Sanctions can hurt an economy, but they can be revoked. Reputation, on the other hand, is not so easily repaired. Vladimir Putin has spent years working to distinguish modern Russia from its czarist and Soviet predecessors, and he is well aware of the costs associated with proposing nationalization as a wartime policy. His willingness to jettison what could have been one of his most important legacies to pursue a war in Ukraine suggests that the last few months represent a marked turn in Putin’s goals and his vision of Russia’s place in the world.
In the late 19th and early 20th centuries, the czarist regime established a favorable reputation with foreign lenders. The czar’s firm control over the economy, which included the power to revoke corporate charters at any time, made direct investment in the Russian economy risky. But the Romanov Dynasty’s 300-year reign and control over roughly one-sixth of the Earth’s land made the regime appear to be a reliable debtor. Lured by high interest rates and often encouraged by glowing articles written by journalists secretly bribed by the Russian government, foreign investors lent a staggering amount of money to the czarist government in its last decades in power.
Foreign investors’ confidence in Russia’s economic stability remained high even as the czar’s regime grew frail. At the outbreak of World War I, 1.6 million French citizens held czarist-backed securities worth 4.5 percent of France’s national wealth. During the war, American and British firms invested more in the czarist government to ensure that their ally could maintain an eastern front in the war. In 1916, even as large American firms, such as International Harvester and Singer Manufacturing, found themselves subject to strict state controls on repatriating their Russian profits, New York City Bank floated $75 million in dollar-backed Russian treasury bonds on American markets.
The czar’s fall from power in March 1917 and the subsequent rise of Vladimir Lenin and the Bolshevik Party the following November, therefore, came as quite a shock to those with a financial stake in the country.
In January 1918 — in a move that staggered global markets and would haunt foreign investment in Russia for decades to come — the Bolsheviks put their communist ideology into practice by nationalizing all foreign-owned property and repudiating all foreign debt accumulated by their predecessors. When the Bolsheviks emerged victorious from the Russian Civil War in 1921, they solidified themselves not only as the government of the former Russian Empire, but as a pariah in the global economy.
Yet even as they renounced foreign debts and pursued a commitment to end global capitalism, Bolshevik policymakers expended a great deal of effort trying to attract foreign capital. They developed a foreign concession committee to court Western firms such as BP and Shell to develop the oil fields at Baku, signed a deal with Armand Hammer to build a pencil factory in Moscow and awarded future U.S. ambassador to the U.S.S.R. W. Averill Harriman a concession to mine manganese in Georgia.
Despite a good-faith effort to abide by the contracts they offered, the Soviet government in the 1920s remained too weak to enforce them, and the relatively few projects that came to fruition were either canceled or taken over by the state by the end of the decade. In light of the Soviet repudiation of 1918, many foreign observers ignored the fact that the Soviet government actually reimbursed many concession holders for the capital they had invested plus interest, and instead presented these concessions as one more communist trick to steal foreign property.
In the 1930s, the Soviet regime turned its search for capital inward, but it never fully withdrew from global markets. Soviet leaders, for example, negotiated contracts to purchase technology from foreign firms, including Ford, in the 1930s. But the U.S.S.R.’s emergence as one of two Cold War “superpowers” after World War II meant that it was no longer reliant on Western investment for economic development.
Still, the U.S.S.R. continued to trade with foreign firms during the Cold War. In 1972, the Soviets struck a deal to bring Pepsi to the U.S.S.R., which they first purchased with Stolichnaya vodka and later Soviet ships.
Yet even after decades of economic growth and a near-perfect track record in fulfilling financial obligations to foreign trade partners, the specter of the 1918 nationalization decree continued to haunt the U.S.S.R. by making foreign firms wary of such engagements.
In the mid-1980s, when Mikhail Gorbachev turned to British and French financiers for loans to stabilize a Soviet economy that was falling alongside the price of oil, both countries mandated repayment of czarist debt as a prerequisite to offering loans. Soviet negotiators eventually relented, although they ultimately settled at a discount, increasing the costs of Russia’s post-Soviet transition to a market economy.
When the Soviet Union dissolved in 1991, the Russian Federation assumed most foreign debt accumulated by the U.S.S.R. This debt, along with Boris Yeltsin’s rule by fiat, helped to make the 1990s a decade of economic and political instability for Russia.
On Aug. 17, 1998, the government declared a moratorium on payments to foreign lenders as part of its response to the ruble crisis, confirming investors’ doubts about Russia’s economic stability. Within a month, Russia’s already low BB credit rating from S&P plunged to an abysmal rating of CCC-. By Jan. 27, 1999, the country was in selective default, where it remained on Dec. 31, when Yeltsin announced that he was resigning as president to be replaced by his prime minister, a relatively unknown former KGB agent named Vladimir Putin.
Putin inherited a Russian economy in free fall. Although it continued to collapse during Putin’s first year in office, rising oil prices allowed Russia to resume debt payments and buoyed Putin’s leadership as he restructured the country’s legal system and recentralized state power at the federal level.
Then, like now, Putin’s lack of concern over human rights was obvious. Yet during his first eight years in office, what seemed most remarkable to many at home and abroad was the success of his economic agenda. As Time magazine put it when naming him 2007 Person of the Year, Putin had “performed an extraordinary feat of imposing stability on a nation that has rarely known it.” And just like his czarist predecessors, Putin found that the image of stability was a valuable asset in attracting foreign investment.
In 2008, when Putin completed his second term as president, foreign direct investment inflows in Russia totaled $74.8 billion, almost 30 times higher than during his first full year in office, and the country’s S&P credit rating had risen to BBB+. Had he ended his tenure in Russian politics then, Putin probably would have been remembered for saving Russia’s economy and setting it on the road to firm integration into the international economy — no small feat.
Instead, Putin’s brutal war against Ukraine is now bringing Russia to the verge of financial ruin once again. Having spent his first years in office distancing Russia from its legacy of economic disrepute, he has reawakened this reputation with startling force. And unlike his first years in office, Putin can no longer make a convincing case that the country’s leadership represents a break with this troubled past. Putin’s destabilization of Russia’s place in the world suggests that he is now pursuing a very different set of goals. So long as Putin and his party remain in power, they will serve as a reminder of Russia’s long history of economic instability, stifling the prosperity of Russia’s people and threatening that of their neighbors.
Perspective | Russia is threatening a move that will haunt its economy for decades - The Washington Post
Read More
No comments:
Post a Comment