Why Putin’s Economy Survives

When the Soviet Union confronted this array of challenges in the mid-1980s, it promptly collapsed. But facing very similar forces today, Mr. Putin’s government has survived—even thrived. What has made the difference, above all, is Mr. Putin’s devotion to conservative fiscal and monetary policies, coupled with an authoritarian’s ability to implement austerity measures without consulting his population.

To understand the different fates of today’s Russia and its Soviet predecessor, we must start with an accurate assessment of what drove the U.S.S.R. to collapse. Westerners now usually explain the Soviet Union’s demise by saying that centrally planned economies just don’t work. But that is only partly accurate.

Soviet communism wasted resources, stifled innovation and left consumers worse off. But central planning had one great advantage: It provided for the needs of the Communist Party elite, notably by furnishing them with the world’s second-largest military and a bristling nuclear arsenal. For the average factory worker, this may not have seemed like a worthwhile trade, but it suited the party elite fine.

When Mikhail Gorbachev took power in 1985, few expected radical change. True, Soviet growth rates had slowed since the economy’s postwar boom years, but the budget was balanced, industries were producing, and consumers were grumpy but quiescent.

In just four years, however, stagnation exploded into crisis. By 1989, the Kremlin’s budget deficit hit 10% of gross domestic product. To make the Soviet Union grow again, Mr. Gorbachev had rightly realized that he had to boost efficiency. Yet the pernicious result of Stalin -style industrialization was that the groups that benefited most from inefficiency were also the groups with the political clout to block change. Heavy industries and the Soviet military-industrial complex were largely funded by public subsidies. Soviet collective farms, which chronically underperformed international benchmarks, demanded ever more public funding to buy unnecessary fertilizer and tractors. But cutting wasteful state handouts to industrialists or farmers was nearly impossible: Those were the very groups that dominated the Communist Party.

Stalin, the architect of this system, faced scant obstruction from economic interest groups, thanks to his willingness to execute “enemies of the people” by the thousands. Mr. Gorbachev was unwilling to use firing squads to provide economic incentives. Instead, he embraced fiscal loosening and promised a wave of subsidies to big industry and agriculture in exchange for their acceptance of his market reforms.

This was a gamble: Mr. Gorbachev bet that a rollback of central planning coupled with deficit-financed fiscal expansion would spark growth. But because the Soviet Union had only limited access to debt markets, his budget-busting spending hikes were funded by printing money. As the money supply shot upward, the value of rubles collapsed. Yet because prices were controlled by administrative fiat, they couldn’t adjust to the new monetary conditions. Markets stopped clearing, and bottlenecks and shortages were the result. By the late 1980s, Soviet citizens had to wait in long lines for bread and milk. Any enterprise that could sell on black markets began doing so. Firms that weren’t able to buy and sell illegally simply shut down. By 1989, the economy was already plunging toward recession, even as prices on black markets skyrocketed. By 1991, the economy had cratered, and the Kremlin had lost control of taxing and spending. The U.S.S.R. was soon extinct.

In the late 1980s, as the Soviet economy began to freeze up, Vladimir Putin was a KGB agent in Dresden, East Germany. Mr. Putin suffered firsthand from the Soviet empire’s demise and vowed never to let such a catastrophe happen again. The primary lesson he drew was simple: avoid large deficits and high inflation.

Since taking power in 1999, Mr. Putin has studiously implemented a conservative macroeconomic policy. This has let him weather crises that many observers expected would bring down his regime. In mid-2014, oil prices began to collapse, and the West slammed financial sanctions on Russia for its invasion of Ukraine. But Mr. Putin is still standing.

Where the Soviets suffered from an exploding budget deficit, financed by money creation, today’s Russia has pushed through an aggressive austerity program, slashing spending on social programs and pensions to balance the budget. The Bank of Russia has hiked interest rates to double-digit levels, driving inflation down to 6%, a respectable figure for an emerging market. The Kremlin’s budget deficit will be a bit more than 3% of GDP this year, even though oil—which previously provided half of government revenues—is now selling for half its price two years ago. And Russia’s government debt remains less than 20% of GDP, according to Russian government statistics. America’s public debt, by contrast, is more than 75% of GDP, according to the Federal Reserve.

This conservative fiscal posture helps explain why, unlike the U.S.S.R., Mr. Putin’s Russia has proven so unexpectedly resilient. Despite Western financial sanctions, large Russian firms continue to attract the foreign-currency funding that they need. Despite the commodity crash, Russian oil production is at a post-Soviet high. Russia’s economy is returning to growth even as Russia’s military wages war in Ukraine and Syria. The Kremlin has mustered the resources that it needs to deploy power at home and abroad, even amid conditions similar to those that bankrupted the Soviets.

Russia’s economic accomplishments shouldn’t be overstated, of course. Mr. Putin has expropriated his rivals, tolerated epic corruption and sent investors fleeing. The Russian state plays a far larger role in the economy today than it did when Mr. Putin took power—not to provide useful services such as health or education but to monopolize oil production and fund his patronage networks. Russian wages grew rapidly in the 2000s, but growth has since slowed—and even reversed.

Yet on the economic issues crucial to the survival of Mr. Putin’s regime, the record is far better. Macroeconomic stability has underwritten a decade and a half of relative prosperity. The coming anniversary of the Soviet collapse won’t be widely marked in Moscow. The demise of the U.S.S.R. is a period most Russians would prefer to forget—and a catastrophe that Mr. Putin is determined not to repeat.

—Dr. Miller is associate director of the Brady-Johnson Program in Grand Strategy at Yale University and the author of “The Struggle to Save the Soviet Economy: Mikhail Gorbachev and the Collapse of the U.S.S.R.” (University of North Carolina Press).