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. Last Updated: 07/27/2016

Empress Trumps Kasyanov

The scene was St. Petersburg over 200 years ago. Empress Catherine II, who fancied herself an expert in economic matters, penned a memorandum on metals exports and sent it to the Berg-Kollegiya, the governing body for Russia's mining and metals industry that functioned intermittently from 1719 to 1807.

Today it might seem strange that the empress sent her proposals to a ministry, and not the other way around. But those were the days of enlightened absolutism. The contemporary reader will probably be even more surprised to learn that the Berg-Kollegiya rejected her idea.

Russia in the mid-18th century was one of the largest suppliers of metals to the world market. Its main client was Britain, which bought up nearly all of Russia's ferrous metals exports. But the English paid little, arousing Catherine's displeasure. To change the situation she proposed a search for new markets in southern Europe. But the Berg-Kollegiya concluded that selling metals in Italy or Spain would prove unprofitable. The demand there was limited, and the buyers unaccustomed to dealing with Russia. The agency proposed instead to increase exports to England.

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Foundries in those days relied on serf labor. This made Russian producers extremely competitive, not to mention that anti-dumping laws had yet to be thought up. To this day, international free trade regulations are directed for the most part against state subsidies and "excessive" social benefits for workers, not against slave labor. However, it never occurred to Catherine or her opponents that in addition to the export market, Russia had a domestic market. Rather than increasing exports or the prices demanded of foreign buyers, they could have helped to increase domestic demand. But for that they would have had to think more about the interests of the Russian people and less about markets.

The recent debate about steel and chickens is very reminiscent of that 200-year-old dispute. The United States has curtailed imports of cheap steel from Russia, which, in turn, charged that U.S. chickens were hazardous and banned imports, although the government later opened a loophole by drawing up a list of good and bad suppliers. Those on the good list are allowed to ship chicken legs to Russia if they can prove that they don't feed their birds poisonous substances.

Our metals producers, meanwhile, are pushing for protectionist measures against competitors in Ukraine and Kazakhstan. And they're using the same arguments that the United States used against Russia. The pitifully low wages paid to Russian workers do not constitute dumping, they contend, and according to the letter of international trade law, they're right. Yet they maintain that Ukrainian producers, who pay their workers even less, are guilty of dumping. The Russian metals industry has even demanded that export duties be scrapped, thus shifting some of their losses onto the state.

No one thinks for a moment about how the Russian economy needs a huge injection of metals. The equipment in our factories is worn out, and the buildings themselves are decrepit. Low wages allow for only one way out: exports.

Russia is far from the United States' main competitor in steel production. Before the introduction of new tariffs, Germany and France were exporting far more. It turns out that you can be competitive even when you pay high wages, your equipment isn't worked until it falls to pieces and you pay your taxes.

Examples like this are everywhere. Employees of Finnair make much better money than their colleagues at Aeroflot. They are union members with the right to strike. Scandinavian taxes are far higher than in Russia, and they get paid. Yet a flight to New York on a Finnish airliner costs no more, and sometimes less, than on a Russian plane. Why?

Many in Russia point to the magical abilities of "foreign managers." Unfortunately, when they come to work in this country, many of these managers start to steal, cook the books and dodge taxes just like the natives.

When Russian companies secure tax cuts, they ensure that the government will have even less to spend on social programs. The policy of squeezing the last drop of blood from workers and equipment leads to a vicious circle of poverty and inefficiency. There is no domestic demand, so production volumes are low. And that means that any production is, in fact, quite expensive. We're saving money on salaries. Catherine the Great had it easier: she had serfdom.

Of course, that led to the Pugachyov rebellion.

Boris Kagarlitsky is a Moscow-based sociologist.