It is not easy to diagnose the current situation. Can we now say that a political crisis has been triggered by the appearance of the people known on the web as i-Decembrists? No, because the question of power is not at stake yet. Is it a social crisis? No. This is not like the situation in Romania or Greece, where people storm parliaments because their real incomes are falling. Still less is it an economic crisis. The economic situation is not as good as the authorities would have us believe, but it is far from catastrophic.

In effect what we are witnessing is a crisis of expectations. In terms of the new political economy, it is a crisis of the social contract. I would like first to take a close look at the economy and then come back to why, in my opinion, the social contract was reformatted during the economic crisis of 2008–2009, but is still impossible to abide by; and how this is reflected not only in the relationship with the population, but in the pact between the elites. I will then try to make a forecast for the near future.

In 2011, many economists were engaged in a game called “the revision of Strategy 2020.” That exciting game failed to produce a strategy for a new government for one simple reason: both the old government and those who think they can form a new government made no decisions at the forks in the road that the drafters had set up. So in fact these are just building blocks that future governments can use to work out a strategy. It must be said that while the recommendations often vary widely (although not as widely as expected), the diagnoses are very similar. Therefore, I will address the challenges facing the country from the viewpoint of those groups of experts that have worked on macroeconomic, budgetary and financial issues, and about the general discussions. And I will of course speak about the potential consequences for the population, the trends and the risks that these trends entail.

First, the former growth model has exhausted itself. That model, shaped in the early 2000s, delivered a very high economic growth rate of 7–8% and a growth of real incomes in 2002–2004, albeit against the background of the devaluation that occurred during the default (the base effect was there as low incomes are easier to increase). That model, the majority of macroeconomists believe, can no longer be reproduced. This makes the authorities nervous. Why is the Prime Minister calling for a search for new ways to speed up economic growth? During the course of the numerous attempts to combat poverty by increasing people’s wealth, the incomes of various social strata were raised, but the Gini coefficient has almost not at all diminished, i.e. the income gap and the inequalities have remained. In fact, they have either grown or at best remained the same. That means that the majority of the population benefits from no more than a quarter of the results of economic growth. So, when they tell the Prime Minister that the normal growth rate for the current Russian economy is 3–4%, that means that the population will get nothing from that growth, or that the gain will be so small as to make no difference. So he wants at least 6%, preferably 7%. But such a model is not yet in sight.

The second point can be called the “competitiveness gap.” There are countries with cheap labor and bad institutions and they normally fit into the world economic system; there are countries with costly labor and good institutions and they too fit in. We are a country with costly labor and bad institutions. It is very difficult to become integrated into the world economy with these parameters. True, as Vladimir Mau has aptly remarked, whereas many think that we will make good institutions and become like Germany, history disposes in its own way. Because skilled labor is leaving Russia and unskilled labor (guest workers) is arriving, we will soon become a normal country with cheap labor and bad institutions. This trend is important for understanding many social and political events. I would like to say right off that squeezing out skilled labor would have happened faster if not for the poor state of the world market, which looks set to remain poor for a number of years. The reason is that the root causes of the 2008–2009 crisis are still there. The G20 recognized it in 2008–2009, but nothing serious was done to change the global system. Therefore, in all likelihood, the deteriorating global economic situation will keep Russian skilled labor from leaving, while in this country, they are being squeezed out by adverse institutional conditions.

Finally, a third important challenge is the insidious crisis of the pension system. I think it is the most acute problem. In that sense, it was of critical importance for the government that those who drafted Strategy 2020 address these issues. They failed to find economists who agreed with the decisions that were being made by the government and with the pension system that we have today. But the roots of that crisis run much deeper than is commonly believed. There is a certain proposition from Yevsei Gurvich, in my opinion one of Russia’s best analytical macroeconomists, a proposition I would describe as the “Gurvich theorem” because it does have general theoretical implications. What is Gurvich’s argument? The problem is not that we haven’t raised the retirement age, as we should have done long ago. The problem lies in the universal phenomenon of inflation of age that needs to be taken into account in a social and economic system, just as monetary inflation has long been taken into account in various financial systems. There is a general global trend of the rising working age and the pension age must shift more or less constantly in keeping with age inflation. If this does not happen, there will be a dangerous political and economic effect. Potentially, a government that pursues a conservative pension policy gets an electorate with an increased share of people interested in redistribution rather than productive activity. Potentially, this is an institutional trap when most of the voters are pensioners who vote for the redistribution of rent. Exactly when that fatal result will come about depends on many factors, not only on the government’s policy, but for example, on the timeframe and the intensity with which active groups are being forced out of the country, etc.

This, in my opinion, is the general economic background. I repeat, it is by no means catastrophic, but the trends are fraught with serious risks and consequences for the relationship between the power and the people.

I will now describe what is happening to the social contract, that is, the exchange of expectations. I would like to draw your attention to the fact that during the 2008–2009 crisis, a serious shift occurred: the social contract in Russia was reformatted, which largely passed unnoticed. At any rate, it was not sufficiently studied.

Governments in various countries have had different ways of combating the crisis. It was possible to shore up the banking system, support enterprises; it was possible to pump up demand, and invest in infrastructure with a good multiplier effect. What did the Russian government do in the face of the crisis? Investments in banks were barely enough to prevent the banking system from going under. The money was recouped quickly enough, bringing handsome profits to the banks. Support for industry was to a large extent token because there was an exclusive list, but even the enterprises on that list failed to take advantage of the assistance. Demand was pumped up in a rather weird way: pensions and public sector wages were jacked up. Zhvanetsky’s remark comes to mind: “One rash move and you are a father.” I would paraphrase it like this: one rash move in an anti-crisis policy and you are the father of a welfare state you cannot support. Article 7 of the Russian Constitution was unexpectedly implemented, although all the previous governments had just declared it without doing anything. Is that good or bad? On the one hand, it’s hard to deny that a social welfare state is good. But a social welfare state is a very expensive affair. The Russian economy cannot withstand the strain that even the German economy is struggling to cope with. Unlike giving unsecured loans to banks or enterprises, you cannot say, once the crisis is over: and now we are cutting pensions, good luck to you. Especially considering the trend of an increasing share of pensioners among voters…

The result has been an unsecured social welfare state. That is a new situation. This social state can only survive in one of two ways. One can relentlessly increase the load on business. The main tension between the President and the government in 2011 was over increasing deductions. The pressure on small and midsized businesses at a time when the country was emerging from a crisis meant that small and midsized businesses would either go underground or, using the common customs union, flee to Kazakhstan, which is actually what happened. The second option is maintaining seemingly stable economic environment. That is problematic if we recall that the forecast for the world market in the next few years is grim. Therefore, maintaining such a source for an unsecured social state in Russia is only possible if civil wars break out in the oil-producing countries: one thinks of the Libyan situation and now, apparently, the Syrian situation, etc. Therefore, it is not easy to secure that format of relations with a significant population group. The Independent Institute for Social Policy has been monitoring this situation and it is evident that pensioners, after having their pensions raised, did not believe it would last, that is, their expectations (like those of public sector employees) were not rosy because they don’t see how that situation can be guaranteed. I think that explains the relative success of the left-wing parties in the December 2011 elections because these are parties that promise impersonal guarantees for what is happening to incomes derived from the state. It seems to me, therefore, that this format of an unsecured social welfare state is a prerequisite for the crisis of social expectations that we saw erupt into a public crisis in December 2011.

The hidden crisis of the pact of the elites began, in my opinion, on 24 September 2011. I will try to explain how it arose. When they say that Russia has no institutions, that is not quite true. Russia has quasi-political institutions, like many states with a restricted-access social order. I would like to remind you of an important 2009 book by three classics of Western social thought – Douglass North, Barry Weingast and John Wallis, respectively an economist, political scientist and historian. The book, called “Violence and Social Orders,” was published in Russian translation by the Gaidar Institute in 2011. The book offers a very interesting and important analysis of two types of social orders: open and restricted access. In our context, the elites of course make pacts about exceptions and not the rules. These are not agreements between organizations, but agreements between persons, because in this country organizations can never survive their leaders, as we all see. The instruments of violence, of course, are divided between influential groups and not collectively controlled––hence the mechanism of personal political arrangements. The circle of parties to these agreements has been narrowing over the last ten years. As a result, the narrow agreement reached on 24 September can be described by Talleyrand’s phrase: “It’s worse than a crime, it’s a mistake.” The “job swap” between Medvedev and Putin is a grave error. During the course of negotiations, a decision was made that failed to take into account a lot of indirect consequences. I think all the groups in Putin’s elite are unhappy about the decision. The situation was totally ruined because the party that opposed the modernization course got as its leader Medvedev, who has always been an opponent of that party while the party was his opponent. He announced that he would sack Putin’s ministers, which made Putin’s ministers dream of Medvedev’s party, United Russia, being defeated in the elections. United Russia deputies were unhappy that they were being replaced with people from the Popular Front. The governors were unhappy that they were no longer seen as the drivers of elections, etc. The “job swap” totally destroyed the situation that existed and made all the groups in Putin’s elite want a minor political setback. In effect, this led to the model of the Third State Duma, when Putin did not have a solid majority and they had to work with different parties. That is a risky path because it calls for a display of skill on the part of the executive and legislative branches. You have to negotiate and agree with a wide circle of people, and not with a very limited one.

The result was a situation that pushed the crisis of expectations towards becoming an open crisis in two ways. On the one hand, the large groups have reason to be unsure of their future, whereas they had expected institutional guarantees. People belonging to the wealthy and highly qualified circles were afraid of the prospect of stagnation but could not go abroad because of the wretched state of the world markets, which must have prompted them to resort to political actions that they were not planning. On the other hand, the groups of Putin’s elite that quietly hoped he would be defeated in order to initiate change or shifts in the situation were expecting this process to take place. And so it did. Now the problem is how it will end. I am not going to make political forecasts but I would like to identify three points that are crucial to the dynamics of the situation.

First, I have already said that the social contract usually means an exchange of expectations unconnected to any documents. But sometimes they take the form of a convention. When mistrust is very serious and there is a threat of civil war and political turmoil, it takes the form of conventions. Historical examples abound, from the Magna Carta to the Moncloa Pact. In general, the ideal space for such public conventions is during the second round of presidential elections (if it ever happens). The trickiest question for such conventions is the mechanism of guarantees. It will be remembered that the arbiter for the Magna Carta was the Archbishop of Canterbury and for the Moncloa Pact it was King Juan Carlos. But I think that the Romanov Dynasty and the Patriarch need not worry in our situation. In our situation, the arbiters are there. For we are a culture centered on literature. What is not found in literature is not found in life. The appearance of people like Akunin, Bykov, Prilepin and Shevchuk in political life, if not in political actions, is no coincidence. These are potentially the twelve jurors who could be the arbiters of any national convention. What is uncertain is whether it will be achieved and whether it can be achieved.

The second point: of course, we are all looking inward at our own country, but I would look more broadly at 2011: the Arab Spring, unrest in Southern Europe, Occupy Wall Street, the victories of pirate parties and their parliamentary advances in Germany and Sweden. It reminds me of 1968. In some ways, it is a situation where values are shifting in the world order. And if Russia is part of these processes, then things look a little different. This merits further analysis; it is just a hunch. Because social graphs are very different and networking technologies play a huge role everywhere. It looks as if there is a demand for a change in values.

Third: values. During the period of the previous value shift, Harvard philosopher John Rawls wrote a book called “A Theory of Justice,” which applied a new theory of the social contract. Rawls argued that there are three criteria in the model of justice. The first is equal votes. We see that the protestors on Bolotnaya Square want their votes to be counted. Second, vertical lifts. In our case, this is the issue of the transition of power––not only political power, but also changing parties, campaigns and non-governmental organizations. The third and most difficult question is of reasonable inequalities. What guaranteed minimum should society provide and should a maximum be set? The issue of redistributing property and the issue of a compensatory tax is already in the air around Bolotnaya Square and Sakharov Prospect. I see signs of some movement in that direction. The outcome is anyone’s guess.

I think that the bifurcation in scenarios of our near (and perhaps not only near) future is about the relationship between events and sentiments in Moscow and in Russia. If the distance is great, the outlook is grim. But things can turn out differently. The question of justice seems to be the key question in Russia today. But a more vital question is whether the forces advocating for different versions of justice can come to an agreement.