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The Russian Economy and the Social Contract: The Path to a Deplorable Reality

The social contract in autocracies and totalitarian dictatorships is characterized by the fact that power is always at the top of the triangle: state, business, society—business and society’s nominal weight is always less than that of the state. In particular, this pattern of social structure is typical for Russia: society and business are in a subordinate position to power.

There are obvious reasons for this in particular the historical distance of power, low levels of individualism, and low coefficients of tolerance in time preference—i.e., aversion to change and unreadiness to take risks due to negative expectations and a low level of social trust. Among others, these factors produce a rutting effect that is perpetuated, in turn, by modern authoritarian power, as this state of affairs is optimal for maintaining the regime’s equilibrium.

Russia has had several types of social contracts in recent times. The zero years began with reforms in which the basic idea of the social contract was to streamline sociopolitical and economic processes in order to stimulate economic development in exchange for disciplined tax payment and political loyalty to power. These reforms were, to a certain extent, liberal and positive with regard to the formation of a favorable environment for business and entrepreneurial initiative and certainly had a positive effect.

Such a social contract can be called a consumer contract, and its model is as follows. The state “brings order”—i.e., tightens conditions in the political sphere. But at the same time, it creates adequate regulatory, judicial, and arbitration institutions for individual civil initiative (primarily entrepreneurial) and economic freedom, encouraging personal income growth. All this is done in exchange for constancy and openness in tax payments and loyalty to a now stronger power.

The need for a strong hand was quite logical, since the process of reforms and streamlining during Russia’s transitional state of the nineties required that the state’s ethical and ideological elasticity be reduced. The political toughening of the time, concerned predominantly oppositionist but systemic elites and bureaucratic elites (as shown, for example, by the abolition of gubernatorial elections and other steps to strengthen the power vertical).

At the same time, civic initiative, whatever its nature, was not persecuted on the whole and in some cases (entrepreneurship, consumer activity, civic self-organization, the development of the internet, and general accessibility of information) was systematically and actively encouraged. In general, we can say that the social contract was balanced and the exchange was equal: loyalty in exchange for security and social openness.

Gradually, as foreign economic conditions deteriorated, on the one hand, and the new affiliated elites’ need to multiply and share new assets through control and budget distribution increased, on the other, this contract underwent changes. The changes came mainly from power, where demands for loyalty were growing and benefits for society were diminishing, where the opportunities for power were expanding and the opportunities for society were shrinking.

One of the new and main benefits of the modernizing contract for society offered metaphysical value—a sense of national greatness and a corresponding narrative of patriotism, a great country rising from its knees, the rebirth of the empire, deception and consumerism from Western democracies, the logically emerged concept of an external enemy, etc. Obviously, this new product of the social contract was a way for power to continue maximizing its own utility while reducing the potential associated costs in the form of social discontent and the threat of overthrow. In fact, instead of increasing prosperity and promoting the “good life,” power offered society an ideology for reasons both endogenous (the desire to consolidate its position and opportunities to control the rent resource—the budget) and exogenous (external economic shocks).

To get society to accept such a substitution in the terms and benefits of the contract, the authorities took two strategic steps: 1) a course toward conservative monetary and fiscal policy to avoid inflation as the main economic trigger of social discontent and 2) multilayered information manipulation to maximize the proliferation of a new imperial-isolationist ideology in society. The tools chosen were full control of the media, comprehensive propaganda bordering on common sense but with a strong national message, increasing repressive mechanisms, and the outright rejection and persecution of opposition. The society as a whole agreed with the amendments to the previous contract.

By 2014, again under the influence of external and internal conditions the state, feeling the growing canopy of social discontent as a major risk factor, decided to renew the social contract. The external conditions were continued deterioration of the foreign economic situation. Internally there was economic stagnation and falling incomes as a consequence of the deterioration of the business climate and reduced competition. In addition, there were strengthening bureaucratic institutions, expanding state property, growing corruption, and significantly increasing repressive pressure on society, not the system elites.

And Russia annexed Crimea, chose Ukraine as a threat to the Russian world. It also intensified the aggression of isolationist rhetoric toward Western democracies and appointed a dominant enemy in the United States. It finally shifted the opposition to the status of “enemies of the people,” in whatever forms this opposition presented itself—whether an organized political movement, media, and a private opinion. Repressive mechanisms became even more repressive. So, society again agreed to this renewal of the contract.

By 2020, the marginal cost of power to society again began to threaten the utility of power, and power went for a new renewal of the contract. Against the backdrop of pandemic, geopolitical, and external market imbalances, power further pumped up the previous ideological concept and further expanded the corresponding narrative with an even greater reduction of private rights and freedoms.

Tightened repression has become the norm and no longer even requires commentary or justification before the public, an assertion and a one-sentence statement suffice. The level of concentration and volume of propaganda is at totalitarian levels. The possibility of civic initiative and self-organization has been reduced to zero. 

Entrepreneurial activity and initiative are completely limited to the level of domestic service and hard work, the bureaucracy and affiliated business elites openly control budgetary resources and engage in rent entrepreneurship. An important fact in the legitimization of the new contract was the virtual cult of the domain personality and the complete elimination of the possibility of electoral alternation.

Firstly, this elimination has occurred through the final and actual devaluation of the institution of free elections that offer the possibility of legal representation of alternative political opinions and proposals and, secondly, through changes in the constitution and the removal of term limits for the supreme ruler. All this shifted Russia considerably from soft autocracy back to repressive autocracy on the verge of dictatorship, and even more precisely to the original model of the state as the sedentary bandit in Mancur Olson’s models.

Judging by social statistics and indirect metrics, Russian society has accepted the new social contract. However, with the change of generations and a growing number of irrational and incompetent decisions of the authorities, the elasticity of society is decreasing: the costs of the authorities for society are beginning to approach their marginal values, judging by a steadily growing number of citizens sympathetic to any kind of opposition.

In particular, this growing openness to opposition indicates that the rating of the root ruling “party” is sharply declining throughout society. This is least true of the domain, which suggests that the rating is still declining but that the conditions and benefits for society of such a social contract are becoming less and less obvious. This could mean an increase in social ferment and a simultaneous increase in repressive pressure from the state, as well as attempts to renew legitimization and “love of the people. This is an illustration of the inevitability of irrational decisions by power and actually shows the diminishing returns to its usefulness.

In fact, the only but very strong drivers of regime stability in the current situation and in some future are two factors: the domain personality factor and the macroeconomic stability factor. The domain persona factor is the trust of the overwhelming majority of citizens and the bureaucracy in the head of state, based on personal sympathies, cognitive distortions under the influence of propaganda, a low level of individual critical consciousness and a direct interest of the elites in maintaining the balance and status quo.

The factor of macroeconomic stability is maintaining a balanced budget and controlling inflationary expectations at a low level, on the one hand, and preserving the capitalist system as the basis of economic relations and the possibility of preserving consumer dynamics, on the other. If these factors remain stable, the present regime can maintain an equilibrium state and significantly prolong its existence. 

However, in reality both these drivers begin to shift the situation from the equilibrium state. Firstly, the number of irrational decisions of the authorities, in particular, strengthening repressions and restrictions of rights and freedoms, decisions under the influence of intergroup conflicts within the elites, decisions in the absence of sources of direct and real signals about public preferences, is getting larger and larger.

On the other hand, forced (in the absence of significant economic growth and business activity) fiscal and monetary policy tightening in the form of raising the retirement age, increasing tax rates and the introduction of new taxes, increasing rates to control inflation and the inevitable decline in personal income and purchasing power also contribute to the growth of social discontent. At the same time, most of all of the mentioned steps are forced to be voiced by the head of state directly in his address to citizens. It may lead to a sense of breach of contract even among the most loyal part of society, which means that confidence in the domain is obviously undermined and reduces the stability of the regime as a whole.

In terms of the factor of macroeconomic stability, the risks of imbalance are somewhat lower, since accumulated reserves, low debt and possible situational growth of commodity assets from time to time, as well as the preservation of the capitalist frame of the economy can help to maintain economic stability. It may also support a sense of material stability in the population, even if there is no growth, even if welfare levels are at a low level.

However, given the total dependence of the Russian budget—namely, the rent resource, on raw material prices, as well as the complete degradation of the entrepreneurial climate and the lack of entrepreneurial incentives, the risks of imbalance have increased significantly. The greening and total digitalization of the world economy contribute in no small measure to this—innovation and technology on the one hand and the growing importance of alternative energy on the other fatally shift Russia, on the long horizon, from its former competitive positions, and thus deprive the regime of the resource of that very macroeconomic stability.

We expect a continuation of monetary and fiscal tightening and new initiatives of the authorities for growth and confidence in the domain. It seems that the main trend of such initiatives becomes clear and the discourse is the same: fomenting patriotism and “love for the motherland,” cultivating the next “threats to national security” from the predatory collective West and specifically the US, exposing “internal enemies,” and, of course, demonstrating the indispensability of the domain persona in all possible contexts. Appendix to the same social contract from such and such date of such and such month of such and such year … You can put in the exact figures yourself.