August 12, 2008 | posted by Michael Baxter in Russia |

And with the developed economy across the world in crisis, the tanks move into Georgian territory. What light can economics shine upon this latest crisis?

So that was the last thing the world, let alone the people of Georgia and Russia, needed. A couple of weeks ago it was told here about the Kondratieff economic cycle – a cycle which is supposed to last around 54 years and sees four stages – spring, which sees inflationary growth; summer, which sees stagflation and is often accompanied by war; autumn, which sees deflationary growth; and winter, which sees deflation, economic depression, and often ends with war.

If you believe in this theory, then it appears World War II marked the end of the last cycle.

The man behind this theory, Professor Nickolai Kondratieff, a Russian, penned his ideas in the 1920s and 1930s, and was sentenced to death in Russia in 1938.

Now it is easy to ridicule the premise of his theory; if the economic cycle is 54 years long, then exactly when did the present cycle begin? But if you squint your eyes, then help yourself to a large pinch of salt, it kind of makes sense. Clearly the 1950s and early 1960s fall into a spring-like phase, the 1970s and early 1980s – summer, and the 1990s to, say, August 9 2007, autumn. Any similarities with the Kondratieff cycle could of course be a coincidence. But it is all a little spooky.

But that does not mean the current cycle has to repeat all the mistakes of the previous cycle. There is every reason to believe we can avoid the winter phase of the cycle altogether, and instead have a kind of early spring.

Ben Bernanke is a wise old owl, and with him at the helm there are good reasons to believe a 1930s type depression can be avoided. But what is this war that is supposed to punctuate each cycle, both at the middle and end?

It is easy to pinpoint what the two wars were in the past cycle, World Wars I and II. But what about this cycle – what was the mid-cycle war? Was it the Vietnam war, or maybe the Cold War?

Okay, forget about the Kondratieff cycle for a few moments – there may or may not be something in this theory. But consider the wars of that period in time which would happen to coincide with a 50-year period starting in 1900. The first war partially caused the second war. World War I ended, the treaty of Versailles heaped economic misery on Germany, the German people saw their pride suffer a deep wound, and we know what happened next. At the end of the Second World War we had learnt our lesson; the Marshall plan helped ensure no repeat of a major war in Europe.

When the Cold War ended there was no concerted attempt to make Russia pay for what it had done. But, even so, the economic misery in Russia and their wounded pride were enormous. At the time there was a joke that it was so bad that things were better under Stalin. So, somehow, through a miracle of science, Russia was able to get Joseph Stalin back and ask him to take control. He said: “Okay, I will do it, but this time, no more Mr Nice Guy.”

The big snag with Russia, though, was what happened next. By 1998, Russia was yesterday’s power, a has been. Even the movie business had reduced Russia to gangland, with cuddly Robbie Coltrane – Hagrid of the Harry Potter films, the most menacing Russian villain they could come up with for James Bond.

But in 1998 Russia really did suffer a huge blow. The economic crisis of that year, which saw the Russian stock market fall such that its total value was barely greater than the valuation of Sainsbury’s, sent the economy back to crisis. Yet more economic misery was the result, pride even more damaged.

This was the time for some kind of modern-day Marshall plan; instead, the IMF enforced an unnecessary austerity programme on Russia that just made things a lot, lot worse. If you wish to know more about the treatment of Russia by the IMF during that period, consult the writings of former chief economist at the World Bank, and winner of the Nobel Memorial Prize for economics, Joseph Stiglitz.

The IMF action of that time was, in a way, akin to the treaty of Versailles.

And the writing had been on the wall for some time. The treatment of Mikhail Khodorkovsky, the way Russia turned the gas pipe to Ukraine on and off, the treatment of Shell and, more recently, BP; be in no doubt, this is a country with big ideas and, more to the point, the government that enacts these ideas has the popular support of its people.

And yet, today, the world needs Russia. It needs its oil and gas, and more to the point, the country has the potential to become the world’s food basket.

And all of a sudden, in contrast to his vice President, George Dubya seems the paragon of diplomacy. “I’ve expressed my grave concern about the disproportionate response of Russia, and that we strongly condemn the bombing outside of South Ossetia,” he said.

By contrast, Dick Cheney said: “Russian aggression must not go unanswered, and that its continuation would have serious consequences for its relations with the United States.”

The trouble is, of course, the US is hardly qualified to condemn one country for invading another without UN approval. So, all of a sudden, hope lies with the diplomats of France – the very people that those same US politicians vilified during the invasion of Iraq.

The Russian regime and its people clearly want the country to regain its status as a global superpower. Whether that means it wants to regain control of the former Soviet Union, or merely exert more influence, can not yet be told. And where this will then lead to is yet uncertain.

But, moving forward, the Russian economy is vulnerable. Right now is its moment of supreme economic influence. If the prices of oil and gas fall, as we have predicted, this will be bad news for Russia. Combine this with Russian inflation that seems to be heading out of control, and all of a sudden it seems the economic prognosis for Russia in the medium term is not so good.

There are parallels with Russia today and Germany before Hitler came to power. But that does not mean the situation has to escalate.

The key to Russia is showing her she can trust the West. The IMF indicated the precise opposite of this in 1998. Economic sanctions will do no good. But when the Russian economic boom goes into reverse – which it will do, then will be the time to repair relations, with support.