The Siberian Curse

How Communist Planners Left Russia Out in the Cold

Fiona Hill, Clifford G. Gaddy

• Publisher: Brookings Institution Press
• Year: 2003
• ISBN:
  9780815796183
• Topic: Politics & International Relations
• Subtopic: Russian Politics
• Index: Politics & International Relations

Can Russia ever become a normal, free-market, democratic society? Why have so many reforms failed since the Soviet Union's collapse? In this highly-original work, Fiona Hill and Clifford Gaddy argue that Russia's geography, history, and monumental mistakes perpetrated by Soviet planners have locked it into a dead-end path to economic ruin. Shattering a number of myths that have long persisted in the West and in Russia, The Siberian Curse explains why Russia's greatest assets––its gigantic size and Siberia's natural resources––are now the source of one its greatest weaknesses. For seventy years, driven by ideological zeal and the imperative to colonize and industrialize its vast frontiers, communist planners forced people to live in Siberia. They did this in true totalitarian fashion by using the GULAG prison system and slave labor to build huge factories and million-person cities to support them. Today, tens of millions of people and thousands of large-scale industrial enterprises languish in the cold and distant places communist planners put them––not where market forces or free choice would have placed them. Russian leaders still believe that an industrialized Siberia is the key to Russia's prosperity. As a result, the country is burdened by the ever-increasing costs of subsidizing economic activity in some of the most forbidding places on the planet. Russia pays a steep price for continuing this folly––it wastes the very resources it needs to recover from the ravages of communism. Hill and Gaddy contend that Russia's future prosperity requires that it finally throw off the shackles of its Soviet past, by shrinking Siberia's cities. Only by facilitating the relocation of population to western Russia, closer to Europe and its markets, can Russia achieve sustainable economic growth. Unfortunately for Russia, there is no historical precedent for shrinking cities on the scale that will be required. Downsizing Siberia will be a costly and wrenching process. But there is no alternative. Russia cannot afford to keep the cities communist planners left for it out in the cold.

1

The Great Errors

As observers have looked at reform in Russia over the decade since the collapse of the USSR, they have assumed that if the old system that produced the wrong results in the past is now changed, the new system will produce the right results in the future. Unfortunately, to be able to put a new system in place, countries in transition must not only dismantle the old system and replace it with a new one; they must also rectify the consequences of operating under the old system for a long period of time. In the case of Russia, the time frame was especially long. For more than seventy years after the Russian Revolution, the Soviet centrally planned economic system produced a certain set of outcomes, which became part of Russian history, society, and political culture.

One of these outcomes was a peculiar and unique economic geography that continues to define Russia and puts it completely out of step with the requirements of a market economy irrespective of system change. Today, despite the abolition of central planning, Russia still has a nonmarket distribution of labor and capital across its territory. People and factories languish in places communist planners put them—not where market forces would have attracted them. Russia cannot build a competitive market economy and a normal democratic society on this basis.

Another specific outcome of the Soviet system is the development of Siberia. In this instance, the freedom of the market was deliberately defied and perversely turned on its head by the use of the GULAG prison-camp system in order to conquer and industrialize Siberia's vast territory. Beginning in the 1930s, slave labor built factories and cities and operated industries in some of the harshest and most forbidding places on the planet, where the state could not otherwise have persuaded its citizens to go en masse on a permanent basis. In the 1960s and 1970s, leaders in Moscow decided to launch giant industrial projects in Siberia. Planners sought to create permanent pools of labor to exploit the region's rich natural resources, to produce a more even spread of industry and population across the Russian Federation, and to conquer, tame, and settle Siberia's vast and distant wilderness areas. This time, new workers were lured to Siberia with higher wages and other amenities—rather than coerced there and enslaved—at great (but hidden) cost to the state. Today's Siberia is the economic legacy and the embodiment of the GULAG and of communist planning.

Thanks to the industrialization and mass settlement of Siberia, at the beginning of the twenty-first century and a new era in Russia's economic and political development, Russia's population is scattered across a vast land mass in cities and towns with few physical connections between them. Inadequate road, rail, air, and other communication links hobble efforts to promote interregional trade and to develop markets. One-third of the population has the added burden of living and working in particularly inhospitable climatic conditions. About one-tenth live and work in almost impossibly cold and large cities in Siberia, places where average January temperatures range from –15 to –45 degrees Celsius (+5 to –49 degrees Fahrenheit).^* Given their locations, these cities (as they did in the Soviet period) depend heavily on central government subsidies for fuel and food; they also rely on preferential transportation tariffs. Costs of living are as much as four times as high as elsewhere in the Russian Federation, while costs of industrial production are sometimes higher still. The cities and their inhabitants are cut off from domestic and international markets. Russia is, as a result of its old centrally planned system, more burdened with problems and costs associated with its territorial size and the cold than any other large state or country in northern latitudes, like the United States, Canada, or the Scandinavian countries.

From the perspective of today's market-economy imperative, looking back over Russia's history reveals that misallocation was the dominant characteristic of the Soviet period. Resources (including human resources) were misused from the point of view of economic efficiency. The system produced the wrong things. Its factories produced them in the wrong way. It educated its people with the wrong skills. Worst of all, communist planners put factories, machines, and people in the wrong places. For a country with so much territory, especially territory in remote and cold places, location matters a great deal. Not only did Russia suffer from the irrationality of central planning for more than seventy years, but Russia's vast territorial expanse offered latitude for a system of misallocation to make mistakes on a huge and unprecedented scale. Had the Bolshevik Revolution taken place instead in a country as small and contained as, say, Japan, the damage could not have been as great. While central planning would still have distorted the economy, it would not, and could not, have distorted it as much in terms of locational decisions. In Russia, Siberia gave the Bolsheviks great room for error. Towns and cities grew to huge size in places they would never have developed under the influence of free-market forces.

Of course, the Bolsheviks inherited Siberia and the rest of Russia's vast territories from the tsars. It was the tsars who, over the course of five centuries, made Russia the world's largest country—a state defined by its physical geography, with a national identity rooted in the idea of territorial expansion and size (“gathering the Russian lands”). It was also the tsars who first pushed people out into Siberia and planted the seeds of cities on the farthest frontiers of the state to establish and affirm Russian sovereignty. But it was the Bolsheviks—the Soviets and their central planners—not the tsars, who shaped modern Russia's economic geography. Where the tsars had placed forts, villages, and towns in Siberia, the Soviets built cities of over a million. Where the tsars exiled thousands of prisoners to Siberia, the Bolsheviks and Soviets deployed millions of labor camp inmates to build factories, mines, and railways, as well as cities. The tsars bequeathed to the Bolsheviks a huge swathe of the world's coldest territory. The Bolsheviks chose to defy the forces of both nature and the market in developing it. Soviet planning subsequently gave modern Russia a supremely distorted economic geography with a huge portion of the bequest (cities, factories, and people) lost in the distance and cold of Siberia. It was a costly gift that can neither be easily maintained nor adapted to the market.

This book uses economic statistics, economic geography, and history to describe the extent to which people in Russia live and work in the wrong (distant and cold) places and to examine the implications of this for the modern Russian economy. Reviewing the history of Russian territorial expansion and the conquest and development of Siberia, the book outlines when and how this misallocation of resources happened. It explains why market mechanisms alone were not able to rectify economic distortions in the 1990s and why these distortions are likely to persist in the immediate future—given desires at all levels of the Russian government to redevelop and repopulate Siberia, and the fact that Russia's size and ideas of battling the elements continue to define the modern state. Finally, the book considers ways in which the Russian government might be able to address some of the distortions by rethinking the relationship between Russia, its economy, and its territory, especially Siberia.

This last point is especially important. Because the spatial misallocation was on such a massive scale, and went on for so long, it has actually become part of Russia's profile. Russia continues to be defined by its size. In spite of all its upheavals, including the loss of territories associated with the Soviet Union and the Russian Empire, Russia remains the world's biggest country. The discrepancy between its sheer size and its economic potential continues to draw the attention of even the most renowned economists and radical reformers in Russia as well as international observers. Consider, for example, this formulation attributed by Russian journalists to Andrey Illarionov, President Putin's economic adviser, in a December 2002 presentation on Russia's persistent economic difficulties and the prospects for growth:

Today the way Russia looks on the map of the world is as follows: it occupies 11.5 percent of the world's territory, it has 2.32 percent of the global population total, and its share of world gross domestic product (GDP) is 1.79 percent in terms of purchasing power parity and 1.1 percent at market exchange rates. The unavoidable conclusion here is a cruel one. Human history has no precedent of a gap this wide between “territorial power” and economic “insignificance” holding for any extended length of time.¹

We argue in this book that trying to tie GDP to territory is precisely the wrong way to think about Russia and its economic development. Instead, we should first remember that economies are “big” not because of their territorial expanse or quantity of raw materials, or even because of the amounts of physical output. Economic size is a matter of the quality of the output as measured by value created. Today's “big” economies are big because of the number of transactions that take place within them. Since the time of Adam Smith, we have known that the rate of value creation depends on the degree of specialization of the economy and the intensity and complexity of exchange within it. In this context, Russia is a large economy, but only as measured in the numbers of plants, machines, and the physical quantity of other inputs. The central issue to be resolved in the Russian economy is, therefore, how to put those inputs to their highest-value uses. To accomplish this, Russia needs not to try to bring its population, purchasing power, GDP, or any other economic index into line with its territorial size, but to concentrate people and resources within that territory.

In essence, to become competitive economically and to achieve sustainable growth, Russia needs to “shrink.” It must contract not its territory (its physical geography), but its economic geography. “Being big” is a serious impediment to development unless distances can be reduced and connections between population centers and markets can increase. Shrinking distance and increasing connections has been the consistent trend in other large countries over the course of their histories. Responding to market forces, the United States, Australia, and Canada, for example, have concentrated and connected their populations within their own vast territories much more than Russia. For the purposes of both economic productivity and good governance, this gives them a distinct advantage over Russia.

Russia's greatest dilemma today is that it must connect an economy that is both physically vast in size and terribly misdeveloped. This is a costly endeavor, and it is also likely to be inefficient once accomplished if connections are pursued within the framework of Russia's current economic geography. Reconnecting the Russian economy is not simply a question of refurbishing and upgrading the existing systems of road, rail, and air transportation, or of constructing new infrastructure and creating new means of communications. This will simply improve the connections between existing towns, cities, and enterprises—especially those in Siberia—which should never even have been located where they are in the first place. New infrastructure will, at high cost, have made places more livable where, from an economic point of view, few should live. As a result, the Russian government and the population will have forgone alternatives that are better.

In the final analysis, if Russia is to “shrink”—contract its economic geography, concentrate its population, and ultimately connect its economy—then mobility is the key to the future. Modern economies are characterized by mobility of factors of production. Today the world is becoming more mobile as people seek new and better opportunities for themselves and their families. This means that people in Russia need to move to warmer, more productive places, closer to markets and away from the cold, distant cities placed by the GULAG and communist planners in Siberia. Unfortunately, the dominant trend in Russia's imperial and Soviet history has been to constrain as well as direct the movement of population. Today, although the legal right to move is enshrined in the new Russian constitution, Russians are still not really free to relocate to places where they would like to live and work. Residence restrictions in cities like Moscow, resource constraints, poorly developed job and housing markets, and the absence of social safety nets all work against personal mobility, while the Russian government also attempts to direct investment to target locations of its choosing. Ensuring mobility, not just changing the system, will be the major challenge for Russia in the coming decades.

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^* In the remainder of this book, we will cite temperatures only according to the Celsius (centigrade) scale. A Celsius to Fahrenheit temperature conversion chart is in appendix A.

2

Size Matters

Throughout history, Russia's size has been its most significant attribute. Its physical geography has defeated aggressors, endowed it with substantial natural resources, and made it a major factor in the geopolitical calculations of Europe, Asia, and the Pacific Rim. But in today's world size is less an asset than a liability. It makes normal economic and political interaction extremely difficult. The primary issue is not just Russia's physical expanse, but where people are located within that space.

Size as Salvation…

Russia has long been a country of daunting proportions. For at least four centuries, Russia—the Russian Empire, the USSR, the Russian Federation—has been the largest state in the world. Already in the sixteenth century, Russian rulers reveled in the fact that awe-struck Europeans considered Russia's territory to be larger than the surface of the full moon.¹ No matter what else happened with Russia, its size was the constant that gave it stature in the world. It was seen as the source of wealth, power, and even invincibility. Russian historians claim that Russia's huge territory saved not just Russia itself, but all of western civilization from devastation by serving as a buffer against the impact of Tatar-Mongol expansion.² Even the celebrated Russian poet Alexander Pushkin wrote that “[Russia's] vast plains absorbed the force of the Mongols and halted their advance at the very edge of Europe…. [T]he emergent enlightenment was rescued by a ravaged and expiring Russia.”³

By the late nineteenth and early twentieth centuries, when the race to divide the globe up into colonies had firmly established a state's size—or, at least, the size of its colonial possessions—as a primary indicator of its influence in international affairs, Russia could scarcely be ignored. With a territory that covered a sixth of the world's surface in one single sweep from the Baltic Sea to the Pacific Ocean, Russia far outstretched both of the only two other contiguous land empires in Europe—Austria-Hungary and the Ottoman Empire. In the course of time, European observers said, Russia—along with the other great continental power, the United States—would eventually dominate global affairs.⁴

The idea that size is power was particularly promoted by British observers, who were used to admiring the attributes and enormous proportions of their own empire, on which the sun famously “never set.” One British historian wrote in 1914: “The Russian Empire is an organism unique in the world's history. It embraces an area greater than Alexander's conquests, than the solid dominion built up by Rome, than the realms overrun by Chinghiz or Timur; it is surpassed only by Greater Britain [the British Empire].”⁵ The eminent British geographer Halford Mackinder went so far as to describe Russia and the Euro-Asian landmass that it occupied as “the geographical pivot of history.” All other areas of Europe and Asia to the east, south, and west of Russia and its great steppe lands were, Mackinder argued, merely marginal to it.⁶

Even today, after the collapse of the USSR, western observers remain in awe of Russia's size and resources. They marvel at a country that sprawls across eleven time zones with a potential market of nearly 150 million consumers. They typically cite a long list of its natural resource holdings: 40 percent of world natural gas reserves, 25 percent of the world's coal, diamonds, gold and nickel, 30 percent of its aluminum and timber, 6 percent of global oil, and so on, and so on.⁷

It goes without saying that such words are music to the ears of Russia's nationalist politicians and ideologues. For them, size in the most abstract sense of pure and empty “space” (prostranstvo) has near-mystical power and appeal. But even respected mainstream politicians fall prey to the temptation of invoking Russia's physical size to justify its international influence. One top political figure—Alexander Livshits, a former finance minister and adviser to President Boris Yeltsin—expressed a typical sentiment when he remarked in July 2001, after a high-level international meeting in Italy, that Russia could never accept the status of a junior partner to the United States. “The country is too large to be a younger brother.”⁸

…and as Stumbling Block

But being “big” has always come at a cost. At the same time that observers in past centuries looked at the advantages of Russia's size, they—or at least some of them—saw its size as a burden. The most obvious was the difficulty of defending the territory. To contend with its huge sprawl across Eurasia, Russia in the nineteenth century was forced to maintain the largest standing army in Europe. The bulk of this force of more than one million men was stationed either on its borders or in potentially rebellious provinces like Poland. Maintaining the army consumed as much as three-quarters of state revenues in times of war, even though Russia spent less per soldier than other European countries such as Germany (Prussia) and France. It was the huge numbers that accounted for Russia's military budget, not the provision of weaponry and equipment or investment in technological advance.⁹ Nor was there money available to provide the infrastructure on the necessary vast scale. Russia lacked a strategic railroad network for the transportation of men, weapons, and supplies thousands of kilometers from home to the frontiers of the empire. In military crises, even in war, troops often had to move on foot.

Time and again, conquering distance proved to be as much of a challenge as overcoming the military foe. The difficulties of mobilization and transportation contributed to Russia's defeat in the Crimean War in 1854–56. The European powers massed against Russia had imposed a naval blockade in the Black Sea that cut off all Russian sea approaches to the Crimean Peninsula. Russia's already overtaxed and disorganized land supply and communication lines eventually broke down into complete disarray.

In 1875, during Russia's military expeditions into Central Asia, the war ministry in St. Petersburg informed the Russian commander, General Kaufmann, that although he could have additional troops to support an offensive in Kokand, he should not count on seeing them for almost a year. The new units would “have to walk from Europe to Asia.”¹⁰ A quarter of a century later, during the 1904–05 Russo-Japanese War, the Russian Baltic fleet needed nine months t...