Blunder: A New Age for Russia

My friend Zach Shore, who teaches at the Naval Post-Graduate School in Monterey, usually writes about foreign affairs with a historical bent -- on militant Islam in Europe, and on Hitler. Now, though, Shore has taken on a sweeping, big-picture theme -- how and why people get trapped into fixed mindsets, and from that make incredibly terrible decisions.

Shore calls his book Blunder: Why Smart People Make Bad Decisions. Much of this slender, thought-packed volume has to do with war and foreign affairs, including events in Russia (which is why I am blogging on the book). But he also applies his theory of cognition traps to business.

In any case, I have wanted to write a couple of year-end looks at the news, including Russia's very different place domestically and internationally from just a few months ago.

In August, Putin's Russia seemed unstoppable, specifically after its five-day war with Georgia punctured the appearance of a new era of U.S. power in the former Soviet Caucasus and Central Asia. Georgia seemed the crowning achievement of a several-year-campaign of projecting Russian power over its borders after a decade of retrenchment following the Soviet collapse. On O and G, we have covered the Gazprom-led rivalry with the West to build new natural gas pipelines into Europe. Russia's Nord Stream and South Stream pipelines appeared to beat out the West's proposed Nabucco pipeline without breaking a sweat.

Not any longer. Simply put, Russia is in trouble. Its much-ballyhooed $600 billion cash reserve base dropped by a quarter by Dec. 1, to about $450 billion, and even further since. Much of that has gone to bailing out banks, select oligarchs and propping up the ruble. But with no sign of an end to the global recession, Putin is allowing the ruble's value to decline rather than pouring limitless reserves into the currency. This Wall Street Journal interview with down-on-his-luck oligarch Oleg Deripaska tells it extremely well. (Note to Barack Obama's Russia team: South Stream is on hold for at least 18 months or two years; Russia doesn't have the wherewithal to finance it; Nord Stream is more likely, but again financing will be a problem. That is an opening that was not present before the financial crisis.)

One thing that Deripaska points out in his conversation with The Wall Street Journal is that a big part of the Russian financial miracle was not oil-driven, but debt-driven. The Putin era's new generation of oligarchs, like Deripaska -- men who obtained ownership of large parts of Russia's industrial sector in the last few years -- is lining up for a bailout from some $110 billion in foreign debt coming due next year. According to Bloomberg's Yuriy Humber and Torrey Clark, that's twice the debt owed in Brazil, China and India. The oligarchs are seeking some $78 billion in loans.

Social tension is rising, and Putin is tightening up. He has significantly broadened the definition of treason. And the Duma has extended the presidential term to six years from four years; should there be a sign of a dire future threat to Putin's popularity next year, look for a snap election and Putin's return to the Kremlin. Short of that, Dmitry Medvedev will remain as president.

In an email exchange, here is how Zach Shore wrapped up Russia's conundrum in the context of the lessons of Blunder:

Russia's recent recession is tied up in cognition traps, the rigid mindsets that invariably lead statesmen into blunders. Just one of them is Cure-allism, the dogmatic belief in panaceas. Cure-allism sabotaged Russia's 1990s transition to a market economy when Western advisers applied the supposed panacea of shock therapy. Cure-allism exacerbated the Asian financial crisis of the late nineties, which engulfed Russia, when IMF experts applied their deregulation dogma to countries needing more regulation, not less. And it has fostered the current global meltdown by insisting on the deregulation of banking and investment schemes.

You might think that after suffering so often from Cure-allism's fallout, Russian leaders would be especially wary of wedding their economy to any one panacea. Yet Russia has allowed its recent growth to be overly fueled by gas and oil prices, believing that these goods could solve the country's deeper revenue problems such as a weak banking sector and an inadequate tax system. Rather than solving Russia's ills, the irrational faith in energy exports has once again revealed the self-destructive folly of Cure-allism.