This year’s mid-fall was not pretty in Moscow, where I write this column.  Wind, drizzle, and early frost herald a long winter.

It won’t be the winter of Russian discontent, however.  Western sanctions and low oil prices have harmed the economy—it contracted by 4.3 percent in the third quarter—but Putin’s approval rating is consistently well above 80 percent.  What the prophets of Russia’s quick doom at AEI and Heritage fail to understand is that, for most Russians, regaining global stature takes precedence over economic issues.  This may change, but not any time soon.

Those economic issues may nevertheless become pressing in 2016.  Russia’s diversification away from commodities (over 70 percent of exports) has not started.  The government’s much-heralded import-substitution program has been a failure thus far, with manufacturing stagnant or even slightly declining.  Pumping trillions of rubles into the banking system has resulted in a new round of currency speculation by the bank-owning oligarchs, rather than making cheap credit available to the economy.  To curb inflation, the base lending rate has been raised by the central bank to 11 percent, with adverse consequences for thousands of cash-starved small- and medium-sized companies.

My Moscow contacts claim that Russia’s economic woes are only partly the result of Western sanctions.  The core problem is political: There are many influential elements within the power structure that are unwilling or unable to devise and apply a coherent long-term program of reforms that would release the country’s enormous economic potential and remove various systemic choke points.

Central Bank chief Elvira Nabiullina still believes in the IMF-mandated orthodoxy of raising interest rates to curb inflation—although its grim results have been visible for years all over the world.  Many influential, politically connected oligarchs prefer the system to remain as is because they profit from its inefficiencies.  They understand the casino of financial speculation, but they do not know how to make a steady profit from investing in potentially promising import-substitution ventures.

President Putin, focused primarily on foreign affairs, seems reluctant to clean the stables.  In a long interview last October with Vladimir Pozner, Russia’s foremost liberal journalist, Putin’s advisor on economic affairs Sergei Glazyev—an outspoken opponent of the central-bank approach—was asked if the president understands that billions earmarked for investment are being misused for currency speculation:

Glazyev: The President counts on the people behaving decently . . . Because he, apparently, believes in the patriotism of our business.  When he said that we needed to stabilize the market, then our large corporations responded and put some money out on the market.


Pozner: So, our President is very naive?

Glazyev: No, he just keeps his word.  He said that we would not introduce any currency restrictions, counting that all parties on the market would behave decently.

It defies belief that Putin “apparently” relies on the “patriotism” and decent behavior of Moscow’s arrogant multibillionaires in completing the task of stabilizing Russia’s troubled economy.  Being in Russia’s capital, where the uncouth “captains of industry” indulge all too visibly in conspicuous consumption, I cannot help but see this response as an implicit admission of Putin’s weakness.

Putin is free to devise strategies for the projection of Russian power abroad (Syria), for the maintenance of an increasingly frozen conflict in the “near abroad” (Ukraine), and for the overall task of making Russia matter in world affairs.  He is not free to intervene decisively in the messy business of domestic finance.  He has lost control of the money, and the oligarchs have won—for now anyway.

Unless Russia reforms her economy, she will be a player comparable to Philip II’s Spain, seemingly powerful, but hollowed from within.  Her emerging partnership with China will be a one-way street in which sophisticated Chinese technology will be traded for oil and gas, enabling China to create a point of contention in the South China Sea in the decade to come—a potential flashpoint of Chinese-U.S. rivalry that is wholly unrelated to Russia’s strategic interests.

It is truly tragic that the American political elite continues to demonize Putin, whose decisions over the past two years have been reactive every step of the way, while failing to comprehend that in the years ahead he could be, and should be, an ally against the forces seeking to destroy our common civilization.  His inability to control the Russian oligarchy and make Russia a normal country is, however paradoxical it may seem, contrary to the American interest.