Argentina and Russia: The has-been curse

Despite their differences, Russia and Argentina both stand to gain from being ruled by political elites with a better grasp of the intricacies of market behaviours than Cristina Kirchner and Vladimir Putin have shown to have

Vladimir Putin and Cristina Fernandez de Kirchner
Fabio Rafael Fiallo
On 2 June 2014 17:55

For all their differences – and they are huge, and many – Argentina and Russia share two characteristics that have in no small measure contributed to undermine the place and weight they once had on the world scene.

First of all, their rulers have more often than not placed their bets on economic dirigisme and state meddling as instruments of promoting growth, thus inhibiting the smooth functioning of market forces. No less important, playing on the population’s nationalist feelings, the have embarked upon hazardous adventures with an unhappy end.

At the dawn of the 20th century, Argentina was the world’s sixth largest economy and outranked Germany, France and Italy in terms of per capita GDP. Yet, with the coming to power of populist dictator Juan Domingo Perón in the mid-1940s, the government’s overwhelming intromission in the economy, and hostility towards foreign capital and business in general, took a toll on the country’s prosperity.

Perón’s rule lasted only nine years, but Peronism and its pro-State mantra have been a key feature of Argentinian politics ever since.

Russia, for its part, reached superpower status at the end of World War II. Yet, the inefficiency inherent to the communist economic model, coupled with the arms race and the costly military adventures the Kremlin used to engage in throughout that period, ultimately led to the economic asphyxia of the Soviet empire.

To redress the situation, political leaders coming from the old political establishment underwent a change of heart in the 1990s and began to test pro-market reforms similar to those that were proving their effectiveness in a variety of countries: Chile, Brazil, Ireland, Poland and the Baltic States, to mention a few.

In Russia and Argentina, however, the reforms didn’t live up to expectations – an outcome for which the rampant corruption that prevailed in those countries bore a good deal of responsibility.

Cue the Kirchners in Argentina and Vladimir Putin in Russia, and with them a different narrative. Without explaining why the pro-market policies had failed in their countries while they were succeeding elsewhere, the new rulers decided to lambast and jettison those policies and to strengthen once again the government’s sway over the economy.

The commodities boom of the beginning of this century enabled the two countries – whose main export items are commodities – to register a robust economic growth. Yet the calamitous, politically-oriented management of state-controlled, or oligarch-owned, firms hindered the countries’ ability to profit from the boom and foster the modernisation, diversification and expansion of the production base.

At the same time, an uncertain investment climate transformed capital flight into a sort of national sport.

It is against this unpromising economic background that the leaders of the these countries have tried to titillate the nationalist feelings of the population – like in the “good” old times of Juan Domingo Perón in Argentina and the Soviet Politburo in Russia.

In Argentina, the government abruptly expropriated the 51 percent stake that the Spanish transnational corporation Repsol owned in the country’s main oil firm, YPF. President Cristina Kirchner hailed the measure as a victory for “energy sovereignty”.

For his part, the economy minister, Axel Kicillof, warned: “We will not give a single cent to Repsol”. Nearly two thirds of Argentinians (62%) approved the expropriation.

Two years later, the measure is a source of disappointment. Since nationalisation, YPF has been unable to increase its output and, still worse, lacks the expertise and financial means needed to modernise its plants and exploit the huge reserves of shale oil and gas that Repsol discovered just before the expropriation took place.

The government began then to search for investors ready to put their money in the capital of YPF. Yet, due to the fear of being expropriated as Repsol had been, and dreading the outcome of a complaint filed by Repsol against the Argentinian government at the World Bank’s arbitral tribunal, foreign investors hesitated to bring their resources and technology to YPF without a prior compensation agreement between the government and Repsol.

Ultimately, Mr. Kicillof agreed compensate Repsol for more than $6bn, an amount that corresponds to the demands of the Spanish firm.

The tendency to exploit the population’s nationalist sentiment is at work in Russia too – with the difference that Putin resorts, not to expropriations, but to the expansion of Russia’s clout over neighboring States that formed part of the former Soviet Union. Putin’s last move, the annexation of Crimea and his support for Russian-speaking separatists of eastern Ukraine, was approved by 80 percent of Russia’s public.

The problem is that in the same manner that the expropriation of Repsol turned out to be counterproductive for the Argentinian economy, so Putin’s Ukrainian adventure is proving to be onerous for Russia. For all their limitations, the tepid sanctions imposed by the West and the threat of further sanctions have begun to harm.

Russia’s Finance Ministry announced that the country is currently in “technical recession” and the Minister, Anton Siluanov, estimates that growth in 2014 may be near to nil as a result of “geopolitical” disruptions.

Capital flight, which had reached significant magnitudes before the Ukrainian standoff ($420bn since 2008, with $56bn in 2012 and $63bn in 2013), has accelerated dramatically. Reliable sources put the figure at $220bn (around 8 percent of GDP) just for the first four months of 2014.

The ruble has depreciated by 10 percent in the year-to-date – as much as in the whole 2013.

To rein in the depreciation, the authorities took measures that produce collateral damage to the overall economy: they raised interest rates, which hampers economic activity, and have been selling the country’s foreign-exchange reserves, which is not sustainable indefinitely.

Furthermore, Putin has invested a great deal of money in modernizing the Russian army. The intention is to restore the military might his country had at the time of the Cold War.

He doesn’t seem to realise, however, that a strong military punch doesn’t prevent a global power with a weak economy from falling. There is no better proof of this than the dismal fate of the Soviet Union itself.

For all these reasons, Putin’s strong-handed manoeuvers in Ukraine and elsewhere, even if they prima facie give the impression of consolidating Russia’s geopolitical weight, are bound to play the same pernicious role that Soviet military adventures did in the economic collapse of the Socialist bloc.

To secure the economic dynamism and international weight that their immense material and human resources bring within their reach, Russia and Argentina stand to gain from being ruled by political elites with a better grasp of the intricacies of market behaviours and the requirements of an effective economic performance than Cristina Kirchner and Vladimir Putin have shown to have.

Fabio Rafael Fiallo is an economist and a former UN official. The author of four books, he writes on issues related to international politics and the world economy

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