in Russia's 20th-century history. Now, 80 years later, and for much different reasons, 2009 could shape up to be a year of similarly far-reaching consequences for Russia's 21st century.

Today's Russia is not the Soviet Union, and Prime Minister Vladimir Putin is not Joseph Stalin. But just as historians view 1929 as the end of the revolutionary period of Soviet history, scholars will (and already do) define Putin's rule as a restoration that followed a revolution. Restoration -- of lost geopolitical influence, of Soviet symbols, of fear, of even Stalin's reputation -- has been the main narrative of the past decade. But as history shows, periods of restoration do not restore the old order; they create new threats. This is what Russia is today -- a new, much more nationalistic and aggressive country that bears as much (or as little) resemblance to the Soviet Union as it does to the free and colorful, though poor and chaotic, Russia of the 1990s.

The idea of a resurgent Russia has been at the heart of Putin's social contract, generating alarm abroad but admiration at home. Russians came to see themselves as winning again, first in international song contests and prestigious soccer matches, and then in a war last summer with their tiny Caucasian neighbor, Georgia. That conflict was presented and perceived as a victory against the United States, which has in recent years backed Georgia and supplied it with arms. It was the epitome of Russia's resurgence, its return at last to being a great power that could stand its ground and that was willing and able to confront the West militarily.

Russia's ambitions were backed by rising oil prices and swelling coffers. Money kept flowing in no matter what the Kremlin said or did. Local businesses and international corporations were scared into total obedience. Dmitry Medvedev, Putin's protégé and successor as president, even began lecturing the world on how to reorganize the global financial system. He dreamed Russia would become a new financial capital, and the ruble a new reserve currency. At last, Russia was feared by the West, which in Putin's book is equivalent to respect.

The financial crisis that erupted on Wall Street in 2008 initially heightened Russia's sense of resurgence. Putin boasted about the success of the past few years and gloated about U.S. distress in the same hawkish tones that Stalin used in 1929 to tout the transformation of the Soviet Union into an industrial superpower. "We did not have a crisis of liquidity; we did not have a mortgage crisis. We escaped it. Russia is a safe haven," Putin said. Then the economic crisis engulfed Russia, too.

In 1929, the Soviet Union was mostly isolated from the global shocks of the Great Depression. That is not true today. The current economic crisis has hit Russia hard, exposing its institutional weaknesses and the fragility of its success. The drop in the price of oil and the seizing up of capital markets are choking Russia's economy, which has relied on petrodollars and cheap credit. Economies have been hit all over the world, but nowhere, it seems, has the reversal been as dramatic as in Russia.

Confidence in the rule of a wealthy, heavy-handed Russian state has been shaken, and it is now a real possibility that the global economic crisis, as it persists and even intensifies, could cause Putin’s social contract to unravel. What is not clear, however, is what would take its place -- and whether it would be any improvement. The nationalist passions and paranoia that Putin has stirred up have poisoned Russian society in lasting ways. Now, 2009 could be a new "Great Break" for Russia, but the result might just be a country in upheaval -- broken.

Putin's social contract has been based on co-opting Russia's elites, bribing the population, and repressing the disobedient. A mixture of nationalistic rhetoric, rising incomes, and pride in Russia's resurgence won public support. Until now, money has been Putin's most powerful weapon. Rising incomes and a strong ruble (due to high commodity prices) have enabled Russians to enjoy imported food, holidays abroad, and foreign cars and technology. But even if the lives of ordinary people have not improved dramatically (49 percent say they have enough money for basic needs but struggle to buy much else), Russians at least felt that they had stopped sliding backward. Now things are looking bleak again.

The immediate response from Moscow has not been greater humility, but deepened bitterness and aggression. Predictably, Russia blamed the United States for everything, from the economic crisis itself to instigating the recent gas conflict with Ukraine. The anti-American hysteria in Russian state media is deafening. The hubristic tone of Russia's leaders is buoyed in part because the crisis is not yet starkly visible in Moscow. Restaurants may not be full, but they are still busy, and supermarkets are heaving with people.

In Russian homes and on the streets, however, the talk is of crisis. Stories of layoffs and reduced salaries, canceled projects, and frozen funding have replaced the chitchat about holidays abroad and new foreign cars. Slowly but surely, the truth is starting to set in: After eight years of economic boom, the growth of Russia's economy is now slowing.

Real incomes are dropping at the same time utility bills are going up. Inflation is forecast at 13 percent, and the ruble has lost more than 30 percent of its value since last summer. Given that half of all goods Russians buy are imported, the impact on living standards will be dramatic. The long-term risk is that the crisis will undermine private initiative and empower inefficient monopolies and opaque state corporations. The new economic model that could emerge would reflect the worst mixture of the private sector and public sphere: nationalization of debts and privatization of profits. This, on top of Russia's other chronic problems (which include dysfunctional public services, thriving corruption, and an aging, shrinking workforce), does not bode well for the country.

The sedation of Russian state television is wearing out for an increasingly disenchanted public. Trust in its coverage of the economic situation has declined dramatically as the pain of the crisis deepens. Only 28 percent of Russians now think the media are objective. And as financial resources become scarcer, it is likely that an increasingly desperate Kremlin will resort to greater violence and repression to maintain its splintering social contract.

This was vividly demonstrated in December during riots in Vladivostok, in Russia’s Pacific Far East. Street clashes with a broadly apolitical crowd -- most unusual in the generally complacent Putin era -- were sparked by a Kremlin decision to raise customs duties for used cars. The idea was to prop up Russia's struggling auto manufacturers. But because the importing and servicing of cheap, secondhand Japanese cars has long been a mainstay of Vladivostok's economy, Moscow's decision ended up depriving hundreds of thousands of people in the Far East of their livelihoods. When thousands of motorists blocked the main roads, the Kremlin could not rely on the local police force and had to airlift special riot police in from the Moscow region, 10 time zones west. The brutality with which these units dispersed the demonstrators shocked even the local police.

When protesters realized that state television failed to report the clashes, their rage, initially aimed against a particular economic measure, turned against the entire political system. Several Russian commentators drew parallels with the massacre of workers in Novocherkassk in 1962, an episode of Soviet history kept secret for many years. When the Soviet government raised food prices while cutting workers' salaries, people took to the streets. The Soviet government brought in an army unit from the Caucasus and opened fire on the protesters.

Whether the current Kremlin is prepared to open fire on its own people is unclear. Soviet hard-liners held their fire when thousands of Russians defeated the coup against Mikhail Gorbachev in 1991. But back then, the KGB and its communist patrons were disoriented and weak. Putin and his regime, on the other hand, are stronger and, most importantly, have more to lose.

What's even less clear is whether Russia's police or military would obey the orders to shoot if they were given. The Vladivostok protests and the government's violent response sparked an online debate in the chat room of Russia's Interior Ministry. One post read: "Dear colleagues, Russia is at a crucial junction. An economic catastrophe is coming. People's patience is coming to an end. Are we going to be the attack dogs of this regime?"

Another member replied: "I will never shoot at my own people."

The ministry hurriedly closed down the forum, citing "technical problems."

So far, neither Moscow nor St. Petersburg has seen anything on the scale of violence that recently erupted in neighboring Latvia or Lithuania, as well as Vladivostok. And they may not: The willingness to protest in Russia's two largest cities has been fairly muted. Seven decades of communism instilled in Russians a capacity to adjust to hardship and an unwillingness to make much fuss about it. Having lived through two massive currency devaluations in the 1990s that wiped out their savings, people have learned not to trust their government. The feeling is mutual: The servile Russian parliament has widened the definition of treason and scrapped jury trials for such crimes as "organizing mass riots." And because the potential for trouble is more severe in cities that rely entirely on just one industry or factory -- of which Russia has a few hundred -- the Kremlin is making sure that people do not get sacked, even if their salaries are delayed or cut.

The Kremlin is acutely aware that civil unrest in Russia could trigger the country's disintegration. The most alarming hot spots that could erupt into full-scale civil conflict are Russia's ethnic Muslim republics in the south, particularly Chechnya, Ingushetia, and Dagestan. After two bloody wars in Chechnya, Ramzan Kadyrov, a local strongman whom the Kremlin installed as president, has been more or less keeping a lid on things in recent years. A steady flow of money and complete carte blanche for Kadyrov to run his republic as he sees fit have removed much of the incentive for fighting. But if the money were to run out, this could change.

Even more than street protests, discontent among the Russian elite could destabilize Putin's regime. Moscow is ripe with speculation about a possible rift between Putin and Medvedev. Parts of Russia's elite seem well aware of the risks facing the country and fear the instability that could result from the concentration of power in Putin's hands. Some of his actions, including the energy war with Ukraine, are no longer in the interests of much of the elite, since cutting off gas to Europe also means cutting off Russian profits.

But the chances of a liberal renaissance as a result of Putin's social contract unraveling are highly unlikely. There is nothing more misleading than to portray Russia as a liberal-minded society suppressed by a nasty bunch of former kgb agents. The uncomfortable truth is, as Mikhail Khodorkovsky, the jailed boss of the Yukos oil company destroyed by the Kremlin, put it: Putin "is more liberal and more democratic than 70 percent of the population." And unlike late Soviet leaders who inspired the contempt of the population, Putin even now remains authentically popular.

Putin's most damaging and possibly longest-lasting legacy is that he has played to Russia's worst instincts. Rather than develop a sense of pride in Russia's victory over the Soviet Union in 1991, Putin has fostered feelings of past humiliation and defeat, and subsequently a longing for retribution. Many foreign responses haven't helped in this regard: American hawks who argue triumphantly that their old Cold War adversary is irrelevant have been of as much assistance to Putin as some of Europe’s appeasers.

At the same time, Putin has stamped out any nagging sense of unease and shame over Russia's bloody past, including Stalin's painful "Great Break." Indeed, these days Stalin is described in Russian textbooks as a successful manager who led the country's industrial transformation. Using state television, Putin has nurtured not only nationalism, but a new wave of anti-Americanism. In the 1990s, these feelings were mainly prevalent in the older generation of die-hard communists. Today, they are firmly grounded in a generation of Internet-savvy 16-year-olds.

When Putin came to power a decade ago, he stirred dormant nostalgia for the lost Soviet empire. "It is an illness," warned former liberal Premier Yegor Gaidar. "Russia is going through its dangerous stage." This danger is made all the more real by today's crises: an imploding economy, expanding economic hardship, and an increasingly desperate Russian state that must rely on repression and nationalism. Whether Russia recovers from the illness or succumbs to it may be as crucial to the world's security as it was in the year of the Great Break.

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